What is Meant by ‘Subject to Contract?’
‘Subject to contract’ is a common term used in legal agreements. The point of it is to clarify to all parties involved that the agreement is not legally binding until a formal contract is signed.
When a business is negotiating a deal with another party, there may be significant risks involved if it’s assumed that the terms of the deal are agreed as soon as some kind of commercial agreement is put in writing. The ‘subject to contract’ wording is often included to prevent a situation in which one party later tries to force through an agreement that is not yet signed.
For example, let’s say that two companies trade products. First company X meets with company Y and agrees that it wants to sell its products to them at a price of £5 each . Company X then says that it appreciates this agreement, but that it is still on a subject to contract basis. Company Y then prepares and signs a formal contract based on the agreement. It makes sense, therefore, that company Y cannot afterwards turn around and say it does not want to buy 100 units of the products at £5 each.
For this reason, references to subject to contract should be taken seriously by all parties. A subject to contract agreement should not be seen as an informal deal, and businesses that treat it as such may be leaving themselves open to future disputes. Even though it would be hard for company Y to argue that it did not agree to a £5 per unit deal when it had signed a contract stating as much, company X should ensure that its own position is also as secure as possible.
The Significance of a ‘Subject to Contract’ Template
Providing a clear framework for negotiations, alongside a document that can be used to agree any interim arrangements is the main attraction for businesses and legal professionals alike in using a ‘subject to contract’ template. An example of an interim arrangement is when lease negotiations are taking longer than expected. A potential tenant may wish to occupy premises and agree heads of terms before any lease has been concluded. In these circumstances (assuming the landlord is happy for the tenant to proceed), a ‘subject to contract’ template may permit the parties to enter into licence terms before concluding the lease. However, if the parties have not already incorporated terms of a licence in their heads of terms, then such a template may not be appropriate. A ‘subject to contract’ template may also prevent any premature commitment to a course of action which the party has subsequently decided to reject or defer. For example, in approving a heads of terms for a lease, a landlord will usually wish to include an obligation on payments of interim rent, rental deposits, landlord’s works, insurance premiums etc. However, the parties may be unable to agree relevant terms. Without a ‘subject to contract’ template stating that no agreement has been concluded until the final agreement has been signed, the parties may inadvertently find themselves with an enforceable interim agreement to the tenants disadvantage. A ‘subject to contract’ template can also be a very useful negotiating tool. If what is deemed as a concession in course of negotiations is reflected in a ‘subject to contract’ template, a party may be less likely to go back on it, particularly if they have set out their position on paper.
Essential Components of an Agreement Template ‘Subject to Contract’
The template letter or email must identify the parties to the contract. It should contain the subject line or heading "Subject to Contract" somewhere in or attached to the document as well as making it clear which party it is that is signing the letter or email, given that most formal letters are written by one party to the other and a party is not usually a co-signatory to its own correspondence.
The template letter or email must also contain the date the correspondence was sent, a statement denoting the offer or agreement as being "Subject to Contract" and which parties’ names are referred to in the letter/email both of which can be used to check against the signed version given that parties would usually want to ensure that their names are clearly referenced in the agreement.
The template letter or email must also include a request to the other party to sign and return a copy of the document and should not only contain a signature line for the recipient to sign and date it but also those parties’ details to be typed up on the document in the event they no longer have sight of the signed version.
The ‘Subject to Contract’ template must also contain a clause of conditionality such as the one in the template below. The clause should refer to the next party to sign and date the document to demonstrate that it must be signed in its entirety before it is legally binding. In such instance, the latest signatory to the document would be the earliest one to have legally executed the document. Parties could instead simply state "subject to contract" at the footer of each page to show the unbinding position was intended to be made by all parties to the negotiation.
How to Formulate a ‘Subject to Contract’ Template
When it is necessary to complete a written agreement that will be subject to contract, or an agreement that requires a heads of terms document, there are a few simple guidelines that can make your life much easier.
Firstly, the conditional terms should be included in the body of the agreement. It is not ideal to try to separate out the contract terms and the conditionally terms that they refer to; this can lead to confusion as to which terms are subject to which conditions. If a reader sees a term that it says is "subject to contract", and then it is not referenced again as being subject to the other conditions, it can be difficult to understand whether the contract term is actually intended to be subject to that particular condition. Therefore, it is always useful to make the reference to the particular condition clear at the end of that term, so that it is easy to follow whether the particular term is subject to a particular condition.
Following on from this, the template should be clear as to whether the written agreement is made conditionally upon one, some or all of the conditions contained within the document. If you have a number of conditions, it is sensible to number them, so that there can be no mistake as to which conditions relate to which provisions. Again, this should follow through to the end of the relevant provision, so that any reader of the document does not need to go back to the conditions section to remind themselves which condition the provision is subject to.
Another good tip is to make sure that you clearly set out which terms there are which are not subject to contract. If a term is not clear, then it should be made clear that it is fully intended to be binding, subject only to the conditions. This is because many people will read "subject to contract" to mean that none of the contract becomes binding until the contract is both signed and executed, meaning that they may feel (rather foolishly) that they do not have to look at the terms carefully.
The final but most obvious top tip, is to actually ensure that the document is signed and executed properly. A vague set of words will often have to be determined as being legally binding by a court (as a matter of M&A rather than as an MRO contract), and in the absence of any clear authority as to whether the parties did or did not intend to be bound, a court will usually seek to give effect to the terms of the agreement. This is even more likely should one party attempt to renegotiate after having signed the document.
