Out-Law Guide | 23 Oct 2013 | 10:43 am | 6 min. read
A recent High Court decision involving an IT supplier provides a helpful reminder of the care which needs to be taken when offering to settle a dispute, and in forming contracts generally.
If there is any doubt as to the terms of the settlement, then the offer should be expressed to be "subject to contract". A failure to mark a settlement offer in this manner convinced the court that a contract had been agreed between the parties once the settlement offer was accepted by the other side. As a result, it was considered too late for the offeror to then seek to add additional terms.
The Claimant - Mr Newbury - commenced court proceedings against Sun Microsystems for alleged unpaid commission. Sun counterclaimed for recovery of an alleged overpayment.
On 3 June 2013, approximately 10 days before the beginning of trial, the Defendant's solicitors wrote to the Claimant's solicitors offering to settle the proceedings. The relevant section of the Defendant's letter was as follows:
“Terms of the Offer...
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.
This offer is open for acceptance until 5pm this evening after which it will be automatically withdrawn without further notice to you.”
The solicitors for the Claimant responded within the timescales agreed between the parties accepting the terms of the Defendant's offer. The Claimant's solicitors said that they would forward a draft agreement for the Defendant's approval the following day. The next day a telephone call took place between the solicitors, where it was stated that the parties were each working on a settlement agreement.
The parties then disputed the form of the settlement agreement.
The Claimant's solicitors sent a letter, marked without prejudice save as to costs, attaching a draft Tomlin Order which contained the settlement terms as set out in the Defendant's letter of 3 June 2013. Later the same day the Defendant's solicitor sent an email setting out its "preferred approach", which was to execute a Consent Order and Deed of Waiver. The draft Deed of Waiver contained provisions to provide for payment to be made within 14 days, dealt with taxation and national insurance contributions, and imposed a further confidentiality obligation on the Claimant.
The solicitors for the Claimant responded shortly afterwards; they contended that, whereas the Claimant's draft Tomlin Order recorded the terms of the settlement as stated in the letter of 3 June 2013, the Defendant's proposed draft Consent Order and Deed of Waiver did not.
The parties disputed whether or not a binding contract was entered into when the Claimant accepted the Defendant's offer on 3 June 2013.
Mr Justice Lewis set out the legal principles said to apply:
Mr Justice Lewis concluded that the parties had entered a binding legal contract by their correspondence on 3 June 2013. He set out the reasons as to why he had arrived at that conclusion:
This is a helpful reminder of the importance of ensuring that a binding contract is not inadvertently created.
The Court made clear that subjective intent is largely irrelevant. As the question of whether or not a binding contract has been formed is an objective one, it is not legitimate to consider evidence regarding the conduct of the parties or their subjective intentions. A subsequent plea of "I didn’t think I was signing up now" would not matter if it is otherwise objectively clear that a contract had been formed.
Where a party does intend to be bound by its offer, it should therefore ensure that all the terms it wishes to include in the settlement are clear from the offer letter. Once the offer is accepted, it will be too late to negotiate further terms.
It is important to be clear in correspondence whether or not you intend the offer to be capable of acceptance. If other matters still need to be negotiated (such as in this example, tax, confidentiality, or the form of any consent order), a simple guiding rule would be to always mark any negotiated offer with the wording "subject to contract". This applies to any form of written documents in which offers capable of acceptance are made.
Where such an offer is a potential settlement of a dispute, consider also marking such an offer as "without prejudice".
In this case, the Court was clear that had the offer been marked "subject to contract" this may have been enough to alter the outcome. The use of this label in commercial negotiations creates a strong, although not conclusive, presumption that the parties do not yet want to be bound. However, it is important to remember that, as with "without prejudice" wording, the court will always consider the form and substance of the relevant documents, rather than relying solely upon the choice of legal labelling. The court will assess all the parties' words and conduct in order to decide if a contract has been formed.
Other wording may be sufficient to make it clear that the contract will only be concluded at a later date. However, in this case, the reference to a "suitably worded agreement" to record the terms was not sufficient to convince the court that the parties had not yet bound themselves irrevocably.
To be on the safe side, always pause to consider whether any document in settlement negotiations or pre-contractual negotiations should be marked "subject to contract and not binding until signed".