When ‘subject to contract’ is a contract and when it isn’t

Businesses need to be careful when negotiating contracts that they do not inadvertently enter into a contract when they intended only to explore possible terms.

Understandably, when negotiating a contract, parties want the ability to explore potential terms without being bound by them, and to achieve this they rely on the use of the title ‘subject to contract’. The issues arise when one party believes terms have been agreed and the other believes that they are still in negotiation. In such a situation as this, a dispute could easily arise as to whether a contract has actually been created; at this point, it is vital to revert to the core principles of contract formation.

In basic terms, to form a contract the parties must:

• intend to form a contract
• be competent to do so
• provide an offer
• accept the offer
• provide consideration (this does not need to be monetary).

Although these principles may appear simple, the recent Court of Appeal case of Joanne Properties Ltd v Moneything Capital Ltd and Moneything (Security Trustee) Limited [2020] EWCA Civ 1541 is another reminder to parties of the issues that can arise from the use of ‘subject to contract’.

In this case, the court reviewed whether a binding contract was entered into between the parties, via their solicitors. Here, despite the phrase “subject to contract” having been used, the court found a contract had actually been entered into, because:

• the only real issue in dispute was the destination of the ring-fenced sum of £140,000
• the correspondence referred to a full and final settlement, not a partial settlement
• no mention was made in correspondence of any other terms of the agreement
• they subjectively thought that the dispute had been compromised
• although there remained certain administrative matters to be agreed, they were not material for the purposes of the settlement.

This case should stand as a warning to all parties that understanding the form and basis of communication is key to ensuring protection of the parties, as simple use of titles, such as ‘subject to contract’, do not provide the blanket protection they may appear to.

If you need advice about a dispute or contractual issue, do get in touch.