Many of our clients ask whether or not they should include the phrase "Subject to Contract" on emails, letters or other documents. When and why should you do this, and will it ever help?
What is the purpose of "Subject to Contract"?
The expression indicates that the parties are still negotiating and have not yet reached an agreement on the terms. Before 1989 it was extremely important to include the phrase, as there were a number of cases in which the Courts had held that correspondence and discussions showed that binding contracts had been exchanged for the sale and purchase of land - even though this was not the parties' intention. That situation improved with the snappily entitled Law of Property (Miscellaneous Provisions) Act 1989, but old habits die hard.
One point to note in relation to that Act is that it only applies to contracts for the sale, lease or other legal estate in land. If you are negotiating a licence rather than a lease or a sale contract, the (Miscellaneous Provisions) Act will not help you. In these cases we would strongly recommend that you use the phrase "Subject to Contract" as a header in emails or at the top of every letter. It is also worth remembering that where the Act does not apply, a contract can be created verbally and so you must exercise care during negotiation of terms.
Is "Subject to Contract" enough to protect me in all situations?
Sadly, "Subject to Contract" is not a cast iron guarantee. In some cases whether a contract has been created is really a question of fact.
There are four requirements before a legally binding contract is created. These are:
- Offer and acceptance.
- An intention to create legal relations.
- Certainty on the essential terms of the contract.
Even though your correspondence is marked "Subject to Contract" if the evidence trail created by your emails fulfils the requirements of a contract you may find that you have created a contract inadvertently.
As mentioned above this does not apply to sales or leases of land, because of the (Miscellaneous Provisions) Act. However, it could apply to other situations, such as appointment of a managing agent or a contract for cleaning services.
It is also helpful to look at the conduct of the parties to see how this reflects the correspondence. If the terms of the contract have begun to be performed and observed, this suggests to the Court that a contract does actually exist. For example, if works are carried out to a property, this might reflect that consent (by way of a licence to alterations) has been given.
What should I do to avoid creating a legally binding contract?
Using the phrase "Subject to Contract" is helpful to show that you do not intend to create a binding contract. However you should also make sure that you don't actually carry out any of the terms of the contract before it has been signed and that your documents are consistent during negotiations. For example, if you're discussing a building contract and allow the contractor on site to start work even though the JCT Contract hasn't been signed, you might both be "performing the terms" of the contract.
There are other popular phrases. The phrase "Subject to Survey" can be seen as a condition which forms part of the contract rather than an intention not to create legally binding relations. We wouldn't suggest that you rely on this to make sure that you don't create a binding contract.
Another possibility is "Subject to Board Approval" This is often used where final agreement between the parties is subject to some internal approval process. It is useful in making sure that the person you are negotiating with understands the limits of the negotiator's internal authority. Marking correspondence "Without Prejudice" has an entirely different effect; it confers privilege on the correspondence so that it is not admissible in Court. If the other solicitor accepts the terms of a Without Prejudice offer in open correspondence this will create a binding offer of settlement. As a result, it is essential that you also mark any Without Prejudice correspondence, as Subject to Contract.
What about Scotland?
The law is slightly different in Scotland and if you are dealing with properties in Scotland we are happy to refer you to good firms of Scottish solicitors with whom we have strong relationships.
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.