The recent decision by the English High Court in Newbury v Sun Microsystems1 underlines the importance for lawyers of taking care when settling disputes.

In this case the court considered whether a binding settlement agreement had been made where the parties to a dispute concerning a commission payment had exchanged solicitors’ letters agreeing to settle the dispute, but had been subsequently unable to agree the terms of formal settlement documentation to record their agreement. The court held that a settlement agreement had nevertheless been formed, and the parties were bound to it. One of the determinative factors considered by the court was the failure of the defendant to make its settlement offer expressly ‘subject to contract’.

The facts

The claimant, Malcolm Newbury, had issued a claim in June 2011 for contractual commission of $2.03m relating to the financial year ending on 30 June 2009 which he said he was entitled to from the defendant. The defendant, Sun Microsystems, counter-claimed for recovery of an alleged overpayment. An eight day trial was listed to commence on 12 June 2013.

On 3 June 2013, nine days before the trial was due to commence, solicitors for the defendant wrote to the claimant’s solicitors offering to settle the dispute. There had been previous unsuccessful attempts at settlement. The defendant’s solicitors’ letter set out the terms of an offer to be open for acceptance until 5pm that day, when it would be automatically withdrawn without further notice. The letter stated that this was the defendant’s final position. The offer was set out as follows:

“Terms of the Offer

To reach a compromise between the parties, our client has agreed to make a further offer of settlement to the Claimant. The offer reflects the strength of its evidence on the QBM but does not seek to place a discount on the Claimant’s assertion of revenue of $173 million.

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.”

The parties agreed to extend the time for acceptance of the offer to 5.30pm and at 5.21pm the claimant’s solicitors sent the defendant’s solicitors a letter by email, marked without prejudice save as to costs, which stated that the claimant accepted “the terms of your client’s offer, being payment of the Settlement Sum of £601,464 plus £180,000 in relation to his legal costs”, and also noted that, “we will forward a draft agreement for your approval on Tuesday 4 June.”

On 5 June 2013 the claimant sent a letter, again marked without prejudice save as to costs, attaching for approval a draft order “recording the terms agreed”. The letter asked for confirmation of “approval of the Order by signing and returning the same, by email in the first instance. Alternatively, please revert with your proposed alterations or amendments for agreement.”

The defendant’s solicitors replied later that day with an amended draft order which referred to the claim being stayed on terms set out in a waiver deed. A draft waiver deed was also attached to the email. The draft deed set out provisions dealing with tax and national insurance contributions, provided for payment within 14 days of the date of the agreement, and also included a confidentiality provision.

Further emails were exchanged that day. The claimant’s solicitors stated, on a without prejudice basis, that the draft order which they had prepared recorded the terms of settlement but the draft order and deed of waiver prepared by the defendant’s solicitors did not. They noted that the claimant would agree to an order directing the settlement and costs payments but otherwise requested that the defendant agree the order as drafted by the claimant’s solicitors. The defendant’s solicitors replied, noting that their 3 June offer had stated that the settlement was to be set out in a suitably worded agreement and that this was what had been sent to the claimant. The defendant’s solicitors also stated that:

“We did not agree to an order where the schedule can be disclosed as a matter of public record or states that your client received a contribution to his costs. The purpose of the structure is to keep the terms confidential. If your client has specific comments I am happy to consider them but otherwise these are the terms of the offer”.

The claimant’s position

The claimant contended that a binding contract had been entered into when the claimant accepted the defendant’s offer in the letter attached to the email sent by the claimant’s solicitors at 5.21pm on 3 June. While this agreement was to be recorded in a suitably worded agreement that reflected its terms, the execution of such an agreement was not a condition of the agreement coming into effect.

The defendant’s position

The defendant contended that an agreement had not been concluded by the parties on 3 June, on the basis that the defendant’s letter of 3 June was not an offer capable of acceptance but rather was an offer seeking to resolve a dispute by indicating figures which the defendant was prepared to agree. This letter was agreement in principle only and depended on agreement on other matters. Alternatively, the defendant contended that the offer was subject to execution of a suitably worded agreement and, until that agreement was reached, there was no binding agreement between the parties.

The court’s decision

The court held that the letters of 3 June 2013 together constituted a binding agreement settling the claim and counter-claim and setting out the terms of that settlement. That the settlement was to be recorded in a suitably worded formal document reflecting the terms agreed by the acceptance of the offer of 3 June did not make the agreement conditional on the execution of such a formal document.

