Can My Company Be Bound by Comments Within Documents Marked ‘Subject to Contract’ in England?

You will likely engage in numerous formal contract negotiations as a business owner. Some of them will be successful, whilst others will not. Whichever way, it is usual practice for businesses to exchange correspondence and draft contracts marked ‘subject to contract’. This article will explore the use of ‘subject to contract’ correspondence and whether any documentation marked ‘subject to contract’ could be binding on your company.

What Does ‘Subject to Contract’ Mean?

This legal phrase confirms that the sender does not intend the contents to form a legally binding contract. Instead, it seeks to demonstrate that the document or correspondence is in draft form. Thus, it does not contain any legally binding assurances regarding the contents of a future contract.

Suppose your business sends a draft contract to another company for their comments and the contract is not marked ‘subject to contract’ (or ‘without prejudice subject to contract’). Accordingly, there is a risk that the other party may later argue that it is a legally binding agreement.  This can even be the case where the contract is marked ‘draft’.

Example

Let us say that your retail business is negotiating with a greeting card company. The initial negotiations centre on the company providing 100 cards per week to your Liverpool store for a three-month period. The purpose of the deal is to ascertain demand for those greeting cards and discuss an initial fee of £1 per card.

You put forward a draft contract with these terms in place and mark the contract as ‘draft’ and ‘subject to contract’ in capital letters on the front cover. Before signing, you decide that the deal is not worth the £100 per week fee and withdraw. However, the card company is keen to force the deal through and start legal action.

Could they successfully argue that the draft contract was a binding agreement? On these facts, and because of making clear that the contract was put forward on a subject to contract basis, it is very unlikely to be held as binding on the parties.

However, in the absence of any ‘draft’ or ‘subject to contract’ markings, it would be unclear what a court would do. This is especially so if the party had delivered the initial weekly shipment of cards.

Can Documents Marked ‘Subject to Contract’ Be Legally Binding?

In most circumstances, no. The point of marking a contract or document ‘subject to contract’ is to make clear to all parties and courts that the sender has no intention of creating legal relations.

However, there are some limited situations in which a court may judge otherwise. Let us consider two potential scenarios here.

Scenario 1

You deliver a contract to another company marked ‘subject to contract’. It states that the company will clean your premises for £80 per week starting from 1st January. No contract is ever signed. However, the company cleans your premises each week from January onwards and receives £80 each time.

Here, the parties’ mutual actions demonstrate an acceptance of the draft contract so that a court is likely to waive its ‘subject to contract’ status. This is likely because the court can judge the parties to have accepted it later through their conduct. Therefore, they have impliedly lifted the subject to contract protection.

Scenario 2

You email another company to confirm a verbal conversation about a potential commercial deal.  The email title is marked ‘subject to contract’, and the covering text summarises a possible deal for that company to provide lunches for office staff each Friday for £200 per week.  A few days later, the parties have a verbal conversation agreeing to the terms of the email. However, they do not confirm this in writing.

Here, the email is likely evidence of the (later) verbal conversation if the judge believes a later verbal conversation agrees to those terms. This is because it is the only written detail. Furthermore, the later discussion would have waived the subject to contract protection.

These scenarios are not commonplace. Nevertheless, they demonstrate that marking documents ‘subject to contract’ is not protection against a legally binding deal.

Key Takeaways

Overall, marking pre-contract correspondence regarding sales, goods or property as subject to contract is good practice. This demonstrates to all parties and courts that your company does not intend to enter into a formal written agreement through that document. However, it is essential to note that there are limited circumstances in which a judge may hold documents marked subject to contract to be admissible within court proceedings. Therefore, it is advisable to consult an expert lawyer when another company attempts to do so. In most cases, such documents will be inadmissible and have no real effect.

If you need help drafting and reviewing subject to contract documentation, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page. 

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