Mistakes to Avoid
A common mistake is in using a subject to contract template that has been prepared without any thought given to how your contract will operate in practice. For example, template contracts might impose obligations on you that do not actually reflect future intentions or render you liable for obligations that are not applicable in the transaction (perhaps because the contract was originally prepared for a different type of transaction). Be sure that your template contract reflects your intentions and is suitable for the transaction that you are concluding .
Another common problem is failing to draft the template carefully and being caught out by assumptions as to what is meant or intended by using certain words or phrases. Words and phrases have legal meanings that differ from the way they are commonly used in everyday language – see, for example, the use of the word "or" in contracts which can be ambiguous – see above.
Templates can also become outdated over time as legislation and regulations change. So, keep an eye on the laws to make sure that your template reflects any necessary changes to your standard terms and conditions.
Practical Uses and Examples of ‘Subject to Contract’ Clauses
The phrase "subject to contract" is most commonly seen subject header in legal contexts. Yet, there are also numerous scenarios where legal contracts, negotiations, and deals have been agreed to with the caveat "subject to contract." Examples include:
Real Estate Deals
When it comes to real estate, "subject to contract" is frequently used by property agents to suggest that a deal has not yet been confirmed. It is also used by both buyers and sellers to help them avoid being held to the full terms of a verbal or social media agreement. In other words, this type of property deal is not binding until a written and legally signed contract between both buyer and seller is established.
Business Contracts
For successful e-commerce companies such as Alibaba Group and Amazon, getting business-to-business (B2B) contracts signed is vital for mutual profit. Since business contracts can be worth millions or even billions, it is not surprising that some businesses pre-emptively want to protect their position by using "subject to contract." For example, before Amazon signed a $395 million deal with Amazon, Beautiful Mind was signed "subject to contract."
Corporate agreements also tend to get signed "subject to contract" when a merger deal is still to be arranged and finalised. Both parties still require board approval for the merger to be signed off. Additionally, these parties may need to agree upon future roles and mentoring of staff to ensure that there is a smooth and productive transition. For example, the merger between Kraft Foods and Heinz was sealed "subject to contract."
Signing Off large business contracts "subject to contract" is not uncommon either. Let’s say that one company wants to invest $100 million on another business. However, further examination of the deal reveals that the target company could be worth anything from $80 million to $200 million. In certain circumstances, both companies may not want to go ahead with a contract that is "subject to contract", but if they require more time to examine the deal and finalise an agreement, then the contract may go ahead as "subject to contract".
Conflict with Other Contract Terms
Of course, "subject to contract" can conflict with other legal terms, especially in UK law, which gives precedence to the "subject to contract" clause over any other contracts, buy-sell agreements, or contracts that apply to a non-binding "subject to contract". This can be very tricky for businesses because there is a risk of having a conflict between a real contract and a contract that is "subject to contract". As a business owner, this could happen to you and your business so it might be a good idea to consider the pros and cons.
The rules of engagement for contracts are evolving as the internet plays a massive role in the way companies do business.
Legal Discussion and Examples
The ‘subject to contract’ template is often used in the context of negotiations to avoid legally binding the parties unless and until all proposed terms for a deal are agreed. In some cases, however, it will not be clear from the drafting of a proposed agreement whether the parties intend to be bound or not. In that case, questions may arise both as to the intention of the parties and as to whether or not an agreement has been reached on the disputed terms.
In Hartog v Colin and Shields [1939] 3 All ER 566, the court held that even where standard contract terms are used in an offer, these terms will not necessarily be accepted as they stand. In this case, the effect of the court’s interpretation of the contract allowed proof of a common mistake so that the seller was not bound by the contract, but was able to rescind it.
Such clauses are routinely dealt with by the courts, even in some very high-value disputes. In the case of Rose and Frank Co v JR Crompton & Bros Ltd [1925] AC 445, the House of Lords dealt with the effect of a subject to contract clause which did not contain the full intended legal effect. Lord Atkin stated that "correspondence clearly intended to be binding is sometimes concluded by an expression of readiness to execute a contract ‘in due course of business’ or ‘subject to contract’. The first terminology is a recognition that the correspondence is indeed a contract. The second indicates an intention that the correspondence should not have legal effect. It is in fact a convenient way of performing the promise made in the nursery – ‘if you don’t want my things do not do it.’"
In the case of MSTC v Goldstraw [2000] Con LR 575, the Chancery Division further clarified Rose and Frank, holding that the rule is based on the intention of the parties. For various reasons , Goldstraw failed to comply with the subject to contract agreement of a due diligence obligation. Whilst the Court of Appeal in Goldstraw upheld Rose and Frank, the Supreme Court has since overruled Rose and Frank.
MSTC may therefore no longer be good law. If this is so, it appears that a party seeking to establish a binding contract will need to show an ‘intention to be bound in circumstances where there is otherwise no clear indication that the parties intend to be bound.’ By way of example, it is clear that where there is an offer or counter-offer in the form of an email, and the sender of the email states at the bottom that the message is ‘subject to contract’, the use of such language will indicate an intention to be bound, in the sense that the parties will be bound contractually despite the absence of a final formal document.
An issue arises where such language has not been used but each party assumes that subject to contract principles apply. As above, the intention will be key to deciding the issue. The court in MSTC indicated that a party who insists that all future dealings are subject to contract will be bound if and when no further dealings take place. Where the court considers that operating such a rule would be unreasonable, it would not be prepared to apply it.
In the case of Goldstraw, Lord Neuberger considered that you can be, for instance, ‘subject to contract’, but also ‘subject to all necessary approvals’. It is possible that Goldstraw has codified the existing case law on subject to contract and that combined with the earlier cases on the point, has made the scope for potential argument/interpretation of a subject to contract clause that little bit clearer.
Goldstraw has provided a framework of clarity on this infrequent but interesting area of English law.