Why Do People Put ‘Subject to Contract’ On Communications?

Why does ‘Subject to Contract’ appear in so many letters, emails and many other communications about transactions? The reason is that the sender does not want a legally binding contract to arise yet and not as a result of that communication.

Formulation of Contract

The first thing that students of Contract Law learn, is that for a legally binding contract to come into existence, there must be:

1. An offer;
2. An acceptance;
3. Consideration (i.e. something each party is to give as a result of the Contract); and
4. Intention to be legally bound.

A practical example of the above:

• ‘If I have advertised my car for sale, you offered to buy it for £10,000 and I accepted and we were being serious, a legally binding contract would come into existence. You have made an offer. I have accepted. We are each giving consideration for the Contract (ownership of the car by me, £10,000 by you) and we intend to be legally bound.’

In non-paper transactions, disputes can arise as to who said what and what was intended. But if a Court concluded these were the facts, then it would proceed on the basis of a legally binding Contract.

The effect of using ‘Subject to Contract’

So if a party to a transaction or its representative puts in a communication ‘Subject to Contract’, it is saying there is no intention to be legally bound at this stage. Therefore, no Contract can come into existence based on that communication.

Only when it is objectively clear that the parties intend to be legally bound does the legally binding Contract come into existence.

‘Subject to Contract’ in real estate

There is a special rule, as specified in Section 2 Law of Property (Miscellaneous Provisions) Act 1989, for Real Estate Contracts that the Contract must be in writing, in one document signed by both parties or in two identical documents each signed by one of the parties and exchanged. So one might think there is no need for ‘Subject to Contract’ in communications about a potential Contract in respect of land or buildings.

But if someone has written a letter setting out all the terms which can, objectively, amount to an ‘offer’. The other party could write ‘accepted’ on it and sign it, to bring into existence a legally binding Contract.

Use caution in emails

Email chains are particularly dangerous. Each time an email is sent, it will have the name of the sender. The law is now that a name at the end of an email can amount to a signature by the sender (Electronic Communications Act 2000 and the 2019 Law Commission Report). If the email chains contains all the terms of the deal, a legally binding Contract can come into existence. This is what happened in the 2019 case of Stavros Neocleous and Kalliroy Neocleous v Christine Rees [2019] EWHC 2452 (Ch).

But if the communication has ‘Subject to Contract’ on it then this an indication that the sender has no intention for a legally binding Contract to come into existence yet. Rather the normal situation will apply that a legally binding Contract will only come into existence when the form of Contract being discussed by the parties is settled, signed and exchanged in the traditional way.

A recent Court of Appeal Judgment in Joanne Properties Ltd v Moneything Capital Ltd & Anor [2020] EWCA Civ 1541 has reaffirmed this. From the opening of discussions, solicitors for the Defendant had communicated by email under the heading “subject to contract”. The Claimant had made a proposal to settle a dispute. The Defendant countered with an offer, again subject to contract. The Claimant’s solicitors replied by email in terms that their client “agreed” and claimed a binding Contract had thereby come into existence. The Court of Appeal disagreed. Lord Justice Lewison said:

Therefore, it is important to recognise that once the caveat of ‘Subject to Contract’ is introduced, it can only be lifted upon express agreement or it can no longer apply due to a necessary implication (such as contracts being exchanged). Otherwise, it can control the dialogue between the parties.