What is a counterparts clause?
A counterparts clause is normally included in a written agreement where the parties to the contract intend they will execute separate copies of the agreement (for example, in transactions where there is no signing meeting). The absence of a counterparts clause will not necessarily invalidate an agreement that the parties execute by separate counterparts. However, it may help to prevent a party from claiming that an agreement is not binding because there is no copy of it that has been signed by all parties.
A counterparts clause will usually read something like this:
“This agreement may be executed in any number of counterparts, each of which when executed and delivered shall constitute an original of this agreement, but all the counterparts shall together constitute the same agreement. No counterpart shall be effective until each party has executed at least one counterpart.”
In a recent Supreme Court case, a counterparts clause was held to be a “subject to contract” provision because it included wording specifying that the agreement would only take effect when all the parties had signed it. As a result, if your business commonly starts to carry out contracts on the basis of a draft unsigned agreement, you will now not necessarily want your counterparts clause to contain wording about when the agreement becomes effective.You should review the counterparts clause you use in your standard agreements to see if it contains any language about when the agreement takes effect, for example, “No counterpart shall be effective until each party has executed at least one counterpart”. If so, you may wish to amend your agreements. However, you should bear in mind that, in certain types of agreements, it can be advantageous to include this condition.
What is a “subject to contract” provision?The phrase “subject to contract” is legal shorthand that means that the parties to the contract have not yet reached agreement and are still in the process of negotiation, or that the agreement the parties have reached is not to be binding until it is signed. A “subject to contract” provision will usually prevent a draft contract from being binding and enforceable until it is signed. However, it is not fail-safe. If an objective appraisal of the parties’ words and conduct shows that the parties did not intend (or have ceased to intend) signature to be a precondition to the agreement being legally binding, the subject to contract provision will be overridden.