Lawyers and their clients tend to bandy around the jargon (weasel words) ‘subject to contract’. As we saw in an earlier blog, all this is an attempt to prevent a contract arising before we think all the relevant terms are agreed.
But how effective is it and what does it really do?
It is critical to distinguish between documents or meetings which:
(a) are stated to be ‘subject to contract’, or
(b) merely ‘expect’ or ‘envisage’ the future execution of a formal contract.
The difference is between an agreement which does not bind the parties as a contract until a formal document is executed, and an agreement which is a contract and merely needs to be formally recorded as such.
If a document is truly ‘subject to contract’, one of the parties has made it clear that she requires the execution of a formal contract. Not just as a wish or fancy but as a condition which must be met before there is any contractual liability.
It is not enough to refer to some vague hope that a formal contract will be executed: “it is a question of construction whether the execution of the further contract is a condition or term of the bargain [no contract] or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through…[where] there is a binding contract and the reference to the more formal contract can be ignored.” [Von Hatzfeldt-Wildenburg v Alexander  1 Ch 284, Parker LJ at 288, 289]
The Textbook Answer
“If an offer is accepted not finally but conditionally, for example with the common formula ‘subject to contract’ or ‘subject to the preparation and approval of formal contract’ or ‘subject to suitable arrangements being arranged between your solicitors and mine’, the effect is that until the necessary contract or arrangements have been made, there is no contract and either party can withdraw. This follows the ordinary rule that a contract to make a further contract on terms unspecified is no binding contract at all. If such a reservation is made, therefore, both parties have complete freedom of action…
“There can also be a binding contract even though the parties intend to make a more formal contract later, as, for example, where they say ‘this is a provisional agreement until a fully legalised agreement, drawn up by a solicitor and embodying all the conditions herewith stated, is signed.’ The difference lies between (a) mere negotiation preliminary to, or subject to, a contract which has not yet been made, and (b) an immediate binding contract, which can nevertheless be superseded by some later contract if the parties so wish. It is also possible for an agreement ‘subject to contract’ to become legally binding if the parties later agree to waive that condition; for then, in effect, they are making a firm contract by reference to the terms of the earlier agreement.” (5th edition, p568)