My pet hates in contract drafting. Part 2: 'subject to' what, exactly?
In Part 1, I confessed my dislike of 'for the avoidance of doubt'. This time the culprit is smaller and more common still: 'subject to'. From where I sit, as the person who ends up interpreting a contract after it has failed, these two words start more fights than you might expect. 'Subject to' is not really the problem. What the drafter leaves out after it is.
Part of the trouble is that 'subject to' does at least two different jobs.
Sometimes it signals priority: 'subject to clause 12, the Contractor may ...', meaning clause 12 wins if the two collide. That use is fine.
The other use is conditional: 'this contract is subject to finance', meaning the deal depends on an event. Same two words, two jobs, and the reader must work out which is which. Ken Adams, whom I cited last time, discusses it. An insightful commenter calls 'subject to' a dubious formulation whose subordination is not always clear, and has floated banning it altogether. I would not ban it. I would just prefer to stop it from doing two jobs at once.
Used as a condition, 'subject to' really has to answer five questions (that I can think of), and often only answers one or two.
Subject to in what sense: a condition of the whole contract, of completion, or just one obligation?
Whose job is it to make the thing happen, and to what standard?
What happens if the condition is not satisfied: no contract, a right to rescind, a right to terminate, damages, or nothing?
When does the condition need to be met?
Does one party hold the benefit, so that they may waive it?
Sure, some of these might be implied from context, but leave any of these unanswered and you have not written a condition. It's just the opening of a dispute.
I want to share three examples, all from a single special conditions annexure I recently had to untangle, with each example failing differently.
First:
'Contract is subject to the purchaser terminating the existing lease and entering a new lease with the vendor after settlement.'
The thing the contract is 'subject to' happens after settlement. A condition that can only be satisfied after the deal has completed cannot be a condition of the deal at all. Was it meant as a promise to do something later?
Adams notes that if you frame something as a condition but the other party can carry on as though it were met, nobody knows what ignoring it costs. If you want a remedy, write an obligation: 'After completion, the Purchaser must terminate the existing lease and enter a new lease on the terms in Schedule X.'
Second:
'The contract is subject to the Vendor granting the Purchaser a lease to access the premises'
followed by a page of rent, rebate, works and insurance terms.
Here, 'subject to' is carrying a whole sub-agreement on its back, and never answers the questions that matter. Is this an independent obligation even if the sale does not go ahead? Does failure to grant this lease automatically terminate the sale, or just give the Purchaser some right? How does it fit with the first condition?
If this is really needed at all, then separate the condition from the machinery: 'Completion is conditional on the Vendor granting the Purchaser a lease of the access area, on the terms in Schedule Y, by [date]. If it is not granted by then, the Purchaser may terminate by notice and recover the deposit.' Put the rent and works terms in the lease, where they belong.
Third, the one that landed in dispute:
'Subject to the Vendor completing its relocation and giving vacant possession no later than 60 days after the deposit is received.'
This one has a deadline. But it never says what happens if the sixty days pass with the vendor still in place. Is it a condition of completion, so the purchaser can rescind? A promise, so the purchaser is left to sue for damages? And is it for the Purchaser to waive if it wants to? When the deadline passed, the parties fought over exactly that, one side calling it a 'pre-settlement condition' after settlement was due and seeking to compel compliance rather than terminate.
Name the consequence and the beneficiary: 'This condition is for the benefit of the Purchaser. If vacant possession is not given by [date], the Purchaser may rescind and recover the deposit, or waive the condition and complete.' Say whether time is of the essence, because a decision maker will otherwise have to guess.
None of this is pedantry. A condition and a promise sit miles apart in law. If a genuine condition is not met, the obligation it governs never arises, and there is nothing to sue on. If a promise is broken, there is a breach, damages, and sometimes a right to end the contract. A drafter who wants a condition must say so plainly. So here is the rule I try to follow. Give 'subject to' one job: making a single, identified clause yield to another, as in 'subject to clause 12.3'. Write everything else as what it is: either a condition, with its trigger, consequence and deadline, or an obligation. The surviving use must point to a nominated provision, which also gets rid of the vague 'subject to the terms of this agreement' and 'subject to applicable law' because they never say which term or which law applies.
I will leave 'subject to contract' (in the Masters v Cameron sense) alone, as a separate term of art about whether the parties are bound at all.
Of course, this is my style, not law. A court can still find a condition wherever the parties intended one. The value of a personal rule is that it makes me decide, for every provision, whether I am writing about priority, a condition or an obligation.
Looking back at Part 1, I wrote 'Notwithstanding clause [X]'. 'Subject to' and 'notwithstanding' can reach the same result from opposite ends, one in the clause that yields, the other in the clause that prevails. Which to use is a matter of preference.
To my mind, the worst version of all this is not an incomplete condition. It is a condition that reads, to the wrong eye, as a promise to guarantee a result. That misreading can turn a walk-away right into a damages claim, and it is where Part 3 is headed.