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A recent case reminds us of the value of three simple words - "subject to contract"

Summary

A recent case has reminded us of the importance of including the words "subject to contract" to avoid being bound by a settlement offer made to the other side. Without it, the courts may well find that the acceptance by the other side concludes a binding contract, whether or not negotiations surrounding the terms of the settlement continued after this date.

Case: Newbury v Sun Microsystems [2013] EWHC 2180 (QB)

Mr Newbury brought a claim against Sun Microsystems for unpaid commission in June 2011. As the matter proceeded to trial the solicitors for Sun Microsystems wrote to the Defendant to make an offer of settlement:

"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".

Although the offer contained a reference to the terms being recorded in an agreement, it was not prefaced with the words "subject to contract". This caused immediate difficulties as Mr Newbury accepted the offer but later rejected a Settlement Agreement produced by Sun Microsystems' solicitors which included provisions relating to confidentiality. 

Mr Newbury claimed that an agreement had been entered into between the parties and that the sums were due to him whether or not the Settlement Agreement was signed. He did not consider that he needed to agree to further terms relating to confidentiality which Sun now attempted to impose. Sun Microsystems claimed that the parties had never reached an agreement and contended that the Court was entitled to consider the conduct of the parties and their communications after that date - which indicated that certain matters were still in contention.

The Court disagreed, finding that a binding contract had been reached following the acceptance of the offer letter. The execution of a "suitably worded agreement" was not a condition of the creation of a contract, but was intended only to record the agreement reached. 

The Judge gave a number of reasons for his decision:
  • The offer letter appeared to be an offer of settlement and gave a timescale for acceptance, following which payment would be made. This indicated that the letter was intended to be a binding offer capable of acceptance by the other party, and then enforcement.
  • The reference in the letter to "such settlement to be recorded in a suitably worded agreement" indicated that it was the settlement offer made in the letter which simply needed to be recorded, and not any further terms imposed or agreed. It reflected a formality and not a condition.
  • Importantly, the letter was not expressed to be "subject to contract" which was significant and indicated that the offer letter was capable of acceptance and of binding the parties without further action.
This is a warning to parties considering making settlement offers – if there are additional terms which you want to see included in a settlement make sure that either they are clearly included as part of the offer letter, or ensure that the offer is marked "subject to contract". Those three words really can make all the difference.

Newbury v Sun Microsystems [2013] EWHC 2180 (QB)

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2012. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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