Subject to Contract: a word of warning

I have recently seen two cases that have provided a stark reminder about the use of the phrase "subject to contract."

The first case, Chew Ai Hua, Sandra -v- Woo Kah Wai [2013] SGHC 120, concerned the use of a formal "offer to purchase" letter in regard to the sale of a condo unit.

The offer to purchase letter was sent with a cheque for 1% of the purchase price to be paid. The letter also stated that the Defendants had to accept or reject the offer within three days. If the offer was accepted, a signed Option to Purchase had to be delivered to the Claimant, but if it was rejected, the Defendants had to refund the money. The letter also said that the sale of the condo was "subject to signing the Option to Purchase".

The cheque was banked and the Defendant signed the Option to Purchase. However, a dispute then arose in regard to the deadline for that Option and as to when the Option could be exercised.

In considering the parties plight, the Court concluded that a legally binding contract had been reached between the parties. Specifically, an offer had been made (the formal offer letter) and accepted (the retention of the cheque beyond the three day deadline). The parties were therefore bound. Unfortunately, despite the Defendant's best arguments, the phrase in the offer letter "subject to signing the Option to Purchase" was not in the Court's opinion a "subject to contract" clause and did not therefore afford them any protection.

In the second case, Newbury -v- Sun Microsystems [2013] EQHC 2180 (QB), in attempting to reach a suitable settlement, the solicitors for the Defendants sent a letter which stated "such settlement to be recorded in a suitably worded agreement". The contents of that letter and the offer were accepted by the Claimant.

Problems then arose when the parties tried to agree the wording of the said settlement agreement. It was the Court's view that a contract had been concluded and it was not possible to then continue negotiations to produce a settlement agreement. Again, the Court concluded that an offer had already been made (the offer letter) and accepted (by a subsequent Letter of Acceptance).

Using a "subject to contract" clause can allow parties to continue negotiations and delay the conclusion of a contract and the binding terms that follow. In both the above cases, the Courts openly noted that the inclusion of a clear "subject to contract" clause could have reversed the outcome.

Whilst the first case is from the Singapore High Court, it does still serve as a usual reference as that Court tends to follow the decisions of the UK Courts. Therefore, taken together, the cases are valuable reminders that if parties want to avoid the finality of a binding contract because, in their opinion, negotiations are still taking place, consideration should always be given to using a clear "subject to contract" clause. However, it must also be noted that whilst a "subject to contract" clause can be seen as a 'safety net' to negotiating parties, it does not always guarantee protection. The Court, as with all disputes, will consider the surrounding circumstances, the parties' intentions and obviously, the specific words and phrases used by the parties in correspondence in reaching their decision.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.