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This offer is open for acceptance until 5pm this evening after which it will be automatically withdrawn without further notice to you.”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:
- In order to determine whether a binding contract has been concluded in the course of correspondence, it is important to look at the correspondence as a whole.
- Even if the parties had reached agreement on all the terms of the proposed contract, they may intend that the contract shall not become binding until some further condition had been fulfilled. Alternatively, they may intend that the contract shall not become binding until some further terms were agreed.
- Conversely, there is no legal obstacle preventing the parties agreeing to be bound now while deferring important matters to be agreed later. It is perfectly possible for parties to conclude a binding contract, even though it was understood between them that a formal document recording or even adding to the terms agreed would need to be executed subsequently.
- It is therefore a question of construction whether the execution of the further document is a condition of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact be executed. In the former case, there would be no enforceable contract either because the condition was as yet unfulfilled or because the law does not recognise a contract to enter into a contract. In the latter case, there would be a binding contract and the reference to the more formal document could be ignored.
- Whether the parties do intend to be bound now, or later on the completion of a subsequent event, depends upon an objective appraisal of the parties' words and conduct. Because the existence of a binding agreement needs to be determined objectively and does not depend on the parties' subjective state of mind, evidence from the parties about what they intended by or understood from their written communications is of little or no relevance.
- Each case will depend on its own facts.
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:
- The Defendant's letter was expressed to be an offer of settlement and set out the terms of its offer.
- This offer was available for acceptance for a specified time, and if it was accepted by that time, payment was to be made within 14 days.
- The Defendant's letter referred to “such settlement to be recorded in a suitably worded agreement”. The reference to “such settlement" referred back to the terms set out in the earlier part of the paragraph. It could not be a reference to terms still to be negotiated and agreed.
- The reference in the Defendant's letter to the terms being “recorded” intended that they would be committed to writing as an authentic record of that which had already been agreed.
- The Defendant's letter was not expressed to be “subject to contract”. Mr Justice Lewis held that had those words been used, it would have been clear that the terms were not yet binding until a formal contract was agreed.
- Conduct after the date of conclusion of the contract is not a legitimate aid in determining whether or not the parties had reached an agreement by that date. Nevertheless, on a review of the correspondence after 3 June 2013, the behaviour of the parties was held to be consistent with attempting to record the terms of the agreement already reached. Mr Justice Lewis did not consider that the parties were still attempting to negotiate the terms.
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".