Many people will enter into negotiations believing they are protected by labelling whatever they agree as being “subject to contract”. This is because it is a well-established principle of English law that an agreement made on terms that clearly state that the parties do not intend to be legally bound unless and until they enter into a formal, executed contract will not in itself be legally binding. For example, the use of the words ‘subject to contract’ in negotiations for the sale of interests in land is sufficient to create a very strong presumption that no binding agreement was intended. These same words have also been recognised in commercial transactions. However, it is worth remembering that in exceptional circumstances, the courts may be prepared to find that the parties actually intended to be bound when these words are used.
It is always critical to ensure that, after agreeing to this formulation, parties do not proceed to do those things which clearly reflect the benefit the parties intended to give to each other through the arrangement. If so, a binding agreement may have come into force.
Representatives from a cement manufacturer and an employment agency signed a document containing proposals for a cleaning contract to be provided through the agency. The agreement was stated to be “subject to contract”, and specified a minimum contract period of two years. The agreement also incorporated a clause which provided that the agreement constituted the entire contract and superseded “all prior representations, agreements, negotiations or understandings whether oral or in writing”. The personnel identified in the agreement were then provided and paid for throughout the stipulated period of two years.
Despite the “subject to contract” language, the court rightly found that a binding contract had been agreed, and that its terms had largely been fulfilled.
It is recommended that legal advice is sought prior to entering commercial arrangements. Without it, despite language and intent, a failure to get proper advice may be more costly than you imagined. To discuss further, please contact a member of our Commercial team at our offices in Bedford, Cambridge, Milton Keynes or Sandy.