Importance of Marking Settlement Offers “Subject to Contract”

Failure to mark a settlement offer as “subject to contract” meant that a binding agreement had been reached when the offer was accepted. It was not therefore open to the employer to seek to negotiate further terms as to confidentiality and tax.

In Newbury v Sun Microsystems, N had brought a High Court claim for unpaid commission. The matter was about to come to trial. Sun’s solicitors wrote to N’s solicitors making a final offer of a settlement sum which was to be in full and final settlement of the claim, payable within 14 days of acceptance and “such settlement to be recorded in a suitably worded agreement”. N’s solicitors responded the same day accepting the settlement terms and said they would forward a draft agreement for approval. Sun’s solicitors sought to include an obligation of confidentiality on N and terms about tax and national insurance contributions and to delay the date for payment to within 14 days of the agreement.

N applied to the Court for a declaration that a binding settlement had already been reached on the terms set out in the original letter. The Court agreed that a binding settlement had been reached on those terms.

The terms of the offer letter were clearly intended to be a binding offer capable of acceptance with the legal consequences which followed. It was not simply an offer indicating a willingness to consider settlement, subject to agreement on other matters. The reference to “such settlement to be recorded in a suitably worded agreement” was not a reference to terms which were yet to be negotiated and agreed but to a formal record of the terms already set out in the settlement offer.

The position would have been different had the offer letter been expressed to be “subject to contract”. Had these words been used, it would have been clear that the terms would not be binding until a formal contract was agreed. It would then have been open to Sun to seek to negotiate the further terms.

This case demonstrates the importance of always marking settlement offers as “subject to contract” where it is intended that the settlement should not be binding until a formal settlement agreement has been executed. Parties will often want to negotiate monetary terms first, with other terms being negotiated later if agreement can be reached on the financial aspects. Marking correspondence as subject to contract will enable them to do this. The same result could have been achieved if the original offer had stated that it was subject to final agreement of full terms to be set out in a settlement agreement. Unfortunately, whilst the wording used by Sun’s solicitors (“such settlement to be recorded in a suitably worded agreement”) may have been intended to achieve this, it was not sufficiently clear to do so. The safest course is therefore always to mark settlement correspondence as “subject to contract”.