Reaffirming the Binding Effect of 'Subject to Contract' in Profit Share Agreements: Farrar & Anor v. Rylatt & Ors [2019] EWCA Civ 1864

Introduction

Farrar & Anor v. Rylatt & Ors ([2019] EWCA Civ 1864) is a significant case decided by the England and Wales Court of Appeal (Civil Division) on November 8, 2019. The appellants, Farrar and an additional appellant, sought declarations against the respondents, Rylatt and others, concerning alleged profit share agreements related to two distinct property developments in West Yorkshire: Hazel Grove and The Barns. The core issues revolved around the existence and enforceability of these profit share agreements, particularly focusing on the role of oral agreements and the implications of the "Subject to Contract" (STC) clause in the Heads of Terms (HoT) documents.

At the heart of this case were disputes over whether oral agreements could establish binding trusts and profit-sharing arrangements, and how the inclusion of an STC tag in HoT documents affected the enforceability of such agreements. The Court of Appeal was tasked with reviewing the trial judge's conclusions, which had dismissed both claims.

Summary of the Judgment

The Court of Appeal upheld the trial judge's decision to dismiss both claims brought by the appellants concerning Hazel Grove and The Barns developments. For Hazel Grove, the appellants alleged an oral profit share agreement and the creation of an express trust. The trial judge found insufficient evidence to support these claims, noting inconsistencies and a lack of clarity in the appellants' evidence. Regarding The Barns, the appellants relied on an unsigned HoT document tagged with "Subject to Contract" to assert the existence of a binding profit share agreement. The court held that the STC tag effectively rendered the HoT non-binding, and no subsequent formal agreement existed to override this designation.

Consequently, the Court of Appeal concluded that the trial judge had appropriately assessed and dismissed the appellants' claims, reinforcing the non-binding nature of agreements marked as "Subject to Contract" unless subsequently formalized.

Analysis

Precedents Cited

The judgment extensively referenced existing case law to reinforce the principles governing the binding nature of agreements and the implications of the "Subject to Contract" tag. Notable cases include:

• RTS Flexible Systems Limited v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14: Established that actions and conduct indicative of an intention to create legal relations can render an agreement binding despite preliminary terms like STC.
• Pagnam v Feed Products Limited [2014] EWCA Civ 5: Highlighted the importance of evaluating parties' conduct in determining the binding nature of agreements.
• Regalian Properties PLC v London Docklands Development Corporation [1995] 1 WLR 212: Demonstrated that without special circumstances, agreements marked as STC remain non-binding.
• Goodwood Investments Holdings Limited Inc v Thyssenkrupp Industrial Solutions AG [2018] EWHC 1056 Comm: Reinforced that clauses like STC render agreements non-binding unless formally concluded.

These precedents collectively underscore the judiciary's cautious approach towards enforcing agreements unless there is clear evidence of an intention to be legally bound, especially when preliminary terms like STC are present.

Legal Reasoning

The court's legal reasoning hinged on the sufficiency of evidence supporting the appellants' claims and the interpretation of the STC clauses within the HoT documents. For Hazel Grove, the appellants' reliance on an oral agreement lacked concrete backing, particularly due to discrepancies in the timing and terms of the alleged agreement. The trial judge noted that the appellants failed to establish the essential elements of an express trust, primarily because the oral agreement's existence was questionable.

In the case of The Barns, the inclusion of the STC tag in the HoT was pivotal. The court emphasized that such tags are designed to indicate that the document is preliminary and not intended to create binding obligations. The absence of subsequent formal agreements to solidify the profit share arrangement meant that the appellants' reliance on the HoT was unfounded. The judgment clarified that unless parties explicitly waive the STC designation or subsequently formalize the agreement, the preliminary terms retain their non-binding effect.

Moreover, the court reiterated established principles that appellate courts should not interfere with trial judges' findings of fact unless there is no evidence to support those findings. Given that the trial judge had adequately considered the evidence and applied relevant legal principles, the Court of Appeal found no grounds to overturn the decision.

Impact

This judgment reinforces the longstanding legal doctrine that preliminary agreements marked with terms like "Subject to Contract" are generally non-binding. It serves as a clear reminder to parties entering into negotiations that without formalizing agreements through signed contracts, especially when preliminary terms are emphasized, there is limited legal recourse to enforce expected obligations or profit-sharing arrangements.

For practitioners, this case underscores the importance of ensuring that key terms are clearly defined and that parties explicitly indicate their intention to be legally bound if they wish to create enforceable obligations. It also highlights the challenges in relying solely on oral agreements, particularly in commercial settings where written documentation is paramount.

Additionally, the judgment provides clarity on appellate review standards, reaffirming that appellate courts defer to trial judges' factual findings unless there is a clear error or lack of evidentiary support. This reinforces the principle of respect for trial court discretion in fact-finding.

Complex Concepts Simplified

'Subject to Contract' (STC) Tag

The "Subject to Contract" tag is a legal term used in preliminary agreements to indicate that the parties do not intend to be legally bound by the terms until a formal contract is executed. Its primary function is to prevent early-stage negotiations from being misconstrued as binding agreements.

Express Trust

An express trust is a legally binding arrangement where one party (the trustee) holds property for the benefit of another party (the beneficiary). For an express trust to be valid, it must meet specific legal requirements, including clear intentions of the settlor to create the trust, defined beneficiaries, and certainty of subject matter.

Heads of Terms (HoT)

Heads of Terms are preliminary agreements outlining the main terms of a proposed commercial agreement. They serve as a blueprint for the final contract but are typically not themselves binding, especially when marked as "Subject to Contract."

Appellate Courts and Findings of Fact

Appellate courts review decisions made by lower courts to ensure the law was correctly applied and that procedural fairness was maintained. However, they generally do not overturn findings of fact unless there is clear evidence of error or misinterpretation.

Conclusion

The case of Farrar & Anor v. Rylatt & Ors serves as a pivotal reaffirmation of established legal principles regarding the enforceability of preliminary agreements and the explicit designation of terms like "Subject to Contract." By upholding the trial judge's dismissal of the appellants' claims, the Court of Appeal has reinforced the necessity for clear, formalized agreements when parties intend to create binding obligations. This judgment underscores the judiciary's commitment to ensuring that only well-substantiated and clearly articulated agreements are deemed enforceable in law, thereby promoting certainty and reliability in commercial transactions.

For legal practitioners and parties engaged in contractual negotiations, the case highlights the critical importance of formalizing agreements and being explicit about intentions to bind legally. It also emphasizes the judiciary's respect for trial courts' factual determinations, ensuring that appellate reviews remain focused on legal correctness rather than re-assessing factual scenarios.