Negotiation Without a Net: How ‘Subject to Contract’ Can Fail the Business That Relies On It

Few phrases in commercial life carry as much unearned reassurance as ‘subject to contract’. It appears at the top of heads of terms, in email signatures, on draft agreements and across the correspondence of property negotiations. The intention is usually clear: nothing is binding until the formal document is signed. Yet the law does not treat the phrase as an invincible barrier. It is a strong signal, not a force field, and businesses that rely on it without discipline can find themselves bound to a deal they thought was still in the air.

The phrase in its natural habitat

‘Subject to contract’ is most familiar in property transactions, where it conventionally means that neither party intends to be bound until contracts are exchanged. It also appears in business sales, joint ventures, supplier arrangements and early-stage commercial discussions. In each setting, the phrase performs the same basic function: it puts the other side on notice that the negotiation is exploratory and that no legal relationship should arise from the drafts, emails or heads of terms exchanged along the way.

That is a sensible commercial objective. Negotiations often involve concessions that a business would not make if it were already committed. A supplier may share pricing models, a buyer may reveal operational plans, or a landlord may agree to a temporary rent-free period in principle. Without a clear marker that these discussions remain conditional, each concession could be argued to form part of a binding agreement. The phrase exists to prevent that outcome.

When the label holds

Where the phrase is used consistently and the parties clearly intend to defer commitment until a formal document is executed, the courts will generally give it effect. The key question is not simply whether the words appear somewhere in the correspondence, but whether the parties’ objective intention, viewed as a whole, was to remain unbound until signature. If every draft is marked ‘subject to contract’, if the parties expressly state that no liability arises until exchange, and if their conduct is consistent with that position, the phrase will usually do its job.

That is particularly important in business sales, where due diligence can take months and the parties may exchange detailed heads of terms long before a share purchase agreement is ready. A well-drafted heads of terms document will state in terms that it is not binding, save perhaps for confidentiality, costs and exclusivity provisions. That carve-out matters: a document can be partly binding and partly non-binding, and a blanket assumption that nothing in it counts can be dangerous.

Where the label can slip

The difficulty arises when the phrase is used inconsistently, or when conduct tells a different story from the label. A business may mark its initial emails ‘subject to contract’ but later send an unqualified purchase order, begin performance, or sign a document that looks like a contract even if it is described as something else. The other side may then argue that the parties had moved beyond negotiation and reached a binding agreement on essential terms.

The courts have repeatedly emphasised that labelling is not decisive. In RTS Flexible Systems v Molkerei Alois Müller, the Supreme Court considered whether a contract had come into existence despite the parties’ earlier intention to formalise terms later. The lesson is not that ‘subject to contract’ is worthless, but that it can be overtaken by events. If the parties begin performing on the assumption that a deal is done, the phrase may not survive the weight of their conduct.

A second risk lies in correspondence that is not clearly labelled. One side may assume that every email is ‘subject to contract’ because the first draft was marked that way, while the other side treats a later exchange as a firm commitment. The phrase must be repeated where it matters, and it must be visible in the documents that could otherwise be read as binding. An email confirming ‘we have a deal’ is unlikely to be neutralised by a footer that nobody notices.

Conduct, part performance and the danger of momentum

Commercial momentum is a quiet threat. A buyer may start placing orders before the formal agreement is signed. A supplier may begin tooling up. A landlord may hand over keys. Each step creates evidence that the parties intended to be bound, or at least that one party reasonably relied on the other’s assurances. If the deal later collapses, the question becomes not what the label said but what the parties did.

For small businesses, the practical answer is to separate negotiation from performance. If work must begin before signature, the parties should document that arrangement expressly. A non-binding letter of intent may be appropriate, but it should be clear about what is and is not agreed. A temporary services agreement, a purchase order on standard terms, or a short interim contract can bridge the gap without turning the whole negotiation into a binding deal by accident.

Lock-out and exclusivity: the missing piece

‘Subject to contract’ protects against premature commitment, but it does not stop either party from walking away. In a competitive business sale or a property negotiation, that can be costly for the party that has invested time and money in due diligence. A seller may want a lock-out agreement preventing the buyer from negotiating with others for a defined period; a buyer may want exclusivity before committing to expensive investigations.

These arrangements must be drafted carefully. A lock-out or exclusivity clause is itself a contract and needs consideration to be enforceable. It should specify the period, the scope of the restriction and the consequences of breach. It should also be kept separate from the ‘subject to contract’ machinery, so that the parties understand which obligations are binding and which are not. A well-advised business will not assume that the phrase protects its commercial position in every respect; it will identify the specific protections it needs and put them in writing.

A practical protocol for small businesses

First, use the phrase consistently. If negotiations are to remain non-binding, mark draft agreements, heads of terms and key correspondence clearly. Do not rely on a single mention in an early email.

Second, state which provisions are intended to bind. Confidentiality, costs, exclusivity and governing law are common exceptions. A short clause identifying them will prevent arguments later.

Third, avoid signing anything that could be read as an acceptance unless you intend to be bound. That includes purchase orders, order confirmations and documents described as ‘letters of intent’ if their content goes beyond a statement of intent.

Fourth, keep performance and negotiation separate. If work must start early, document the interim arrangement in a short agreement or a clear letter. Do not let operational urgency create a contract by the back door.

Fifth, take advice before the point of no return. The cost of a solicitor’s review at heads-of-terms stage is usually modest compared with the cost of arguing later about whether a deal existed at all.

‘Subject to contract’ remains a useful and often effective phrase. But it is a tool, not a substitute for clear drafting and disciplined conduct. In 2026, with negotiations moving faster across email and messaging platforms, the businesses that fare best are those that treat the phrase as part of a wider strategy for keeping negotiations open until the signature is dry.