The force of "subject to contract"

An agreement – in relation to a building that was sold once its owner fell into arrears – was embodied in a formal written contract signed by each party. The issue on this appeal was whether the parties reached a further binding agreement about how ring-fenced funds were to be shared between them once the property had been sold, despite “subject to contract” communications. The Court of Appeal overturned a decision that concluded that they had.

Once negotiations have begun “subject to contract”, the court will not conclude that such a qualification has been expunged unless that is expressly agreed by the parties, or if this is the necessary implication of their words or conduct. There must therefore be a formal contract or clear, factual grounds for inferring that the parties must have intended to dispense with the precondition. In the court’s view there was neither.

The court held that while it is an objective test that determines whether or not parties intended to enter into a legally binding contract, the context is “all-important”. And in this case, it is the phrase “subject to contract” that has shaped the context within which the contract was formed. Quoting from one of his previous decisions, Lord Justice Lewison put it this way:

“The meaning of that phrase is well-known. What it means is that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and (b) that each party reserves the right to withdraw until such time as a binding contract is made.”