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Subject to Contract: What Business Owners Should Know

Table of Contents

In Short

  • This wording signals that negotiations are non-binding until a formal agreement is signed.
  • Even with the phrase, actions or communications suggesting agreement can create a binding contract.
  • Use the term consistently across all communications to avoid ambiguity.

Tips for Businesses

When using “subject to contract,” clearly label all relevant correspondence and documents to avoid confusion. Ensure your actions align with the non-binding intent to prevent unintended obligations. Seek legal advice to draft agreements and clarify terms, particularly for complex negotiations or heads of terms.

Contracts are critical legal documents for business owners which are intended to create binding obligations on the relevant parties. You may encounter the phrase ‘subject to contract’ in emails, letters, or draft documents when negotiating contracts. These words are typically used to highlight that discussions or agreements are not intended to be legally binding. However, using this language requires careful thought to ensure it serves its intended purpose, and businesses should understand the specific risks that can arise from using this terminology. This article explores how subject-to-contract is intended to work in practice and key considerations for business owners who come across this terminology.

Why Do Businesses Use Subject to Contract in Negotiations?

Businesses often use the phrase subject to contract to confirm that they do not intend to create a binding agreement until they execute a formal contract. By applying this wording to discussions and exchanges of correspondence, both parties acknowledge that no contractual obligations arise from their negotiations. It highlights that parties do not wish the discussions to have legal effect nor to form a contract.

Businesses often mark correspondence or documents as subject to contract during negotiations to show that neither party intends to become legally bound until they agree on all terms and sign a formal agreement. Without this safeguard, businesses may risk unintentionally becoming bound by the provisions they discuss during the negotiation stages.

What Should Your Business Know About Using This Terminology?

The term “subject to contract” helps businesses manage expectations and maintain flexibility during commercial negotiations. Companies might use this phrase as a heading or label in certain documentation. For example, draft commercial agreements, to clarify that the parties are still negotiating and have not yet reached a binding contract.

Using “subject to contract” can help avoid the presumption that a legally binding agreement has been entered into. Does this wording work for its intended purposes? To determine this, it is essential to examine the specific language and context. A business can strengthen its position by prominently stating its intent (such as by labelling an entire document “subject to contract” to prevent any uncertainty about the parties’ intention). 

It is essential to know that although this terminology can create a presumption that no binding agreement exists, the courts may decide that one does exist if the parties’ conduct clearly shows their intention to be bound, for example, if they start performing the relevant contractual terms.

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How Can Subject to Contract Feature in Heads of Terms?

Heads of terms can help summarise key points that parties agree on before drafting a full, detailed contract. Parties typically mark these documents as subject to contract to clarify that they are not legally binding but represent a statement of intent that should guide further negotiations. Including this phrase helps both parties acknowledge that no binding obligations will arise until they execute a formal agreement.

However, heads of terms can sometimes include specific obligations that one or both parties agree to carry out before signing the entire contract. For example, parties may state that confidentiality or exclusivity clauses are legally binding. Including binding clauses can complicate the legal status of the heads of terms and create enforceable obligations – so it is important to approach such documents with caution. 

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This example highlights the importance of carefully using subject-to-contract terminology within documents to ensure the document aligns with the parties’ intentions. If you are uncertain, seeking legal advice from a commercial contracts solicitor can help you clarify the implications of including such wording during pre-contractual obligations and whether the terminology you intend to use is clear enough. Legal advice can help you draft and reflect your intentions accurately and prevent unintended legal consequences.

What Risks Come With Using Subject To Contract Wording?

The term subject to contract can be effective, but you must apply it carefully. The phrase cannot always prevent a binding contract if the parties’ words or actions indicate otherwise. If the courts get involved, they usually examine the entire negotiation process. This helps them determine whether the parties desire the document to have legal effect. If a company’s actions or words suggest agreement, you might inadvertently create a binding contract, even with the label subject to contract.

Inconsistent use of subject to contract across communications may also create ambiguity and reduce the effectiveness of the wording. As such, businesses should maintain consistency in language and behaviour if they wish for the phrase to work as intended.

Disputes can arise over whether an agreement stated as subject to contract creates binding obligations, and there has been litigation on this topic. Given the risk of disputes, businesses in doubt should use this terminology carefully. They should also seek legal advice to protect their position.

Key Takeaways

Subject to contract wording can express that businesses wish to negotiate without creating binding commitments. Applying this terminology consistently and clearly is vital to ensuring its effectiveness. If you need support with this, you should seek legal advice from a commercial contracts lawyer. 

If you need help drafting or 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

Frequently Asked Questions 

Why do businesses use the words subject to contract?

This wording usually ensures that negotiations remain non-binding before the signature of a formal contract.

Why should a lawyer assist me with my contracts?

A lawyer can help your business protect itself in business relationships by drafting robust and legally binding contracts specific to your business needs and can help you protect it in various ways. For example, a lawyer can support you with strong written contracts to comply with your legal obligations. They can also protect your intellectual property rights and avoid non-payment risk with clear payment terms. 

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Sej Lamba

Sej Lamba

Sej is an Expert Legal Contributor at LegalVision. She is an experienced legal content writer who enjoys writing legal guides, blogs, and know-how tools for businesses. She studied History at University College London and then developed a passion for law, which inspired her to become a qualified lawyer.

Qualifications: Legal Practice Course, Kaplan Law School; Graduate Diploma in Law, Kaplan Law School; BA, History, University College.

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