In Newbury v Sun Microsystems [2013] EWHC 2180 (QB) it was held that a letter which sets out proposed settlement terms in a contractual dispute, and a subsequent acceptance of this, could constitute a binding agreement. This is in spite of the terms of the settlement not being recorded in a formal agreement.

This case involved an employment dispute over unpaid commission which was owed by Sun Microsystems to Mr Newbury. Shortly before the trial was due to begin, Sun Microsystems wrote to Mr Newbury offering to settle the matter by paying out over £600,000 in commission plus a further £180,000 for legal costs within 14 days of the acceptance. The settlement was to be ‘recorded in a suitably worded agreement according to the letter sent to Mr Newbury.

The offer was accepted by Mr Newbury’s solicitors on the same day. They also agreed to forward a draft agreement to Sun for their approval. However, when a dispute as to the terms of the settlement arose, Mr Newbury’s solicitors applied to the court for a declaration that a binding contract between the parties had already been reached. They made this application on the basis that they had received an ‘offer’ (the letter laying down the terms of settlement) which they had accepted.

The defendant’s argument that their offer was ‘in principle’ only was rejected by the High Court. The court found that there was a binding legal agreement between the parties. This was because the letter sent by Sun was expressed to be an offer to settle and the terms of that offer were set out. If the defendants had intended for their offer to be only ‘in principle’ then their offer letter should have included the words ‘subject to contract’.

This case demonstrates that when negotiating terms, contracting parties must always be clear on whether or not their ‘offer’ is to be treated as a starting point for negotiations or if it is supposed to be capable of acceptance. If it is meant only to start the negotiation process then it must be clear in the document that there are further matters requiring agreement before a binding contract will have been formed. These might include provisions in relation to confidentiality, public statements, or even dispute resolution clauses. If, on the other hand, it is intended to be capable of acceptance then it should only include terms on which a party would be prepared to contract and then be bound by. This is where inclusion of the term ‘subject to contract’ is useful to make this clear.

Subject to contract is a small phrase but one which helps signal that a binding agreement is not intended, otherwise contracting parties may end up with a very different result to what was expected.