In a bind

02 September 2013

Failure to use the words “subject to contract” in a proposed settlement proves costly.

In the recent case of Newbury v Sun Microsystems [2013] EWHC 2180 (QB), the defendant argued that an offer to settle proceedings was "in principle" only and that a binding contract could not be formed until further terms had been agreed and a formal contract had been signed. It supported this argument by referring to a statement, in the offer letter, that the settlement was to be "recorded in a suitably worded agreement".

The judge rejected this argument and held that a binding contract was formed when the claimant replied later the same day accepting the claimant's offer. The statement, in the defendant's offer letter, that the settlement was to be recorded in a suitably worded agreement was not sufficient to "negative"  an intention to create legal creations and was not a pre-condition of a contract being formed. Objectively, those words did no more than reflect an intention to record in writing a contract that had already been finalised. The position would have been different if the offer letter had been expressed to be "subject to contract".

The case demonstrates the importance, when negotiating the terms of any contract (not just settlement agreements), of identifying the status of any "offer". If the offer does not contain all of the terms on which the offeror is prepared to be bound, the letter or email should make this clear. Using the phrase "subject to contract" may be a convenient shorthand method of achieving this, although it should be remembered that the court will look at the substance, and not the form, of a communication and the application of a particular label may not be decisive.