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Summary

The use of the words subject to contract in an agre em e nt will, except in a very
strong and exceptional case, pre ve nt an im plie d binding contract from arising on
the basis that the phrase is use d to indicate that until a form al contract is
e x e cute d, the partie s do not inte nd to owe e ach othe r contractual obligations.
Howe ve r, in e x ce ptional circum stance s, if both partie s act on and tak e ste ps in
re spe ct of the te rm s and conditions that the subject to contract agre em e nt
provide d for, this m ay support the courts concluding that the partie s had re ache d
an im plie d binding agre em e nt de spite the fact that a form al contract had not
be e n e x e cute d.
To addre ss this risk , partie s:
o may wish to add to the phrase subject to contract the words and not intended
to create a legal contract, or other words expressing a similar statement of
intention.
o should be careful not to start acting on the terms and conditions of the subject
to contract agreement, as this could be used as evidence that the parties have
entered into an implied binding contract.
The Subject to Contract principle
Parties wishing to avoid informal creation of contracts use the term subject to
contract in negotiations prior to execution of a formal written contractual document.
Lewison J stated in Confetti Records (A Firm) and others v Warner Music UK Ltd
(trading as East West Records) [2003] EWC H 1274 (C H) that the settled meaning of
the phrase subject to contract being that the parties intend an agreement should
not be binding until a formal contract is entered into can be displaced by a very
strong and exceptional case.
The case of Rugby Group Ltd v ProForce Recruit Ltd [2005] EWHC 70 (QB) was an
example of such a strong and exceptional case.

The case confirmed the principle that agreed heads of terms may still bind parties if
all the following apply:
1. they satisfy the general law for the creation of a contract, i.e:
a) certainty of terms agreed
b) an intention to create legal relations
c) consideration
2. they satisfy the provisions of section 2 Law of Property (Miscellaneous
Provisions) Act 1989, which provides that an agreement regarding an interest in
land must:
a) be in writing,
b) incorporate all the terms that the parties have expressly agreed in one
document, or where contracts are to be exchanged, in each document
c) be signed by or on behalf of each party
3. where if they are expressed to be "subject to contract", the conduct of the
parties supports the conclusion that they have reached a binding agreement.
In the case of Rugby Group:
The parties had signed a document setting out term s and conditions, which we re
expresse d to be subject to contract, where by ProForce would supply Rugby
cleaning products and workers, and provide d that Proforce would be give n
preferred supplier status for a contractual term of two years.
Both parties then acted on the term s of this subject to contract agreement by
performing the obligations in the term s and conditions, including ProForce
supplying and Rugby paying for the workers throughout the stipulate d two year
period.
The dispute arose whe n R ugby re cruite d additional labour from othe r supplie rs to
supplem e nt the work e rs supplie d by ProForce . ProForce conside re d this was a
bre ach of the ir preferred supplier status and the re fore a bre ach of the subject to

contract agre em e nt, and m ade an application for bre ach of contract against
R ugby.
R ugby m ade an application to strik e out ProForce s claim on the basis that:
firstly, the agre em e nt was not e nforce able be cause it was subject to contract.
o secondly, in the alternative, that the words preferred supplier status meant no
more than that to the extent that the Rugby might maintain a list of suppliers, the
ProForce would be on that list.
The Hon. Mr. Justice Field allowed Rugbys application to strike out on the basis of
Rugbys second assertion (although this part of his decision was successfully
appealed at the C ourt of Appeal). However, he said in respect of their first assertion
that:
in this case, save for the alleged breach, the agreement cannot be regarded as
being executory because after it was signed the parties did those things that the
agreement contemplated that each should do for the benefit of the other. . . It is in
my view that the parties are taken to have entered into an implied binding contract
on the terms of the agreement.
Accordingly, the conduct of the parties in acting on the terms of the subject to
contract agreement resulted in the court concluding that there was an implied
binding agreement.
2/4/2015 Subject to Contract
http://www.wslaw.co.uk/e-gen-articles/e-gen-july-2012/subject-to-contract/ 3/3
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Gemma Pryke.
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