The fact that ‘subject to contract’ may not always be effective
JIREHOUSE v BELLER [2008]
The significance of the words ‘subject to contract’, which are frequently used in correspondence and often stamped on drafts as a matter of course pending an agreed contract, was the main issue in this judgment. The words are meant to indicate the parties do not intend to be legally bound until an agreement is finally concluded, at which point these words are removed. However, here the High Court ruled that despite the use of these words, terms agreed while negotiating were binding as it was evident this is what the parties in fact actually intended. Hence, this case shows that relying on a ‘subject to contract’ restriction may not always work to prevent parties being bound by terms that they have agreed during commercial negotiations.
facts:
The parties had been negotiating a settlement ‘subject to contract’ and had arrived at an agreement imminently before the trial hearing date although the correspondence referred to the settlement being ‘subject to contract’ until the documents were signed. The parties had informed their lawyers the deal was done, had notified the court that the matter had been settled and had behaved as if everything was agreed. The wording of the document was effectively finalised and execution of the document seemed to be just a formality. However, signature of the agreement was delayed by one party for a few days who subsequently claimed the issue had not actually settled and wanted to claim more. A dispute then arose as to whether the earlier settlement was binding.
decision:
- The Court held that the ‘subject to contract’ qualification used in the negotiations had in effect been removed by implication and that the parties had intended to be bound contractually even though the qualification had not been expressly lifted. The principal reason for this outcome was the parties’ conduct and behaviour which showed they had both treated the settlement as concluded whether the words ‘subject to contract’ had continued to be used or not. For example, they would not both have asked their lawyers to stand down nor informed the Court of a settlement just before a trial date, if no settlement had been achieved.
- Once the ‘subject to contract’ umbrella had been lifted (even if only by implication), neither party can unilaterally reinstate it (even expressly) to try to remove the binding nature of the agreement. This means that once the parties have agreed everything in negotiations (and the ‘subject to contract’ restriction is lifted), the parties are contractually bound there and then.
points to note:
- This case related to a settlement agreement for a dispute, but the same principle applies when entering into any contract. Many commercial agreements are negotiated ‘subject to contract’ and this is a useful illustration that this wording will not always protect a party from being held to what has been agreed. Using this qualification in correspondence and on documentation creates a strong presumption that the parties do not want to be bound, but it is only a presumption and is not immune from attack if the surrounding circumstances show a contrary intention that the parties had in fact reached a binding agreement.
- An earlier decision on this topic held that except in very strong and exceptional cases, ‘subject to contract’ would prevent a contract coming into existence and that where the parties do precisely what the document envisaged, this will represent an exceptional case. This judgment perhaps extends this to show that if the parties’ actions following an ‘agreement’ demonstrate sufficiently that they intended to be bound by it, this will also be treated to be an exceptional case and a binding contract will be deemed to have been formed.
- However, the outcome in this case does not mean that the phrase ‘subject to contract’ should not be adopted. If used, it still indicates that the parties do not intend to be committed contractually but if, despite this umbrella wording, the parties’ actual conduct clearly shows they do mean to be legally bound, that phrase will not help.
- The use of the ‘subject to contract’ badge is often misapplied and/or its use is prolonged and indeed lawyers sometimes appear to use or simply copy and paste it on every letter, e-mail and draft, whether in fact it is appropriate or not. In relation to the very last exchange of emails in this case, the judge said "The old observation that solicitors' typewriters had 2 extra keys marked "subject to contract" and "without prejudice" ... is not without a modicum of truth. In my view that is the way in which those 2 emails should be considered".