Failure to use “Subject to Contract” during negotiations could prove to be a costly mistake

The recent case of Newbury v Sun Microsystems [2013] serves as a useful reminder of the importance of expressing documentation to be “subject to contract” whilst under negotiation. In this case the High Court held that correspondence between two parties negotiating a settlement sum amounted to a binding agreement. In order for negotiations to have continued the parties should have used the words “subject to contract” in the correspondence.

An employee (Newbury) brought a claim for unpaid commission. In response the employer counterclaimed for the recovery of overpaid commission, thus a dispute entailed. To avoid going to trial the employer’s solicitor sent a letter offering a settlement sum to the employee’s solicitor containing the following terms:

“Our client is willing to settle the entire proceedings by paying the Claimant within 14 days of accepting this offer, the sum of £601,464.98 (the “Settlement Sum”) inclusive of interest by way of damages, by means of an electronic transfer into his nominated bank account, in full and final settlement of the Claim and counter-claim plus the sum of £180,000 in relation to his legal costs, such settlement to be recorded in a suitably worded agreement.”

The letter was not expressed as being “subject to contract” and the employee’s solicitor responded accepting its terms. As a result there was an offer, an acceptance, consideration and an intention to create legal relations; all the ingredients required to form a legally binding agreement.

The employer had intended to negotiate further terms of the settlement contract, in particular with respect to income tax, confidentiality and the form of the consent order. Therefore the employer argued that there was not an intention for the correspondence to form a legally binding agreement.

The High Court held that there was a contract contained in the correspondence and that the conduct which occurred after the date of the letters could not be used to determine whether there was an intention to create a legally binding agreement. As the letter was not expressed to be “subject to contract” there was a demonstration that there was an intention for the offer to be legally binding. If the words “subject to contract” had been used, then it would have been clear that the terms would not be binding until a formal contract was finalised and agreed.

This case is a classic example of why, when offering or negotiating a settlement of any dispute or agreeing terms of a contract, it is important to add the words “subject to contract” to correspondence where it is intended that further terms are to be negotiated. In fact it is often very sensible or even tactical to focus on key terms at the initial stages of negotiations to enable efficient progress and to then look to introduce certain subordinate or ancillary terms later.

So remember: always express correspondence to be “subject to contract” until you are satisfied with all of the terms and you intend to make the agreement legally binding.

By Stephen Wilson