Subject to contract: subject of debate

The point at which 'binding' agreement is reached between negotiating parties in the settlement of any dispute should be clearly identifiable. So as to facilitate fair and productive negotiations, it is essential that parties are free to negotiate without fear of inadvertently being bound to those terms before they intend to be. The recent case of Newbury v Sun Microsystems serves as a reminder that negotiating parties should use express wording in negotiations so as to minimise scope for disagreement as to when, or if, binding agreement is reached.

Facts

Mr Newbury and Sun Microsystems ("Sun") were in pre-trial negotiations to settle a claim (and counter claim) in respect of contractual commission sums that were allegedly due to, and by, Mr Newbury arising from his employment with Sun.

Close to the trial start date on 3 June 2013, Sun's solicitors issued an email to Mr Newbury's solicitors setting out what they described as their "full and final settlement [position]". Mr Newbury's solicitors responded that same day accepting those settlement terms and stating that such agreement would be recorded in "a draft agreement for their approval", to be sent the following day. It followed that the parties came to a disagreement as to the form in which that agreement should take (with Sun seeking that it remain confidential rather than being attached to an Order and subject to public disclosure in Court).

Mr Newbury's solicitors applied to the Court to assert that a binding contract had already been reached when Sun received the acceptance email sent on behalf of Mr Newbury on 3 June 2013. They asserted that the 'formal' agreement was simply, as had been stated, a means of recording the agreement already reached between the parties and that such recording (and subsequent execution) was not required to give effect to the contract already concluded between them. Sun counter argued that there had only been 'agreement in principle' which was subject to agreement on specific terms.

Decision

The High Court agreed that a binding contract had been reached between the parties upon acceptance by Mr Newbury's solicitors of Sun's final offer of settlement on 3 June. Although this was considered in the context of a contractual employment dispute, the principles from this case are directly transferrable to commercial contract negotiations.

In reaching this conclusion, the Court examined the well-established principles of conclusion of contract and reiterated the objectivity required in determining whether the parties had intended to create legal relations. In particular, the Court acknowledged circumstance in which parties may reach agreement on all terms to a settlement but for 'binding agreement' to occur some further action is required – being the typical "subject to contract" scenario.

The Court distinguished the facts of Newbury from such a scenario for the following key reasons:

The decision was heavily reliant on the words employed by the parties within their email exchange. This reinforces that any subjective reservations the parties may have are largely irrelevant to the objective determination of whether a contract has been concluded. Essentially, if Sun had not intended to be bound by the terms of their 'final offer', their solicitors should have made this clear.

Comment

There are two lessons that should be taken from this case with regard to negotiations: firstly, parties should utilise the words "subject to contract" in all correspondence that they do not intend to facilitate binding agreement with the other party; and secondly, when reaching final agreement parties should ensure they cover off all settlement terms as they may not be able to negotiate any further terms beyond this point.

Newbury

acts as a reminder, if one was needed, that when negotiating you should be mindful of the exact point at which you intend to be bound to the terms agreed. Express and appropriate wording should be used at each stage, so that the point in time at which that intention is reached is clearly identifiable.