When negotiating a business deal, it is common for parties to agree on the terms of a contract but leave the execution of the document for a later date. This is known as a «subject to contract» agreement.
But what does «subject to contract» mean from a legal perspective? And what are the implications of such an agreement?
Firstly, it is important to note that a «subject to contract» agreement is not legally binding. It essentially means that the parties have agreed to the general terms of the deal but have reserved the right to change or abandon those terms until a formal contract is executed.
This can create some uncertainty for both parties, as they may be unsure what the final terms of the agreement will be. It is also important to note that a «subject to contract» agreement may not be enforceable if either party fails to sign a formal contract or if the terms of the final contract differ significantly from those discussed in the preliminary agreement.
However, a «subject to contract» agreement can provide some benefits for parties during the negotiation phase. It allows them to continue to negotiate and refine the terms of the deal without the pressure of having to sign a formal contract immediately. It also allows for greater flexibility in case any unexpected issues arise in the negotiation process.
Ultimately, the legal effect of a «subject to contract» agreement is that it is not legally binding until a formal contract is executed. Parties should be aware of the potential risks and benefits of such an agreement before entering into negotiations. It is also advisable to consult with legal counsel to ensure that any preliminary agreements are properly drafted and understood by all parties involved.