“Subject to Contract” – What does it mean

When negotiating a settlement of any dispute it is imperative to add the words “subject to contract” to correspondence where it is intended that the settlement should not be considered binding until a formal written agreement is executed. This gives the parties the opportunity to negotiate on ancillary matters which, in the employment sense, could mean tax, confidentiality and restrictive covenants. Whilst this is mainly an issue for Employers, Employees should also be aware of the legal position.

The recent case of Newbury v Sun Microsystems [2013] EWHC 2180 (QB) serves as a stark reminder of the dangers of omitting the words “subject to contract”.

Newbury concerned a claim for unpaid commission and Sun Microsystems’ counter-claim for overpayment of commission. The parties were heading for a lengthy and very costly trial due to start on 12 June 2013. In a final effort to settle the matter, Sun’s solicitors sent a letter to Mr N on 3rd June 2013 offering a full and final settlement payment of £601,494.98 and £180,000.00 in respect of legal costs; both sums to be paid within 14 days of acceptance by Mr N. The offer included the words ‘such settlement to be recorded in a suitably worded agreement.’

Mr N’s solicitors accepted the offer on the same day and confirmed that they would send a draft agreement for approval. Sun’s solicitors made amendments to the draft agreement and attempted to include an obligation of confidentiality together with terms relating to income tax and national insurance contributions which, as you can appreciate, were significant.

Mr N disputed these amendments and applied for a declaration from the Court that settlement had already been agreed on the terms set out in the original offer letter of 3rd June and the agreement was not subject to the execution of a ‘suitably worded agreement.’ Sun contended that, in determining whether the letters of 3rd June formed a binding contract, the court should look at the conduct of the parties after that date which showed that they were still negotiating and had not reached a binding contract.

The Court agreed with Mr N and held that the letters constituted a binding agreement which settled the claim and counterclaim and set out the terms of the settlement. In reaching its conclusion, the Court considered the following;

  • The offer from Sun was not merely an offer indicating a willingness to settle, subject to agreement on other matters. It was an offer of settlement and set out the terms of that offer. It was available for acceptance by a specific time and payment had to be made within 14 days of acceptance. This was a clear indication that Sun intended the offer to be binding.

  • The words ‘such settlement to be recorded in a suitably worded agreement’ were not reference to terms that were not yet to be negotiated and agreed. Had the words ‘subject to contract’ been used then it would have been clear that the terms would not be binding until a formal contract was agreed.

  • Viewed objectively, the letters of 3rd June gave rise to a legally binding contract and conduct occurring after this date could not be used to determine whether the documents were intended to give rise to a legally binding contract.

Due to this finding, Sun Microsystems had to pay the agreed settlement figure and costs, together with additional costs of Mr N obtaining the declaration. They were also left with an ex-employee with no express confidentiality obligations and a liability to HMRC for tax and national insurance contributions.

This case therefore demonstrates the importance of including ‘subject to contract’ on all correspondence if negotiations on ancillary matters are to continue. If those words are not used then all the terms a party wishes to include in the settlement must be clear in the offer letter. Once the officer is accepted, it will be too late to negotiate further terms and a party will miss the opportunity if they fall foul of this.

This decision is especially relevant in the employment context, especially in regard to settlement agreement negotiations.

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