Why use of the words “Subject to Contract” is so important

Case: Newbury v Sun Microsystems [2013] EWHC 2180 (QB), 22 July 2013

Facts

Claims had already been made by Mr Newbury (“Claimant”), an employee of Sun Microsystems, for unpaid commission when Sun’s solicitors wrote to Mr Newbury’s solicitors with an offer of settlement stating that the terms of the offer were Sun’s final position.  The terms of the letter stated:-

“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 solicitors acting for Mr Newbury responded on the same day in a “without prejudice save as to costs” letter via email accepting the above terms and saying they would forward a draft agreement for approval the next day.

A dispute then arose as to how the terms of the settlement should be recorded as Mr Newbury’s solicitors wanted them to be contained within a schedule to a Tomlin Order but Sun’s solicitors, as a matter of public record, did not want terms to be attached to a court order.  Rather, they preferred to have a separate waiver agreement.  In such an agreement, they wished to include a confidentiality clause as well as inclusions of income tax and NI contributions.  They also provided for payment within 14 days of the agreement as opposed to their original offer of within 14 days of accepting the offer.  Mr Newbury applied to the court for a declaration that a binding agreement had already been reached by the terms set out in the previous offer.

Decision

It was held by the High Court that the letters constituted a binding agreement between Mr Newbury and Sun Microsystems, settling the claim and counterclaim and set out the terms of the settlement agreement.  The parties had agreed upon the terms essential for the formation of a legally binding agreement.

Key points in reaching the decision included (this list is non-exhaustive):-

  • The letter from Sun’s solicitors was an offer of settlement and set out the terms of that offer.
  • Sun’s solicitors’ letter referred to “such settlement to be recorded in a suitably worded agreement”.  The High Court confirmed that “such settlement” was, on acceptance, a record of the terms of settlement between the parties.
  • The letter was not expressed as being “subject to contract”.  Had these words been used by Sun’s solicitors then it would have been clear that the terms were not binding until a formal contract had been agreed.  As Sun’s solicitors had not used such wording, it indicated that the letter constituted an offer that was capable of acceptance in that form.

Another important point was that the parties were due to enter a costly trial and Sun’s solicitors’ letter was an attempt to reach a final compromise to avoid the trial and it stated that it was Sun’s final position.

Comment

This case highlights the importance of using the wording “Subject to Contract” on correspondence during negotiations where it is desired that the terms should not be considered binding until a formal written agreement has been executed.  Should such wording be omitted by a party, then that party should ensure that the terms it wishes to include in any settlement are clear from the outset as once an offer is accepted, it cannot then be renegotiated.

The question of whether the use of “Subject to Contract” is effective to exclude an intention to create legal relations will always be a question of fact under Contract law.