Marking a document "subject to contract", does it mean the whole document? - in depth - Gateley
In depth

Marking a document "subject to contract", does it mean the whole document?

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The term “subject to contract” is widely used when drafting documents relating to commercial transactions. The term safeguards the parties in a transaction from being bound by a set of terms within a draft document until they are finalised, and the parties enter into the finalised document. In the recent case of Farrar v Rylatt, the Court of Appeal had to consider whether the subject to contract principle could apply to certain terms within a document. 

The case of Farrar v Rylatt  [1] concerned, in part, whether a set of unsigned Heads of Terms marked “subject to contract” on the front of the document, created a binding profit share agreement. The Heads of Terms related to the conversion of two barns in Featherstone (the Barns). The Heads of Terms recorded the proposed arrangements for:

  1. the sale and purchase of the Barns;  
  2. the proposals for their development (including the parties entering into a joint venture partnership with the landowners’ company to build out the development);
  3. the proposals for financing the project; and
  4. the post-project completion profit-sharing arrangements. 

The parties entered into subsequent contracts for the sale of land and the building works, but not the joint venture partnership and profit sharing. 

The appellant claimed that they were entitled to the profit from the sale of the Barns based on the provisions in the unsigned Heads of Terms marked “subject to contract”. 

When the Court reviewed the use of the term "subject to contract” in the Heads of Terms it found:

  • All the terms had not been settled - The use of the label “subject to contract” within the Heads of Terms meant they could not amount to a binding contract for sale of the Barns, on the basis that “all the terms have not been settled”. The Heads of Terms also being unsigned meant they lacked a significant pre-requisite of a binding property contract.  
  • The entitlement of profit share to the appellant was under dispute - If parties undertake works pursuant to an arrangement which is marked “subject to contract”, any loss must lie where it falls. Whilst building works were carried out to the Barns and paid for by the joint venture company (which was formed by the parties), no element of profit share was paid to the appellant, due to their entitlement having been disputed.
  • The Heads of Terms were intended to outline proposals only - It was found that the Heads of Terms were correctly labelled "subject to contract”, on the basis that one of the parties was out of the country at the meeting which was held to agree the terms of the transaction. The agent who prepared the Heads of Terms also advised that he intended them to outline the proposals only. 
  • The principle “subject to contract” was found to apply to all terms - Despite it being alleged that the parts of the Heads of Terms relating to the joint venture and the profit-sharing arrangements were exempt from the “subject to contract” principle, it was held that by using the term on the front of the document (and not disapplying the principle to any terms within the document), the principle applied to all the terms. The appellant had argued that following a copy of the Heads of Terms being attached to the completed building contract, the “subject to contract” label had been disapplied (on the basis that the matters in the Heads of Terms had been agreed, including the profit-sharing arrangement). 

The principles above echoed the findings in a Supreme Court decision in 2010 [2] . It was accepted that when negotiating a contract which is subject to contract, and work begins before the contract is entered into, it does not always follow that a contract will be entered into upon the terms which were agreed subject to contract.   

What can we learn from this case?

If the subject to contract tag is positioned on the front of the document, it usually is taken to include all terms within the document, unless specified otherwise. 

In order for such a document to be legally binding, all parties must sign the document. In the case of Farrar v Rylatt, there was no claim to the profit generated by the joint venture as detailed in the Heads of Terms agreement as the joint venture clause was not highlighted as being exempt from the subject to contract tag and because the document was not signed by all parties. 

It is important to always ensure that the final contract you want to agree encapsulates all of the terms required, that any terms you want included or excluded from the subject to contract tag are identified specifically and that the document is signed by all parties to ensure it is legally binding.

 [1] Farrar & Anor v Rylatt & Ors [2019] EWCA Civ 1864 (08 November 2019) 
 [2]RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh & Company KG (UL Production) 2010

 

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