Employment Law Solicitor Chris Hadrill on the importance of “subject to contract” in settlement negotiation
In this article we’re going to take a look at the recent case of Newbury v Sun Microsystems  EWHC 2180 QB, a High Court case which examined the circumstances in which a binding contract may be formed when the parties to the litigation are negotiating settlement terms.
The facts of Newbury v Sun Microsystems
This case involved an employment dispute between Mr Newbury and his employer, Sun Microsystems. Mr Newbury maintained that he was owed unpaid commission by Sun Microsystems and sued in the civil courts. Approximately a week before the case was due to come to trial Sun Microsystems’ solicitors wrote to Mr Newbury’s solicitors and proposed that the matter be settled by paying approximately £600,000 to Mr Newbury and £180,000 towards his legal costs within 14 days of settlement being agreed. The settlement was to be “recorded in a suitably worded agreement” according to the settlement terms of the defendant.
Unfortunately, there was a dispute as to the actual terms of the settlement agreement (but not the headline settlement figure). The claimant’s solicitors therefore applied to the High Court for a declaration that there was a binding contract between the parties as the defendant had made an offer which the claimant had accepted. The defendant, on the other hand, argued that their offer was “in principle” only.
The relevant law relating to the formation of contracts
As the High Court emphasized, the principles of whether parties have reached an agreement is succinctly laid out in the judgment of the Supreme Court in RTS Flexible Systems Ltd. V Molkerei Alois Muller GmbH  UKSC 13. According to Lord Clarke, whether
[quote]there was a binding contract between the parties and if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations[/quote]
The relevant principles in determining whether there has been an agreement were also set out by Lord Clarke in the same judgment, those being:
[quote](1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole …
(2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary ‘subject to contract’ case.
(3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed …
(4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled …
(5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty[/quote]
The High Court’s decision in Newbury v Sun Microsystems
The High Court ruled in favour of the claimant, finding that the fourth principle espoused above applied. The court found that there was a binding legal agreement between the parties and that if the defendant had intended its offer to be “in principle” only then their letter proposing settlement should have included the words “subject to contract”.
This is an important and an illustrative case, as it highlights the importance of clarity in negotiations regarding whether or not an offer is to be seen as a starting point in negotiations or whether it is intended to be capable of acceptance in itself. If the offeror intends for further negotiations to conclude specific terms of the agreement (such as, for example, arbitration clauses, confidentiality agreements etc.) then this must be made clear otherwise – as in this case – a binding agreement may have been reached unintentionally. Inclusion of the word “subject to contract” may help to give clarity where the offeror does not intend its offer to be immediately capable of agreement but wishes to engage in further negotiation regarding ancillary terms.