Subject to Contract: Protection or Not?
The words ‘subject to contract’ are commonly supposed to mean that a document is in effect a mere statement of intent and that the parties to it do not want it to be enforceable until a contract has been drawn up and signed.
However, a recent case shows that this can be a risky approach. It involved an agreement by which one party would supply cleaning equipment and make a ‘preferred supplier’ of a second firm (an employment agency) which would supply it with contract workers. Both sides acted in accordance with the subject to contract agreement, but later the equipment supplier started hiring workers from other sources, so the employment agency sought to enforce the agreement.
The court held that since the agreement was a statement of intent and both sides had acted in accordance with it, it was a contract which was binding on both sides.
However, the judge was not willing to construe that those aspects of the agreement which were not included in the subject to contract agreement (i.e. those matters agreed verbally but not incorporated into the written agreement) were a part of the contract.
A subject to contract agreement should be turned into a proper contract as soon as possible, if for no other reason than the fact that using the court is a very expensive way to find out whether a contract exists.
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