A recent High Court decision provides a timely reminder that, when negotiating the terms of a commercial transaction, the words ‘subject to contract’ should be used to ensure that a legally binding agreement has not inadvertently been created before a party may have otherwise intended.
In Newbury v Sun Microsystems  EWHC 2180 (QB), Mr Newbury made a claim against his employer Sun Microsystems (“Sun”) for unpaid commission. Sun subsequently counterclaimed for an overpayment of commission. The dispute was set to come to trial and Sun’s solicitors wrote to Newbury to negotiate a settlement sum. The letter read as follows:
“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.”
Newbury’s solicitors responded to this letter, accepting the terms of the settlement by email on the same day. Their email was headed ‘without prejudice save as to costs’.
A dispute then arose between the parties as to the specific terms of the settlement. Sun sought terms that were not set out in the above letter and Mr Newbury would not accept them. He subsequently applied to the court for a declaration that the terms set out in the letter constituted a binding settlement.
The court held that the terms set out in the letters constituted a binding agreement which settled the claim and counterclaim.
Importantly, the court held that had the words ‘subject to contract’ been used it would have been clear that the terms expressed in the letter would not have been binding until a formal contract was entered. As Sun did not use these words, the Court inferred that the letter was a binding offer capable of acceptance.
This case is a reminder that, when exchanging correspondence relating to any potential legal agreement, all such correspondence should be marked “subject to contract” until the parties have agreed all of the terms and incorporated those terms into a legally binding agreement. This wording should be used wherever it is desired that the terms should not be viewed as binding until a formal contract is executed.
Please contact Henry Maples if you would like to discuss any of the issues raised in this article.
The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 14 August 2013. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, August 2013.