Importance of the expression ‘subject to contract’

October 2013

Reading time (1-10 minutes): 3 minutes
Sophistication level (1 (idiot) – 10 (expert)): 4
Entertainment value (1 (turgid) – 10 (side-splitting)): 4

Background:

This case involved a dispute over unpaid commission. Shortly before they were due to go to court, Sun Microsystems wrote to Mr Newbury offering to settle by paying him over £600,000 plus £180,000 for legal costs (oh to be a litigation solicitor…) within 14 days of him accepting. The letter went on to say that this settlement was to be ‘recorded in a suitably worded agreement’.

Mr Newbury’s solicitors wrote to accept the same day. They also promised to send Sun a draft agreement to approve. But they never got round to agreeing all the terms of this draft agreement. (They fell out over provisions relating to confidentiality obligations; whether the settlement terms should be recorded in a publicly viewable court order; tax implications; and when exactly the payment should be made.)

Mr Newbury’s solicitors asked the court to rule that there was already a binding contract even though a formal agreement hadn’t been signed. What did the court say?

Answer:

The court sided with Mr Newbury. The letter from Sun amounted to an offer, which his solicitors had accepted on his behalf.

Conclusion: whether you are negotiating a commercial agreement or the settlement of a commercial dispute, if you don’t want your offer or acceptance to be legally binding unless and until various other issues are addressed and agreed, you should make it very clear in writing. But you do not need to go into great detail setting out the kinds of things that still need to be agreed. All you need to do is use the magic expression ‘subject to contract’. Sun hadn’t done this. It had used different wording, which the court ruled did not have the same meaning.

Advice:

· Always add the magic words ‘subject to contract’ if you are negotiating something, unless you are happy that what you are agreeing should be legally binding even though there are other things you have not yet resolved.

· Repeat this expression in all subsequent correspondence, or at least make clear in your first correspondence that all subsequent correspondence should be treated as being subject to contract unless and until you specifically agree otherwise.

Case: Newbury v Sun Microsystems [2013] EWHC 2180 (QB), 22 July 2013