Subject to Contract is one of those stock phrases that gets bandied around during negotiations without many people understanding its proper meaning. There may be a temptation to think that the concept of Subject to Contract harks back to a Victorian era and has no relevance to modern ways of doing agreement. That would be a mistake.

As one unfortunate ICT company recently discovered to its cost, Subject to Contract still serves an important purpose and, if not used at the right time, can lead to unfortunate consequences.

In the case which came before the High Court, a large ICT company had been negotiating a severance agreement with one of its employees. The company made a settlement offer for a substantial sum which was immediately accepted by the employee. However, the company’s offer was not marked 'subject to contract' so, when the company subsequently said that it wanted to put the agreed terms in a settlement agreement and include extra provisions requiring confidentiality and set out a particular income tax treatment, the employee objected.

The judge held that, because of the company's failure to use the 'subject to contract' phrase, an agreement was formed immediately upon the employee’s acceptance of the settlement offer. If the company had intended there to be extra terms or strings attached to the offer, then it should have set these out at the start. If 'subject to contract' had been used in the correspondence leading to settlement, it would have been clear that there could be no binding agreement until a formal contract as signed. But without those three little words, the company was stuck with what it offered – especially as the company’s last letter made it clear that "this is our final offer".

The case is a useful reminder that, when negotiating any kind of agreement, whether a settlement agreement, technology licence or other form of commercial contract, letters, emails or other negotiation-type correspondence ought to be labelled 'subject to contract' until you are absolutely sure that all terms have been agreed. If you don’t use 'subject to contract', then you need to be sure that you include in the correspondence all the terms that you subsequently want to have included in the agreement. You can’t automatically assume that you can reach agreement on the main terms and then fill in the legal detail later.