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Why ‘subject to contract’ is key in avoiding a binding agreement

The recent case of Newbury v Sun Microsystems should serve as a warning for employers to use the words ‘subject to contract’ in settlement negotiations to avoid a binding agreement where it was not intended. The party must also make clear from the outset that they require the execution of a formal contract to avoid them being contractually liable for any offer made.

In this case, settlement negotiations were initiated by Sun Microsystem’s legal representatives. They offered Mr Newbury a sum and stated that the terms of the offer reflected their final position. 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.”

Mr Newbury’s legal representatives responded that same day, marked “without prejudice save as to costs”. In the letter, they accepted the terms of settlement and stated that they would “forward a draft agreement for your approval” the next day.

Unfortunately for Sun Microsystems, a dispute then arose regarding the draft agreement and neither party could agree on the following points: confidentiality, income tax and national insurance contributions and the date for payment. Mr Newbury therefore applied to the court on the grounds that a binding settlement agreement had already been reached on the terms set out in the original offer letter (as set out above).

The High Court held that if the employer had wished to carry out further negotiations with the other party then the term, ‘subject to contract,’ should have been included in the proposed settlement letter.

Sun Microsystem’s solicitors stated in this letter, ‘settlement to be recorded in a suitably worded agreement.’ The High Court held, however, that ‘such settlement’ referred to a ‘record of terms of settlement’ between the parties. If the letter had made reference to ‘subject to contract,’ then it would have been clear that the employer wished to carry out further negotiations and the letter would not have been binding until a formal contract had been established.

This highlights that it is vital to make it absolutely clear that any offer is subject to entering into a legally binding agreement. The inclusion of the term ‘subject to contract’ should be used if parties wish to negotiate terms. The terminology used must be clear and concise, setting out that the party wishes to establish a formal contract before any contractual liability will be applicable.

Once an offer has been accepted, it will be too late to subsequently negotiate.

 

 

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further