HOME NEWS & VIEWS MEETINGS COMMITTEE LAW REPORTS CONTACT LONDON INSTITUTE
Articles
Subject to Contract
This is an expression which almost all of us will recognise, from house purchase for example and realise that it means that, even if we have agreed all terms of the contract, no contract will come into existence until the formal contract document has been executed. It now appears that it has general application.
'Subject to contract' can, in a similar way to 'without prejudice' arise by the intent of the document, regardless of the heading. However, if that is what you intend, then put it in the heading. It was assumed that, once the phrase was introduced, it would continue to apply and could only be displaced by express agreement.
However, in Confetti Records -v- Warner Music UK Ltd. [2003] supported by the Court of Appeal case of ProForce Recruit Ltd. -v- Rugby Group Ltd. [2006] (both judgments can be downloaded from www.bailii.org ) it was not only accepted that the concept of 'subject to contract' was for general application but that the requirement for a formal contract could be waived by the actions of the parties, a specific denial was not necessary.
Typically, a letter of intent may include an expression which says that formal documents are being or will be drawn up for execution by the parties. This may be sufficient to introduce the concept of 'subject to contract'. There will be more force in this argument if the intention is that the contract will be executed as a deed. Under normal circumstances, no contract can arise until such time as the formal document is executed. However, the parties may, by their actions negate this presumption.
I can do no better that quote some of the passages from Mr. Justice Lewison's judgment in
Confetti:
The use of the phrase 'subject to contract' construed objectively, means, in my judgment, that the parties must be taken to have intended that the (deal memo) should not be binding. There is nothing in the (deal memo) itself which is inconsistent with that. (para 33)
In my judgment no contract was created by the signature of the deal memo. (para 94)
In my judgment no estoppel as to the existence of a binding contract can arise out of the signing of the (deal memo) alone. The meaning of the phrase 'subject to contract' is that either party is free to withdraw from the proposed transaction until such time as a binding contract is made. How can that amount to a representation that there is a contract? In my judgment it cannot. (para 115) (F)or an estoppel to arise in this context, it must be based on something other than the 'subject to contract' agreement alone. (para 119)
Although the settled meaning of 'subject to contract' may, in theory, be displaced by a very strong and exceptional case, there are very few cases in the books in which the circumstances have been strong enough to displace that meaning. (para 68)
The case was to do with music copyright, the term 'deal memo' is, I believe, synonymous with 'letter of intent'.
I suggest that the correct approach to determining the effect of a letter of intent which apparently introduces 'subject to contract' is in three phases:
1. Does the letter expressly or impliedly indicate the intention that no contract will exist until execution of the formal document.
2. Is there anything in the letter which is incompatible with this.
3. Have the parties done anything, expressly or impliedly to show that the requirement for formal execution has been waived.
This is a personal view and is without any liability but I hope that it will help in deciding the effect of this aspect of a letter of intent.
Peter Horne