When do negotiations for a business deal turn into something that legally binds the parties? To put it another way, when is a contract actually formed? Without getting too technical about it, for a contract to exist there must be:
The question of whether or not these elements exist in a commercial relationship is the root cause of a significant number of contractual disputes across the globe. Anyone who has ever been involved in contractual negotiations will be more than familiar with the term ‘subject to contract’ – it normally appears on all relevant correspondence. Here we look at recent case law that demonstrates how crucial it is not to overlook the importance of this ‘subject to contract’ label.
Whether or not the term is present and used appropriately can have widespread financial implications for the contracting parties. The specialist commercial litigation [AM1] team at Bahamas law firm ParrisWhittaker advises businesses across all sectors on contractual disputes, including disputes that arise over the existence of a contract.
Why Use The “Subject To Contract’ Label?
When there’s a dispute over the existence of a contract courts will examine a range of factors to decide whether the parties did in fact intend to enter into a binding legal relationship. As we’ll see, use of the ‘subject to contract’ term will be highly persuasive in establishing that a contract has not arisen.
By inserting the words ‘subject to contract’ at the top of correspondence you give perhaps the clearest indication you can that negotiations are ongoing – that an agreement is yet to be reached. (On the flip side you must be careful to remove the term from correspondence once you decide you want to create a binding agreement).
One point for our clients to note is that, while including the term ‘subject to contract’ on letters, emails and other communication is a highly effective way to avoid becoming unintentionally bound by a contract, it’s not fool proof. As we’ve mentioned judges will also look at surrounding factors. For example, would a reasonable person think a contract existed given the subsequent behaviour of either party?
‘Subject To Contract’: What Do The Courts Say?
In Joanne Properties v Moneything Capital (2020) the Court of Appeal in London (whose decisions have persuasive authority in the Bahamas) examined the use of the term ‘subject to contract’ in a dispute between a finance company and a property developer.
The case concerned a loan agreement between Joanne Properties and Moneything Capital. The loan covered a property in London. Following drawdown of the finance a dispute arose which led to Joanne Properties beginning court action against Moneything. While this case was proceeding the parties agreed that the London property should be sold and that the loan taken out by Joanne Properties should be redeemed from the proceeds of sale. It was anticipated that following the sale there would be a surplus of £140,000 and this should be paid into a separate account. It was the question of what the parties had agreed to do with the £140,000 in the separate account that was the focus of the Court of Appeal decision. Had there been a binding contractual agreement as to how to use that money?
The court examined the interaction between the solicitors for both sides. These included:
When Joanne Property refused to sign the draft order Moneything sought relief from the High Court seeking confirmation that there had been a binding contract. The High Court agreed that there was. Joanne Property then appealed to the Court of Appeal.
The higher court found in favour of Joanne Property deciding that the High Court judge hadn’t given the ‘subject to contract’ label sufficient weight. Relying on a 1981 case (Sherbrooke v Dipple) the court reiterated the following:
If I Don’t Use The Words ‘Subject To Contract’ Am I Bound To A Contract?
No. In some circumstances courts will infer that certain discussions or correspondence were intended to be subject to contract even if that’s not expressly stated. The 2021 case of Richards v Harvey is a useful illustration of this principle. Again the case is an English decision (this time in the High Court) with persuasive authority here in the Bahamas.
Richards v Harvey involved a long-running and complex dispute relating to the development of a beachside resort in Barbados. The courts had to examine whether or not a meeting between Mr Richards the Claimant and Mr Harvey the defendant was held on a ‘subject to contract’ basis or not.
At the relevant meeting discussions took place over the sale of properties at the resort (the Kings Beach Village). Mr Richards argued that a contract had been reached and because of Mr Harvey’s failure to meet his obligations under it Mr Richards had suffered losses amounting to $6.8m.
The court carried out a detailed examination of all of the discussions that had taken place between the parties. It then assessed these in the context of the meeting at which Mr Richards claimed a contract had been arrived at. The court then concluded that it was clear “from the surrounding correspondence that neither party understood that the (disputed) meeting had the effect of reaching a binding agreement.”
So while some correspondence was labelled subject to contract and some was not, overall it was impossible for the courts to conclude that a contract had been arrived at as suggested by Mr Richards.
The meaning of the phrase ‘subject to contract’ is a common legal term. It’s widely understood to mean:
Nevertheless as the cases discussed show the term can still lead to confusion – and costly litigation. If anything, the cases serve to highlight the importance of getting good legal advice at the time you negotiate and execute commercial contracts.
