The recent High Court case of Newbury v Sun Microsystems has helped to clarify the law on “subject to contact” negotiations in relation to settlement contracts. Mackrell Turner Garrett Commercial Solicitor Reagan Scarborough examines one of the potential pitfalls clients can fall into during contract negotiations.

The case concerned an employee, Mr Newbury, who brought a claim for unpaid commission against his employer, Sun Microsystems (“Sun”). Sun then counterclaimed for recovery of an alleged overpayment of commission.

Just days before the matter was due for trial, Sun’s solicitors wrote to Mr Newbury’s solicitors and made an offer to settle, stating that the terms of the offer reflected Sun’s final position. 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.”

Mr Newbury’s solicitors responded the same day with a letter by e-mail, marked “without prejudice save as to costs”, which accepted the terms of settlement and stated that they would send through a draft agreement for approval the next day.

During the days that followed, the parties disagreed on how the settlement should be recorded. Sun’s solicitors sought to impose a duty of confidentiality on Mr Newbury and further requested that terms relating to income tax and national insurance contributions be included in the agreement. They also drafted the agreement to provide for payment within 14 days of the agreement rather than within 14 days of acceptance of the offer, as previously stipulated.

Mr Newbury applied to the court for a declaration that a binding settlement agreement had already been reached on the terms set out in the original offer letter.

The High Court held that Sun’s original offer letter and Mr Newbury’s subsequent acceptance letter (together the “Letters”) did constitute a binding agreement between the parties which settled the claim and counterclaim and set out the terms of the settlement.

The factual background of this case was important in interpreting whether the Letters constituted a binding agreement. In this case, the parties were just about to begin a potentially expensive trial and it is therefore highly feasible that the letter from Sun’s solicitors was an attempt to reach one final compromise and avoid litigation.

Sun argued that the question of whether the parties had entered into a contract should be determined by reference to all events, not just to the Letters. It claimed that the parties’ subsequent conduct indicated that negotiations were still taking place and that a binding agreement had not been reached. However, the High Court disagreed and noted that, where a contract is written, it is the documents themselves that should demonstrate objectively that the parties had entered into a binding agreement.

This case is a classic example of why, when offering or negotiating a settlement of any dispute, it is important to add the words “subject to contract” to all correspondence during negotiations where it is desired that the settlement should not be considered binding until a formal written agreement has been executed.

The point is equally applicable to commercial negotiations. The question of whether or not the expression “subject to contract” is effective to exclude an intention to create legal relations will always be a question of fact. However, this case serves as a reminder that correspondence should in practice always be labelled “subject to contract” until the parties are sure that all terms have been agreed.

Reagan Scarborough
Mackrell Turner Garrett