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Are you negotiating “subject to contract”?

20th April 2021

Are you planning a home or business sale? Perhaps you are faced with the worries and challenges of a divorce; or maybe you are about to settle a claim that has been brought against you or your company.

Whichever of these apply (and there are many other examples), it is highly likely that the matter will only be concluded once you have entered into a contract. It is therefore important to ensure that you do not inadvertently enter into the contract until you are entirely happy with its terms and ready to do so.

It is surprisingly easy for one party to think the negotiations have been concluded, whilst the other party does not. This gives rise to uncertainty, and can lead to litigation, which is why many Solicitors make sure that all negotiations are conducted “subject to contract”.

So, what does “subject to contract” actually mean?

Clarification and Detail

 In simple terms, a contract sets out an agreement (usually between two parties) following a period of negotiation. It details and clarifies what has been agreed and what will take place, as a result.

“Subject to contract” is a label that can be applied by either party to the discussions and exchange of correspondence that occurs during the period before the contract is entered into, so as to provide a ‘neutral ground’ within which the negotiations can take place.

It is really just the parties confirming to one another that, “none of the discussions between us give rise to any contractual obligations. Either of us could pull out of the negotiation at any time, and a contract will only be formed between us once we have both clearly agreed to all of the terms of the proposed contract.”

In a recent case, the Court of Appeal has confirmed that, where the “subject to contract” label is applied, only a signed, formal contract or mutual agreement between parties will form a binding contract.

It was further reiterated in that case that, once one or other of the parties has applied the “subject to contract” label, the negotiations will continue under the protection of that label even if future correspondence is not expressly marked as being “subject to contract”.

The label will only fall away if there is express agreement between the parties that it should do so. However, it is always sensible to mark all correspondence “subject to contract” if that is your intention, so as to avoid any confusion or misunderstanding.

Contractual negotiations are quite often stressful, particularly if they are something you are not involved in on a regular basis, and as ever with contract law, the devil is in the detail. The use or omission of these three simple words could make all the difference to your situation. It is therefore important that they are used appropriately.

Here to help

If you have any questions concerning your company, or if this article has raised concerns for you, our hugely experienced Dispute Resolution team at Ansons are here to help.  Please get in touch with Adam Pike, Associate Director, at apike@ansonssolicitors.com or on 01543 431197.

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