The scenario

You're a property investor and interior designer. A developer approaches you with a good project and you agree to set up a joint venture company to implement it. You both have one share each in the JV Co. It is agreed that whilst the developer will do most of the work on site, you will also carry out some of the works.

Unfortunately, the project doesn't progress as planned. Your relationship with the developer deteriorates. You no longer see any real value in the project, and you want to bring the JV to an end. The developer agrees to buy back your share in the JV Co and, expressly "subject to contract", you agree broad terms to sell the developer your share.

No contract is ever agreed, but payments are made and you remove your kit from the site. Several months later you see that the project will be profitable. So, given that the terms of the buyback were expressly "subject to contract" and given that the there has been no contract, you can still take your half share, right?

Contract?

Wrong.

If the essential terms of a contract have been agreed and the parties take substantive steps to reflect that agreement, there is a real risk that a court will find that there is, in fact, an intention to create a binding legal relationship.

The facts outlined above are similar to those in the recent case of S.E. Johnson v H. D. Spooner & another [2022] EWHC 735 (Ch). In that case the High Court looked past the "subject to contract" label and found there to be a binding contract.

It may be that at the point the term "subject to contract" is first used there is no intention to be bound. But later conduct, for example making payments or starting building works, when there is still no formal agreement in place suggests that the intention to be bound might have changed. A court may then decide that the terms of the original "subject to contract" agreement have become the terms of a live, binding, agreement. Equally the court may determine that the words and conduct of the parties indicate that a varied form of that original agreement is now a more appropriate reflection of the parties intended agreement.

The moral

Using the "subject to contact" label isn't conclusive.

As ICC Judge Prentis explained:

"…whether negotiations are continued under an express “subject to contract” banner or not, the court’s task is to determine the facts and then to consider whether objectively, and taking into account that banner, there was a sufficiently-determined agreement effective before being contained in writing."

The takeaways

Do still use the "subject to contract" label. It’s very helpful and the courts will take it seriously.

But the term "subject to contract" is not magic. What you say and what you do afterwards matters.

If you talk and act as though there is an agreement in place, the court may well find that you intended to create a legal relationship and be bound. The court will then have to try and work out the precise terms of the agreement from surrounding circumstances – that's difficult and may mean you don't end up with what you want or expect.

So, if you do want an agreement to stay subject to contract, be very clear about exactly what conditions need to be satisfied before the agreement becomes binding and don't say or do anything inconsistent with that. For example, avoid making payments or starting works on a project or taking active steps to progress it unless the basis for those actions is clear.

This can be tricky area of law. If you say that something is "subject to contract" make sure that you take active steps to get a written contract in place. Failing that, at least try to make your position clear to the other side throughout (and keep the relevant email chains etc.). A lot will depend on the precise facts and circumstances.