The High Court in Malcolm Newbury v Sun Microsystems  EWHC 2180 has found that a settlement offer was binding despite the fact that the settlement was still "to be recorded in a suitably worded agreement". The drafting of the written agreement was held to be merely a formality and, as a result, the Defendant was prevented from including any additional terms in the final settlement.
The settlement offer was delivered in the context of an impending eight day trial. Previous attempts at settlement had not been successful and, as a result, the Defendant's solicitors wrote to the Claimant's solicitors setting out their client's 'final position'. The settlement letter included the proposed settlement sum, a figure for legal costs, a deadline for when the offer was to close and a statement that the settlement was "to be recorded in a suitably worded agreement". The Claimant subsequently accepted the offer by email within the appropriate timeframe.
Problems arose, however, when the parties sought to draft the "suitably worded agreement". The Claimant's solicitors drafted a Tomlin Order which the Defendant's solicitors objected to as it conflicted with their own draft agreement which included additional terms on taxation, national insurance and confidentiality. Confidentiality was a particular issue as the Defendant did not want any details of the settlement to be publicly available (as per the Claimant's solicitors' draft Tomlin Order).
The Claimant rejected the Defendant's draft agreement, stating that it did not reflect the agreed terms specified in the settlement letter which were now binding following the Claimant's acceptance of such. Furthermore, the Claimant argued that execution of a written agreement was not a condition to the agreement coming into effect. The Defendant rejected the Claimant's arguments and countered with the assertion that the letter was not capable of acceptance as it was an agreement in principle only and it was conditional upon agreement of the other matters which were to be included in the "suitably worded agreement".
The Claimant applied to the High Court for a declaration that the Defendant's original offer letter and the Claimant's acceptance of such, amounted to a binding settlement agreement.
Lewis J, in agreeing with the Claimant, held that the letter and the Claimant's acceptance of the terms of the settlement contained within the letter, amounted to a binding legal contract and, furthermore, that the "suitably worded agreement" was only intended to formally record the agreement that had been reached (being "an authentic record") and that its execution was not a condition to the creation of a binding agreement.
The Court's decision was based on a few key factors. First, the letter was on its face capable of acceptance and contained the necessary terms to constitute a valid settlement (including the settlement sum, provision for legal costs and time for acceptance).
Secondly, in relation to the argument that the agreement needed to be in writing before it became binding, the Judge relied on the wording of the settlement letter itself which stated that such settlement was "to be recorded…". This gave credence to the fact that the "suitably worded agreement" was in fact intended to be a record of the terms of the settlement and that scope for further negotiation was never intended.
Lastly, and arguably most importantly, the Court paid particular attention to the fact that the letter was not expressed to be "subject to contract". Lewis J held that, "[h]ad those words been used, it would have been clear that the terms were not yet binding or agreed until a formal contract was agreed".
This judgment highlights the need for parties in settlement negotiations to state that any agreement in principle is "subject to contract", particularly if a party wishes to include any further terms in the final detailed agreement. The inclusion of "subject to contract" wording provides a party with the necessary flexibility to negotiate matters which may be ancillary to the main agreement, but are ultimately very important (for example, confidentiality issues and forms of payment). However, it will always be a question of fact whether or not "subject to contract" wording is sufficient to exclude an intention to create legal relations. To prevent the situation that occurred in this case, it is good practice to ensure that any written offer which is intended to be binding should include all of the terms which the parties intend to be bound by.