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Why All Settlement Negotiations Should Be “Subject To Contract” Until They Are Agreed

  • August 19, 2013 test
  • By Hunters Law

The High Court has held that a letter from an employer to an employee containing a proposed settlement offer, together with a subsequent letter of acceptance from the employee, amounted to a binding agreement. In the absence of the words “subject to contract” in the offer letter, the employer could not continue to negotiate with the employee.

In Newbury v Sun Microsystems [2013], Mr Newbury made a claim against his employer, Sun Microsystems (“Sun”), for unpaid commission.  Sun, in response, filed a counterclaim for recovery of an alleged overpayment of commission.  Just before the final hearing was due to commence, Sun’s solicitors wrote to Mr Newbury’s solicitors and put forward a settlement proposal in full and final settlement of Mr Newbury’s claim and Sun’s counterclaim.  Sun’s solicitors omitted to state that the settlement proposal was subject to contract.

Mr Newbury’s solicitors responded the same day and accepted the terms of the proposed settlement.

A dispute arose between the parties as to the way in which the settlement should be recorded and Sun wanted to impose an obligation of confidentiality on Mr Newbury and insert terms into the agreement relating to income tax and national insurance contributions, none of which had been included in Sun’s original offer letter.  Mr Newbury applied to the Court for a declaration that a binding settlement agreement had been reached on the terms set out in the original offer letter, which he had accepted by return.

The High Court held that the letters constituted a binding agreement between the parties which settled the claim and the counterclaim.  Importantly, the original offer letter was not expressed as being subject to contract, which meant that there could not be any ongoing negotiations between the parties.

This case highlights why it is essential to add the words “subject to contract” in any settlement offers or correspondence during negotiations where it is intended that the settlement should not be considered binding until a formal written agreement, for example a settlement agreement, has been executed.  If a party makes an offer that is not “subject to contract”, it should ensure that all of the terms that it wishes to include in the settlement proposal are clearly set out.  Once the offer is accepted, it is too late to change it.

If you would like any further information about the subject-matter of this article, or if you would like any other employment or business law advice, please do not hesitate to contact a member of our Business Law Team

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