Beijing, China (PressExposure) January 15, 2010 -- In order for a contract to become legally binding and effective, three important ingredients consisting of offer and acceptance, consideration, and intention to create legal relations are required.
The first two requirements are some what straightforward. One example of offer and acceptance could be where Party A agrees to fix Party B's car for X dollars if Party B then agrees to this a legally binding contract has been formed. Consideration can be an exchange of anything of value between the two parties. The third requirement, intention to create legal relations, can either be clear and transparent, or not obvious at all. In the latter category, the reasonable persons test would be applied. In order to make it clear that there are no such intentions certain wording such as "subject to contract" are used.
Where parties do not intend to be bound by the content of their agreement phrases such as the one above are usually used to highlight this. The use of such phrases appears that there can be non reliance on agreement terms, a lack of enforceability options, and no liability arising from non performance however dicta from a 2003 case decided the Chancery Division of the United Kingdom's High Court suggests otherwise. Sargant L.J. stated "Be sure that to protect yourself you introduce into any preliminary contract you may think of making the words 'subject to contract'." I do not say that the phrase makes the contract containing it necessarily and whatever the context a conditional contract.
But they are words appropriate for introducing a condition, and it would require a very strong and exceptional case for the clear prima facie meaning to be displaced." Confetti Records (a firm) and others v Warner Music UK Ltd suggests that the phrase "subject to contract" may be displaced only by a very strong and exceptional case. Sargant L.J. provides previous case law examples of Michael Richard Properties Ltd v. Corporation of Wardens of St Saviour's Parish Southwark , Alpenstow Ltd v. Regalian Properties plc , and Cranleigh Precision Engineering Ltd v. Bryant , as such examples whereby the phrase was displaced.
One example whereby the courts displaced such a phrase was in the case of Michael Richard Properties Ltd v Corporation of Wardens of St Saviour's Parish Southwark. Here, the phrase had been typed by mistake into an acceptance letter. The courts held that since there was no room for further negotiations then the phrase could be displaced.