UK: "Subject To Contract" – The Importance Of Those Words In Negotiations

Last Updated: 29 November 2013
Article by Caroline Greenwell

Newbury v Sun Microsystems [2013] EWHC 2180 (QB)

The importance of ensuring the parties' intentions are clear during the contractual negotiation process has been reiterated in a recent decision by the High Court.

Facts

Sun made an offer to settle just before trial - by paying £601,464.98 within 14 days of acceptance of the offer in full and final settlement of the claim and counterclaim, such settlement "to be recorded in a suitably worded agreement".

The offer was accepted, and Mr Newbury's solicitors confirmed they would forward a draft agreement for approval. Thereafter, a dispute ensued as to how settlement should be recorded; the timing of the payment; and whether the terms would be attached to a Tomlin Order. Mr Newbury applied to the Court for a declaration that a binding settlement agreement had been reached on the terms in Sun's original offer letter.

The High Court held that there was a binding agreement which served to settle the claim and counterclaim, and contained the terms of the settlement. It held that the parties had intended to create legal relations and had agreed upon the terms which would govern those legal relations. The Court considered the following:

1. The letter from Sun's solicitors was an offer of settlement and set out the terms of that offer. It was available for acceptance by a specific time and contained a term that payment was to be made within 14 days of acceptance. The letter was intended to be a binding offer capable of acceptance, which was indeed accepted. The letter did not simply indicate willingness to consider settlement with agreement on other matters pending.

2. Sun's letter referred to the settlement being recorded in a suitably worded agreement. This was not a reference to terms which were still to be negotiated and agreed, but rather a way of recording the terms already agreed.

3. Sun's letter was not expressed as being "Subject to Contract". If those words had been used then it would have been clear that the terms would not be binding until a formal contract was agreed.

4. Use of the words "Without Prejudice Save As To Costs" did not have the same effect as "Subject to Contract".

Comment

A key element in contract formation is whether parties are intent on creating a legal relationship. There is a distinction between suggesting terms of a contract which are capable of acceptance with the intention of legal relations ensuing; and suggesting terms as a first stage in negotiations. Newbury highlights how important it is for parties to communicate the purpose of the suggestion clearly.

Key points

  • l Use "Subject to Contract" where it is intended that negotiations will continue on ancillary matters before an agreement is finalised.
  • l Where a party does not use "Subject to Contract" it should ensure that all terms it wishes to be included in the agreement are entirely clear. After the offer is accepted it will be too late to negotiate any further terms.
  • l The safest course is for all correspondence to be labelled "Subject to Contract" until all terms have been agreed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Caroline Greenwell
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