Section 3(1) of the Conveyancing and Property Ordinance reads:
‘Subject to section 6(2), no action shall be brought upon any contract for the sale or other disposition of land unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged or by some other person lawfully authorized by him for that purpose.’
In essence, contracts concerning land either have to be made in writing or (if they are oral) must be recorded in writing. In either event, the written contract or written memorandum must be signed by the party to be charged (the defendant) or that party’s agent. The reason for this rule is the prevention of fraud. The insistence on a written document signed by the defendant is a safeguard against false evidence alleging the existence of an oral contract.
In the vast majority of cases, the section will be satisfied because there is a formal written contract signed by each of the parties. But what about the situation where there has been oral agreement followed by written correspondence between the parties? The oral agreement will not satisfy section 3(1). It is quite common, however, for the solicitors acting for the parties to write to each other referring to the terms that have been agreed orally and for the seller’s solicitors to send a draft contract that incorporates these terms. The intention may well be that the parties are still negotiating the precise terms of the contract. Could it be, however, that the correspondence and the draft contract amount to a memorandum satisfying section 3(1)? If so, then there is a valid and enforceable contract even though the parties believe that they are still negotiating.
This was essentially the case in Tiverton Estates Ltd v Wearwell Ltd ( Ch 146). Here there was oral agreement for the sale of land. The buyer’s solicitors wrote a letter (marked ‘subject to contract’) outlining the terms of the oral agreement. The seller’s solicitors replied with a letter that enclosed a draft contract incorporating the agreed terms.
The question was whether the letter from the seller’s solicitors and the draft contract were a memorandum that would satisfy the English equivalent of section 3. It was held by the English Court of Appeal that the letter and contract did not constitute a sufficient memorandum. It is not enough to set out the terms of the contract. It is also, more importantly, necessary to acknowledge the existence of the contract and the seller’s letter did not do so.
It did not help to link the seller’s letter with the earlier letter from the buyer’s solicitor. This did indeed seem to refer to the existence of a concluded oral contract but it was headed ‘subject to contract’. Lord Denning MR explained what this means:
‘It is everyday practice for a solicitor, who is instructed in a sale of land, to start the correspondence with a letter ‘”subject to contract” setting out the terms or enclosing a draft. He does it in confidence that it protects his client. It means that his client is not bound by what has taken place in conversation. The reason is that, for over a hundred years, the courts have held that the effect of the words “subject to contract” is that the matter remains in negotiation until a formal contract is executed.” (at 159 – 160).