Saying Those Three Little Words…
The words 'subject to contract' are commonly used in legal communications, whether during negotiations for the settlement of a dispute or when thrashing out the terms of a commercial deal. The recent High Court case of Newbury v Sun Microsystems  EWHC 2180 (QB) has highlighted the importance of these words, particularly where the parties intend that the terms under negotiation are not to be binding until a formal document has been executed.
- The parties were on the verge of a lengthy trial.
- The solicitors for the defendant sent a letter containing an offer which stated their client was willing to settle, with payment terms including the amount, the date for payment and the amount for costs, with the caveat:
- "…such settlement to be recorded in a suitably worded agreement".
- The claimant replied by email, stating the offer was accepted, and stated a draft agreement was to be provided for approval.
- The parties then could not agree upon the wording of the settlement agreement.
The court found that the claimant was entitled to receive a settlement sum on the terms set out in the defendant's letter. This was decided on the basis that the parties had reached an agreement to settle, with the agreed settlement terms to be recorded in a 'suitably worded' document.
It was noted that had the parties included wording 'subject to contract' or similar on the correspondence, the intention not to be bound until a formal document was executed would have been evident.
Whilst this case relates specifically to a settlement agreement, it is a cautionary tale, relevant to legal negotiations of all kinds. In fast-paced exchanges of emails in the run up to settlement or completion it is easy to see how a similar set of circumstances, or similarly-worded correspondence, could arise.
With this in mind, it is advisable to ensure all documentation and communications are labelled 'Subject to Contract' where parties intend (or may need) to negotiate further. Equally, and harking back to the decision of the Supreme Court in RTS v Muller  UKSC 14, even this may not be a panacea, if the conduct of the parties implies an intention to be bound contractually. In the Muller case, a yoghurt production line was built without a signed contract in place; the parties had labelled many of their exchanges as 'Subject to Contract', but the Supreme Court still found there was an enforceable contract. So, be careful with those three little words.