When an agreement is made “subject to contract”, it does not necessarily mean that the contract is not binding.

There are essentially three recognised categories of agreements “subject to contract”:

  1. the parties have reached final agreement on the terms of their bargain and intend to be immediately bound, but want those terms to be set out in a more precise, but not materially different form. This category represents a binding agreement;
  2. the parties have reached finality and do not intend to alter their agreement, but want to defer performance of it until it has been incorporated into a formal document. This category represents a binding agreement;
  3. the parties do not intend to make a concluded bargain unless and until they sign a formal contract. This category represents a non-binding agreement.

Therefore, if an offer is made “subject to contract” (or similar words) care must be taken as it could still be binding on the parties. If an agreement is not meant to be binding, the parties should specifically state, for example: “this agreement is not legally binding on the parties until such time as the parties enter into a formal business sale contract”.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

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