Subject to Contract - What's the fuss?
The phrase "subject to contract" is often found at the top of documents and emails, but what does it mean?
When deciding whether someone is bound by a contract, the Court will test for whether the parties intended to create a legally binding contract. There are various things the Court will look for, and, if they exist, the Court will presume the parties intended to contract.
Heading a document with "subject to contract" can help prevent a party being bound by draft terms until the final terms are agreed. It’s used to indicate that the parties are still negotiating, but haven't yet reached agreement and don't intend to be bound until an agreement is signed and dated. Phrases such as "subject to details" may be found to have the same effect. However, you should exercise some caution and be aware of the following:
(1) Alternative terms may not cut it. The Courts have found that the phrase "a formal agreement to follow" may indicate that the substance of a contract has been agreed and that any written agreement that follows is a formality only, meaning that the parties are bound.
(2) Using the "subject to contract" label is not fool-proof. It may not do what it says on the tin if: (a) the content of the document suggests that the parties did intend to contract; (b) the parties act in a way that suggests that there is a binding contract; or (c) the parties waive the condition of a subsequent contract. In these scenarios, the Court may decide that a document headed "subject to contract" is in fact a binding contract.
(3) Use of the phrase "subject to contract" (or other variations) in emails can be particularly risky. It’s use in email footers may be overlooked and may cause uncertainty over whether it applies to attachments. It may also be left in email headings by mistake, potentially allowing one party to wriggle out of any subsequent agreement reached.
To avoid later dispute, you should be careful when putting together correspondence labelled "subject to contract" and consider whether the above points apply. Don’t blindly assume that the phrase is a catch all that will keep you safe whatever. We'd also always suggest you hold off from performing any of your obligations under a contract under discussion until it's formally and finally agreed and signed.