Effectively using ‘subject to contract’

If you have spent time and effort carefully crafting an agreement, then when should you mark them ‘subject to contract’? Never?

In my experience this phrase does more harm than good. If you are still discussing or negotiating your contract, then it may prevent a contract occuring prematurely. But it won’t work if:

  • you add it to a wide variety of pre-contract and post-contract documents from brochures to invoices
  • you don’t have processes that ensure you get clear contracts signed
  • you start work without getting your terms finally agreed (starting work can be acceptance of their terms).

When to use ‘subject to contract’

This phrase should only be used when you want to prevent a contract arising i.e. before all the essential terms are agreed. The phrase counteracts the implication that you intend to enter into a contract now.  Even if you have an offer, accepted, for consideration and with certain terms (the other four legal essentials for a contract), there can be no legally binding contract.

Between businesses (ie B2B), it is presumed that the parties intend that any agreements they make will be contracts, so if you are not ready then you may have to hit the pause button by adding ‘subject to contract’ to your correspondence.

Of course, you need to make sure that at some point after this you let the other side know that either

  1. you have both now reached agreement on all essential terms and that you intend to enter into a binding contract – this should kick-start the process of recording your agreement, getting it fine-tuned and signed; or
  2. you cannot reach agreement and you withdraw.

As with most aspects of contract process, using ‘subject to contract’ without knowing your exit strategy is risky. It’s unclear whether you mean: I’d like a formal contract to record what we have already agreed, I need a formal contract to record our agreement or I am not ready to agree to these terms: “the mere fact that the letter giving instructions to proceed envisages the execution of further documentation, does not preclude the court from concluding that a binding contract was nonetheless entered into, provided that all the necessary ingredients of a valid contract are present.” (Harvey)

What should you do?

For business: only use ‘subject to contract’ where you want to be bound by a formal contract AND can guarantee a formal contract will replace the current paper trail – you might be better off with an oral or part oral-part written contract than no contract at all. If you do use it, be consistent about when to start and when to stop adding it. You also need to make sure you record the agreement, and then sign it, or be prepared to walk away.

For consumers:  don’t use ‘subject to contract’. However if you want to be clear what your rights and remedies are, prepare a simple contract.

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