The labels we put on legal documents can be all important when it comes to whether or not they are enforceable as contracts or admissible in court. But when drafting an agreement or negotiating a lease, landlords and tenants should be wary of relying too heavily on headings such as "subject to contract" and "without prejudice". You may think you are protected, but the court might think differently.

Subject to contract

It is an essential part of contract law that for an agreement to be enforceable, the parties must intend to create binding legal relations; it has long been established that an "agreement to agree" cannot be enforced.

The phrase "subject to contract" is frequently used in commercial negotiations.Whilst the courts will treat the use of the phrase as a strong presumption that the parties do not wish to be bound by their agreement6, a party should be wary about relying on this label alone.

For example, in Proforce Recruit Ltd v The Rugby Group Ltd7, the High Court decided that although an agreement was stated to be "subject to contract", because the parties had carried out their obligations and exercised the rights that were contemplated under the agreement, there was an implied binding contract.

However, where the "subject to contract" qualification applies to negotiations, it will only cease to apply if the parties expressly or by necessary implication agree that they will be bound8. So in a case where solicitors had exchanged a string of emails each headed "subject to contract", it was held that they were merely following each other's lead and did not have in mind what the phrase was intended to cover. The court therefore, by necessary implication, removed the "subject to contract" restriction9.

When drafting a document as part of negotiations, it is therefore advisable to spell out that "the parties do not intend to be legally bound", rather than rely simply on the phrase "subject to contract".

Without prejudice

The availability of the without prejudice device facilitates settlement of disputes by preventing certain statements made by one party being used against it in court by the other, as evidence of a supposed "admission".

The crucial feature of the rule is that it applies only to evidence of "negotiations genuinely aimed at settlement10." For example, an exchange of letters between solicitors attempting to come to a compromise is likely to be covered by the without prejudice rule, whether or not those negotiations are successful.

The courts have carved out a number of exceptions to the without prejudice rule and in these cases a document will normally be admissible in court. The exceptions include where the document provides evidence of misrepresentation, fraud, blackmail, perjury or undue influence. However, it is generally speaking a blanket rule that applies in a wide range of circumstances11.

An important way of making it clear to the other side, and the court, that a document is not intended to be admissible is of course to use the heading "without prejudice" at the top of the page. But labelling a document in this way does not always have the desired effect. There must be "some indication that the author intended the document to be treated as part of a negotiating process"12 in order for the document to attract such privilege.

Equally, if a document is not marked "without prejudice", the court will consider that to be material as to the question of whether it is in fact without prejudice. Indeed, in a case where no label was used, the burden was put on a litigant to rebut the presumption that correspondence was open rather than without prejudice13.

Using the headline "without prejudice" is therefore advisable but not conclusive.

Conclusion

In Jirehouse Capital, Mr Justice Peter Smith noted that: "the old observation that solicitors' typewriters had two extra keys marked "subject to contract" and "without prejudice"… is not without a modicum of truth." Case law shows that while those labels are useful, they can sometimes be risky to rely on.