Remember subject to contract until you have a fully agreed contract

A significant, although by no means only, benefit of instructing a lawyer is to rely on the lawyer’s understanding of the importance of using the right words in contracts and when to use them. When and why is it important to use “Subject to contract” in correspondence ? You don’t see these words on every

Home » James Swede » Remember subject to contract until you have a fully agreed contract
James Swede - Senior Partner & head of property law
James Swede – Senior Partner & head of property law

A significant, although by no means only, benefit of instructing a lawyer is to rely on the lawyer’s understanding of the importance of using the right words in contracts and when to use them.

When and why is it important to use “Subject to contract” in correspondence ?

You don’t see these words on every item of correspondence between 2 parties who are potentially about to enter into a contract and you certainly don’t hear then used in verbal communications – otherwise you would have an absurd situation ! Imagine going into a shop and picking up some shopping items, say a bar of chocolate, and offering to hand your money over “subject to contract” !

However, there are circumstances where parties are in advanced negotiations about an important and/or complicated contract where it is vital to use subject to contract on correspondence or documents. especially where negotiations are advanced but important details are outstanding. In those situations, it can be all too easy to make a mistake which turns out to be significant and that’s why it’s vita to remember to mark all correspondence as “subject to contract” until the agreement is fully concluded. Failure to do so may leave you open to a court concluding that a contract had been finalised.

Another way of dealing with negotiations potentially leading to a very detailed contract, where one or both parties want some form of preliminary commitment, is to enter into Heads of Terms (a typical use would be to outline what has been agreed in principle and possibly to include clause also whereby a party must pay the other party’s costs if they pull out except for specified reasons).

A recent case highlights the importance of “subject to contract”. The case in question,  Newbury v Sun Microsystems [2013] EWHC 2180 (QB), was a situation where an employer and employee had agreed in principle a settlement to avoid an ongoing dispute. They had reached the point where the amount had been agreed and letters were exchanged between advisers which focused more on logistics for payment and ancillary issues.

The correspondence in dispute was not marked subject to contract but did use terminology suggesting that a formal settlement agreement would need to be drawn up. The Court decided that the correspondence itself  formed the settlement agreement and an important considerations for the employer, that the settlement agreement should not be annexed to the court order confirming settlement, so as to preserve confidentiality, was not included in the correspondence.

In reaching this conclusion, the High Court considered that the letter from employer’s solicitors was an offer of settlement and set out the terms of that offer. The offer was available for acceptance by a specific time with payment  within 14 days of acceptance. The letter was not simply an offer indicating willingness to consider settlement and subject to agreement on other matters.

The letter was not expressed as being “subject to contract”. If these words had been used, then it would have been clear that the terms would not be binding until a formal contract was agreed.

The upshot of the above is to take care in any situation of importance – it is easy to drop your guard after lengthy and difficult negotiations – often you will be relieved and/or excited to have almost reached the finishing line, but as always the details often matter and it’s important to stay alert until you are 100% satisfied with all the details, including implementation aspects of a contract.

James Swede

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