UK: The Importance Of "Subject To Contract": A Salutary Lesson

Last Updated: 9 February 2015
Article by Alex Barker

A recent case in the Technology and Construction Court has underlined the risk of inadvertently entering into a contract and reinforced the value of the phrase "subject to contract".

The Background

The case of Malcolm Charles Contracts Limited v Crispin and Another [2014] EWHC 3898 (TCC) concerned extensive works to the Crispins' house in Sevenoaks, Kent. The Crispins were based in China, but prepared to relocate to the UK by purchasing the property in 2009. They planned to carry out substantial works to the property (including a multi-storey extension, a loft conversation and the addition of a patio and driveway) and, following a tender process, entered into negotiations with Malcolm Charles Contracts Limited ("MCC"), which had tendered for £518,739.25 (the lowest price by far, but still in excess of the Crispins' budget).

The Crispins instructed their agent Mr Elliott (an architect acting as project administrator) to seek out opportunities for savings, by agreeing a reduction in MCC's scope of work. Following further correspondence, MCC eventually produced a revised price schedule in the amount of £369,861.

The Crispins, MCC and Mr Elliott all subsequently convened at a pre-contract meeting at the property. Mr Elliott took careful minutes of the meeting, which recorded the fact that price, start date, completion date and scope of works were among the topics discussed. The works were seemingly all set to proceed.

The Dispute

Problems began when the Crispins suffered, for unspecified reasons, a decline in their financial position on the weekend prior to the planned start date. The day before the start date, Mr Crispin emailed MCC and Mr Elliott to say that he was not content for the works to start, and various contractual details were yet to be ironed out. He said that works should not go ahead the following day. MCC had already taken delivery of plant and materials to the site in order to prepare for the start date, which they understood was agreed by all parties.

In light of their fiscal position, the Crispins started to seek further costs reductions from MCC, and indeed MCC offered an additional £40,000 of savings. Despite this, the Crispins eventually confirmed that they did not wish to proceed with the works.

MCC claimed for breach of contract and its abortive costs. The Crispins made no payment and so MCC referred the dispute to adjudication. The adjudicator determined that MCC was entitled to damages of £104,852.88. When payment was not forthcoming, MCC sought to enforce the adjudicator's award in the TCC.

The TCC Proceedings

The Crispins argued that the adjudicator lacked jurisdiction. They contended that they had never entered into a contract, meaning the contractual adjudication scheme did not apply and, given that statutory adjudication does not apply in the case of a contract with a residential occupier, there was no basis for adjudication.

Carr J therefore had to decide whether the parties had formed a contract. She acknowledged that, as negotiations were lengthy, her job was to "look at the whole correspondence and decide whether, on its true construction, the parties had agreed to the same terms". She found that they had, most likely during the meeting between the parties at the property, but if not upon the handing over of keys to MCC a month later.

The Lesson

Carr J made the point in her judgment that "there may be circumstances where the parties make it clear that, although they have agreed all the terms necessary for the making of a binding agreement, they do not intend their agreement to become binding until they have gone one step further, and embodied it in a formal document".

Indeed, marking negotiations "subject to contract" or ensuring that that phrase is used prior to oral negotiations is an extremely common way of denoting a party's lack of contractual intention.

The lesson is simple but important; in order to avoid inadvertently creating a contract, ensure that negotiations are carried out on a strictly "subject to contract" basis. In all but the most exceptional cases, these words will prevent a binding contract being implied. Unfortunately for the Crispins, they neglected to use the phrase at any point. Had they done so, they would have saved themselves a lot of money.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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