“Subject to Contract” overused and misunderstood

During the early stages of your next business transaction with another commercial party, you may be tempted to use the words “subject to contract”.

The term is commonly used during negotiations for heads of agreement, with the intention of preventing the terms of the HOA becoming binding, until such time as a formal written contract is agreed.

Importantly, however, the words “subject to contract” are often ineffective, and you can still be bound by an agreement you have reached containing these words, even if it the agreement appears preliminary.

A recent case Stellard Pty Ltd v North Queensland Fuel Pty Ltd

[2015] QSC 119 starkly illustrates the point.

Consider the following email exchange in that case:

Purchaser email: “This offer is of course subject to contract and due diligence as previously discussed. We are hopeful of effecting an exchange of contracts next Monday but need acceptance of our offer immediately so we are in a position to instruct the appropriate consultants to carry out the necessary investigations. I look forward receiving your client’s confirmation that our offer is accepted as clearly both parties are now going to start incurring significant expenses.

Vendor (approximately 45 minutes later) email: We accept the below offer which we understand will be subject to execution of the contract provided (with agreed amendments) on Monday, minimal due diligence period and the provision of all information/reports, etc. that are obtained by the purchaser during the due diligence period.”

The Court found (amongst other things) that the language of “offer and acceptance” was indicative of an intention by the parties to enter into binding legal relations. Consequently, the use of the term “subject to contract” was downplayed by the Court in favour of other factors (including this language) which showed the parties meant to enter a binding contract on the terms specified in their emails.

Parties with bargaining power often assert that a HOA is binding and adequate, and insist on completing transactions based on that agreement without further negotiation of terms. This disadvantages the other party who is conducting itself on the basis that the HOA was just the start of the negotiation process, and that there was further scope to add, amend or clarify particular terms, or even walk away from the transaction altogether.

How can we help? NextGen Legal can review your Heads of Agreement before it is agreed to maximise the prospect of it being found to be binding or non-binding, depending upon your objectives. Approached strategically, a well worded HOA can be a powerful tool in subsequent negotiations.

 

By | 2017-08-29T21:45:07+11:00 September 11th, 2016|Contracts & Agreements|