A recent case in the High Court (Newbury v Sun Microsystems) illustrates the importance of ensuring that all settlement negotiations are stated to be "subject to contract"- otherwise you could find yourself bound by a contract you did not intend to make.

In this case, in the context of a claim for unpaid commission, the employer's solicitor wrote to the employee's solicitor to propose an offer of payment "in full and final settlement of the claim" to be paid within a certain time-frame, with provision that "such settlement [was] to be recorded in a suitably worded agreement". The claimant's solicitor accepted this offer on the claimant's behalf in a letter marked "without prejudice save as to costs" and agreed to forward a draft agreement setting out the terms.

There was then a disagreement over the form of the agreement and the employer decided that it no longer wished to proceed with the settlement. The dispute rested on whether a contract was created by virtue of the letters themselves, or whether it would only have been properly created if the parties had produced a contract in an agreed form.

It was held that whether a contract had been formed would be decided by considering whether "to all outward appearances" the parties had reached agreement on all the essential terms. This demonstrates that it is possible to create a binding contract without fully intending to.

Here, although there were outstanding formalities to be agreed, all the essential elements of the agreement had been decided and so a contract had been formed by the correspondence. Furthermore, that the terms would be recorded in a suitably worded agreement was not a condition of the contract being formed: it was only "an expression of the wishes of the parties that there be a formal record of what had been agreed."

Had the letter been marked "subject to contract" it would have been clear that the terms were not yet binding or agreed until a formal contract was signed.

What lessons can be learnt from this case?

  1. Ensure that all written negotiations / discussions about settlement are marked "subject to contract". As ever, we would also recommend that offers are stated to be "without prejudice" so that they cannot be referred to in legal proceedings.
  2. It is not enough if you do not intend for an offer to be binding, it will depend upon whether to an outside observer an agreement has been reached. Again, the easiest way to ensure you make your intentions clear is to mark correspondence as "subject to contract".

The implications of Newbury

  1. This case was decided in the High Court and the position would be different for a claim in the Employment Tribunal as certain settlements in the Tribunal must be formally recorded in either a settlement agreement or through ACAS to be binding. This would cover most employment claims. However, the rule in Newbury would still apply if the dispute was about the breach of a term of an employment contract. In our opinion it is best practice to mark all written negotiations as "without prejudice and subject to contract"
  2. There is also potential scope that this ruling could apply to "pre-termination discussions" as well as to attempts to settle following a dismissal. It is therefore important to ensure that any offers made before terminating an employee's contract are "subject to contract" to avoid unintended contracts being created.