A recent High Court decision illustrates the importance of stating clearly that a settlement offer is intended to be subject to contract, where that is the case. Here the court found that the defendant’s letter setting out terms of settlement, “such settlement to be recorded in a suitably worded agreement”, constituted an offer that was capable of acceptance and had been accepted by the claimant: Newbury v Sun Microsystems [2013] EWHC 2180 (QB).

There was little dispute as to the applicable principles. In determining whether a contract has been concluded, the court must look at the correspondence as a whole and apply an objective test. Where it is understood that a formal document recording the terms will need to be executed, the question of whether the parties intend to be bound immediately, or only when the formal document is executed, depends on an objective appraisal of their words and conduct.

On the one disputed point of principle, the court found that where, as here, a contract is said to be contained in a document or documents, the court cannot have regard to the parties’ subsequent conduct for the purpose of considering whether those documents gave rise to a binding contract.

Ultimately each case will turn on its own facts, but here it was significant that the offer specified a period for which it was available for acceptance, and a period in which payment would be made if accepted. The judge said these factors clearly indicated an intention to put forward a binding offer. It was also relevant that the letter was not expressed to be “subject to contract”; the presence of those words would have been a clear indication that the terms were not intended to be binding, and their absence was a relevant factor indicating the contrary.

Background

On 3 June 2013, nine days before trial of the action was scheduled to begin, the defendant’s solicitors wrote to the claimant’s solicitors stating that the defendant had agreed to make a further offer of settlement. The letter stated: “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”) … such settlement to be recorded in a suitably worded agreement.” The offer was stated to be open for acceptance until 5pm that day, after which it would be automatically withdrawn. The parties agreed to extend the deadline to 5.30 pm.

At 5.21 pm, the claimant e-mailed a letter to the defendant’s solicitors marked “without prejudice save as to costs”. The letter stated “the Claimant accepts the terms of your client’s offer” and said that a draft agreement would be forwarded to the defendant’s solicitors for approval. The parties then failed to agree on the terms of the draft agreement.

A dispute arose as to whether the 3 June exchange of correspondence itself constituted a binding settlement agreement. The claimant said it did; although the agreement was to be recorded in a suitably worded agreement, that was not a condition of the agreement coming into effect. The defendant contended there was no concluded agreement; its letter of 3 June indicated an agreement in principle only, or alternatively the offer was conditional on execution of a suitably worded agreement.

Decision

The judge (Lewis J) held that, viewed objectively, a binding agreement had been concluded. That agreement would be recorded in a suitably worded agreement, i.e. one which reflected the terms of the agreement, but execution of that agreement was not a condition of creation of a binding agreement. The judge reached this conclusion for a number of reasons:

  1. The defendant’s letter of 3 June was expressed in terms of constituting 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, if accepted by that time, payment would be made within 14 days of acceptance. Both those factors were a clear indication that the letter was intended to be a binding offer capable of acceptance.
  3. The letter referred to “such settlement” being recorded in a suitably worded agreement. The reference to “such” settlement was a reference back to the terms set out, not to terms still to be negotiated and agreed.
  4. That conclusion was reinforced by the reference to the terms being “recorded” in a suitably worded agreement, i.e. as a record of what had already been agreed.
  5. The letter was not expressed to be “subject to contract”. 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 fact that those words were not used was a relevant factor.

That conclusion was reinforced by, but not dependent on, the factual background against which the letters were exchanged, namely an attempt to reach a final compromise and therefore avoid the potentially expensive trial that was due to begin shortly.

The judge rejected the defendant’s contention that the conduct of the parties following the 3 June exchange of correspondence was admissible and relevant in determining whether that exchange gave rise to a binding contract. Where a contract was said to be contained in a document or documents, the judge found, it was not legitimate to have regard to the parties’ subsequent conduct for the purpose of considering whether those documents gave rise to a binding agreement.

Such conduct might be relevant in limited circumstances, for example if it is alleged that there was a variation or new agreement, or that the contract was a sham, or if there are claims of estoppel. But such conduct was not relevant in determining whether, properly construed, the documents gave rise to a binding contract. In any event, on the facts, the judge considered that the subsequent correspondence did not support the defendant’s contention that the parties had not reached agreement.