During negotiations parties frequently head correspondence ‘subject to contract’.  But the question is, what does this actually mean?  Does the phrase have legal force, and will other phrases have the same effect?

The phrase ‘subject to contract’ indicates that negotiating parties wish to remain uncommitted until a formal agreement is reached.  It prevents one party bringing a claim based on what was said in pre-contract correspondence.  This is a very valuable tool if used correctly. It can be used in traditional written correspondence and should be used to head all pre-contract emails as parties may find themselves bound by a contract formed through a string of email correspondence.  The courts have recently highlighted that it is important to use the exact phrase ‘subject to contract’ or a very similar form of words, otherwise it could enforce the intention of the parties.  A recent case of Immingham Storage Company Ltd v Clear plc showed that just saying that a formal contract will follow is not enough to prevent a contract already having been reached.

The facts of the case
The Defendant wished to store diesel at Immingham’s storage facilities. Various e-mails regarding the proposed storage contract were exchanged and proceedings to enter into a contract began.

An e-mail sent by Immingham attached a quotation headed “subject to board approval and tank availability”. At the end of the quotation were the words “a formal contract will then follow in due course”.

The Defendant signed the quotation and returned it by fax to Immingham, who responded by e-mail stating “we are delighted to be able to accept your offer…you are assured of storage and can now proceed to source your product accordingly…in further confirmation of the above, our full contract for this business will now be raised over the next few days by our Head Office and sent for your signature and return.”

A formal contract was sent out by Immingham; however, it was not returned by the Defendant who did not go on to use the storage facilities. When Immingham raised its bill the Defendant refused to pay, denying the existence of a contract due to its failure to sign and return it.

The first instance judge, finding for the Claimant, held that a binding contract was made by the returning of the signed quotation. However, the Defendant appealed to the Court of Appeal over the email accepting their offer, arguing that a communication which expressly refers to a full contract to follow cannot constitute full acceptance of the terms to follow.

The Court of Appeal concluded that a contract had been formed and that the provision stating that “a formal contract would then follow in due course” did not indicate that the Defendant’s acceptance of the signed quotation was in itself subject to contract.

Three factors were paramount to the Court’s reasoning:
1. The quotation itself was not made subject to contract
2. The quotation was made subject to two other pre-conditions which had both been fulfilled
3. All the substantial terms were agreed; there was no substantial difference between the quotation and the formal contract.

Practical advice
This case demonstrates the courts’ willingness to enforce an agreement, whether made informally or not, and to give effect to the parties’ true intentions.
If you do not wish to become bound by pre-contractual negotiation this should be made clear and unambiguous from the outset. To avoid doubt, the phrase ‘subject to contract’, or words of a similar effect, should head all correspondence and emails, including attachments and enclosures.  A vague reference to a formal contract, or the mere indication that negotiations are not meant to be binding is simply not enough.