A number of reasons indicated that, read objectively, the defendant’s solicitors’ letter of 3 June 2013 was an offer to settle the claim on certain terms which, if accepted, were to be subsequently recorded:

  1. The letter was expressed to constitute an offer of settlement and set out the terms of that offer.
  2. The offer was stated to be available for acceptance by a specified time, and provided for payment within 14 days of acceptance, both factors indicating that the letter was intended to be a binding offer capable of acceptance with certain legal consequences flowing from that acceptance. The terms of the letter were not consistent with it being simply an offer indicating willingness in principle to consider settlement on the figures set out and subject to agreement on other matters.
  3. The letter referred to “such settlement to be recorded in a suitably worded agreement”. The reference to “such settlement” did not indicate that terms were still to be negotiated and agreed, but rather that if the offer was accepted, the terms of the offer would constitute the terms of the settlement agreed between the parties.
  4. The reference to the settlement being “recorded” in “a suitably worded agreement” reinforced the conclusion that if the offer was accepted, the terms set out would constitute the terms of the settlement agreed between the parties.
  5.  The letter was not expressed to be ‘subject to contract’. The judge commented:

“Had those words been used, it would have been clear that the terms were not yet binding or agreed until a formal contract was agreed. The Court of Appeal has held, and Mr Reade QC for the Defendant accepts, that the absence of a reference to the words “subject to contract” may be significant: see paragraph 25 in Immingham Storage Company Ltd. v Clear plc2. The fact that the Defendant did not use those words in the letter is in my judgment a relevant factor. It indicates that the letter was an offer of terms capable of acceptance as it stood. It was not intended to be subject to discussion and agreement on additional or different terms.”

The offer was accepted and although the offer and acceptance were to be recorded in a suitably worded agreement, the execution of that agreement was not a condition of the agreement. Rather it was an expression of the wishes of the parties that a formal record be made of what had been agreed. The judge stated that this conclusion was reinforced by, but was not dependent on, the factual background providing the context to the exchange of letters on 3 June (in particular that the parties were very shortly due to begin a potentially expensive trial).

The court’s decision on the relevance of post-facto conduct

Although the parties largely agreed the legal principles governing the resolution of the dispute about whether the parties had reached agreement on 3 June 2013 (which the judge noted were helpfully set out in the judgment of Males J in Air Studios (Lydhurst) Limited T/A Entertainment Group v Lombard North Central PLC3 at paragraphs 5 to 12), there was one area of disagreement. The defendant contended that, in determining whether the letters of 3 June 2013 did give rise to a binding contract, the court was entitled to look at the conduct and communication of the parties after that date.

The defendant contended that the conduct of the parties after 3 June demonstrated that they were still negotiating and had not reached a binding agreement. In particular the defendant relied on the fact that the claimant’s solicitors’ letter of 3 June and 5 June email were marked without prejudice save as to costs and argued that the use of such words indicated that the parties considered that they were negotiating terms which were not agreed. The claimant contended that conduct post-dating 3 June was not admissible in relation to the question of whether or not a binding contract had been formed on that date.

The judge held that where the contract was said to be contained in a document or documents he did not consider it legitimate to have regard to the parties’ subsequent conduct for the purpose of considering whether those documents gave rise to a binding agreement. The judge went on to state that, in any event, evidence of post‑contractual conduct was unlikely to have much, if any, significance where there was said to be a written contract, given that the essential question was whether, objectively, the documents demonstrated that the parties had entered into a binding agreement on the terms set out in the documents. The existence of a binding agreement does not depend on the subjective intent of any party. So what the parties thought, or what it can be inferred they thought, is unlikely to be of much significance to determination of the objective question of whether the documents demonstrated the parties had reached a binding agreement.

For completeness, however, the judge did consider the conduct occurring after 3 June to see if it indicated that the agreement of 3 June was not a binding agreement. He found that it did not because reading the two emails as a whole they were consistent with the view that, read objectively, the letters of 3 June constituted a binding agreement. They did not demonstrate that the parties were negotiating terms after 3 June 2013.

Conclusion

Although this case concerned a dispute over commission payments, it is of wider application. It provides a salutary reminder of the care which needs to be taken when settling a dispute. In particular, should there be any doubt as to the terms of the settlement being made at the time of an offer, or doubt as to the desire to enter into a settlement on those terms, as opposed to terms to be subsequently negotiated and agreed in a final settlement agreement, then an offer should be expressed to be subject to contract. Further, the question of whether or not a binding contract has been entered into to settle a dispute is an objective one, and the judge considered that it was not legitimate to consider post-facto evidence regarding the conduct of the parties, and their subjective intentions, which in any event was unlikely to be relevant.