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When does a contract come into existence? Answer: when the parties have the intent to create one, and have agreed on the essential terms. What the essential terms are depends on the circumstances, but may include things such as key obligations, amounts and dates. If you haven’t agreed the essential terms, then you may only have an unenforceable ‘agreement to agree’. (Although it’s not quite so straightforward – see for example this brilliant article I wrote last year.)
More technically, English law looks at the ‘offer-acceptance’ process. A contract is created when one party makes an offer containing essential terms and that offer is accepted by the other. (This process is why you have to be careful when you are bouncing your terms and conditions against those of someone you are looking to trade with – the so-called ‘battle of the forms’, when the question of whose terms and conditions apply often comes down to which party was the last to circulate its terms and conditions (its ‘offer’) before the other ‘accepted’ them by effectively agreeing that a contract was in place).
The offer can be oral. When you are creating a contract you do not even need it to be in writing, although it’s useful if you want to prove you have one and what it says. The acceptance and the intent to create a contract can simply be given orally, or by conduct, eg starting to perform the contract. People often have discussions or correspondence setting out the terms that might apply to a contract they are discussing. They may intend to put together a formal contract in due course. But a contract might well come into existence before they get round to that. In deciding whether a contract has been concluded, a court will look at the parties’ words and conduct overall and decide whether they intended to be bound by a contract.
But there are some magic words that you can use if you want to make absolutely sure that you don’t enter into a contract until you have agreed and signed a formal legal agreement. It is well established law that the words “subject to contract” indicate that parties do not intend to be bound until a formal contract is executed, however detailed and complete any correspondence or draft contracts that may have been drafted and negotiated may be.
But what needs to happen for the ‘subject to contract’ condition to cease to apply to conversations which have previously been held ‘subject to contract’?
Joanne Properties Limited (‘Joanne’) had a dispute with Moneything Capital Limited (‘Moneything’) over a secured loan Moneything had made which Moneything wanted to enforce by appointing receivers over the charged property. Joanne was arguing that the secured loan arrangement had been procured by undue influence and so shouldn’t be enforced. Alongside the litigation shenanigans which this entailed the parties engaged in settlement negotiations (ie with a view to reaching agreed terms on which they could settle the dispute). They reached a definite agreement for Joanne to sell the property and to ringfence £140k of the sale proceeds which should then be paid out depending on how the dispute was resolved (either by a court or by a further agreement between the parties). There was then plenty of correspondence between the parties (through their solicitors) on what to do with these sale proceeds, all of which was marked ‘subject to contract’. In the correspondence it looked pretty much as though they had reached concensus on most of the things that they were trying to agree on. There was in due course an argument as to whether the parties had reached an agreement. Moneything thought they had, and asked the court to rubberstamp it (the facts are all quite complicated because of the court procedures involved). Joanne said that they hadn’t. For some reason the trial judge sort of ruled that a binding agreement had been reached. Joanne appealed to the Court of Appeal.
What did the Court of Appeal say?
The Court of Appeal agreed with Joanne and said that the trial judge had seriously undervalued the strength of the ‘subject to contract’ wording. For it to stop applying, the parties need to expressly agree so, or circumstances need to be such that they must be implied to have agreed so (which is an objective test, with the context being all-important). There was no such express or implied agreement here.
Comments and tips
- If you want things to be subject to contract until you definitely say otherwise, mark your correspondence ‘subject to contract’. You don’t necessarily need to out ‘subject to contract’ on every bit of paperwork. But it helps to make clear in your first correspondence that that correspondence and all future correspondence and paperwork is to be treated as subject to contract until you definitely say otherwise.
- If work actually needs to start under a potential contract before all the final terms have been properly agreed, things can get very complicated later (you really don’t for example want to be arguing over principles such as quantum meruit); so try to at least put together a clear interim agreement – and extend it as needed. (For a bit more on quantum meruit, see the end of this article.)
Case: Joanne Properties Ltd v Moneything Capital Ltd  EWCA Civ 1541