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The Rewards and Risks of the ‘Subject to Contract’ Label

14 January 2020 #Corporate #Commercial


Following the recent decision in Farrar v Rylatt [2019], it is clear that use of the phrase ‘subject to contract’ continues to create work for lawyers in commercial situations and relationships.

Historically, use of ‘subject to contract’ as an overlay to discussions and documentation has been taken to create a robust assumption that neither party wants to be bound for the time being by the commercial negotiations they are entering[1] and the courts have typically supported this assumption However, whilst the phrase is regularly used as a means of rebutting contractual intent, often this may be undermined by a lack of prominence in the negotiations, the subsequent actions of the parties, and/or the content of the agreement in question.

When outlining the principles in their judgement, Lord Justices Coulson and Rose have demonstrated that interpretation of ‘subject to contract’ is not black and white. In Farrar v Rylatt, a set of Heads of Terms were labelled ‘subject to contract’. They covered the proposal and key principles of a lucrative profit-sharing joint venture, an agreement one of the parties was seeking to enforce. However, due to the prominent placing of the ‘subject to contract’ tag on the document and its clear application to the document in its entirety, its use was deemed appropriate and therefore the proposed joint venture agreement was not binding; Lord Justice Coulson commented that it was “nonsense to suggest that clauses 5-7 of the Heads of Terms were somehow exempt from the Subject to contract Tag, whilst everything else was covered by it.”

The prominent placing of the ‘subject to contract’ tag is often first in a number of key indicators that will define whether negotiations are binding or not. It is therefore preferable that the document itself is labelled ‘subject to contract” rather than the phrase being included within the body of the document. The latter can lead to confusion as to which part of the document is or is not supposed to be ‘subject to contract’. Whilst simply labelling it will not render a document immune to the argument that a binding contract has been created, it is usually taken to mean that the parties have not yet reached an agreement, for example: where a number of items are still being negotiated. The risks of not using ’subject to contract’ were highlighted in a High Court decision[2] in 2000, where, as negotiations were not concluded on a ‘subject to contract’ basis, all essential terms were held to be agreed and formed a binding agreement, even though a subsequent detailed contract was envisaged.

It is also worth considering the prominence issue raised above in the context of email and other electronic communications, given the growing trend of conducting preliminary and/or advanced negotiations over email. Whilst parties have sought to rely on the ‘subject to contract’ tag despite it only existing at the very end of a long email chain that spanned months of negotiations, or in an email footer, clear, express, and repeated assurance that the matter is ‘subject to contract’ is advised. By contrast, in Grant v Bragg and Another, failure to expressly lift the ‘subject to contract’ tag, once the parties had moved on from the initial negotiations stage, allowed one party to walk away from the agreement as the terms were held to have remained in a non-binding state. 

The actions and conduct of the parties will also be scrutinised where the intention to create legal relations becomes an issue. In the 2005 decision in Rugby Group Ltd v ProForce Recruit Ltd, a document that was clearly expressed to be ‘subject to contract’ was held to be binding as, after it had been signed by the parties, they both started to perform the contract before any subsequent formal agreement had been signed. It is therefore paramount that any actions taken after negotiations are carefully considered as their performance may negate the use of the ‘subject to contract’ tag.

Finally, the significance of the express words ‘subject to contract’ should also not be overlooked. In a 2011 Court of Appeal decision[3], the words “a formal contract will follow” did not make the agreement subject to contract. Similarly, “subject to more complete documentation”[4] was not sufficient and, in another instance, a failure to use the words ‘subject to contract’ during negotiations meant that a binding settlement was in place[5].

The ‘subject to contract’ formula is not, therefore, fool-proof and it must be carefully considered and applied by the reliant party. The Clarkslegal corporate team regularly advises clients on joint ventures, agreements, collaborations and partnerships. We have the knowledge and expertise to assist in negotiating and formalising such arrangements.

 

[1] Winn v Bull [1877] 7 Ch D 29

[2] DMA Financial Solutions Ltd v BaaN UK Ltd [2000] 3 WLUK 833

[3] Immingham Storage Company v Clear plc [2011] EWCA Civ 89

[4] Beta Investements SA v Transmedia Europe Inc [2003] EWHC 3066

[5] Newbury v Sun Mircosystems [2013] EWHC 2180

Clarkslegal, specialist Corporate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Corporate matter please contact Clarkslegal's corporate team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
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This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Jon Chapman

Jon Chapman
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Jacob Montague
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