The importance of creating clarity of intentions during the negotiation process of any contract has been reiterated in a recent decision by the High Court.

The regulation of negotiating contracts has long centred on the concept of the parties' intentions and whether one or both are intent on creating a legal relationship. It is important for each party to establish and set out whether the suggested terms of a contract are capable of being accepted or whether they are merely the first step in the negotiation process. The recent decision in Newbury v Sun Microsystems [2013] EWHC 2180 (Newbury case) not only ruled on the intention of the parties generally, but the specific wording that was used in correspondence when the parties were negotiating the terms of the contract.

Facts

The Newbury case involved a settlement agreement, although the principles will apply to all contracts in the same manner. In response to a claim brought by Mr Newbury against Sun Microsystems ("Sun"), his employer, for unpaid commission Sun made a settlement offer, stating that the terms of the offer reflected Sun's final position. Sun's solicitors set out in writing the sum offered to Mr Newbury, that they were willing to pay Mr Newbury within 14 days of acceptance of the offer and that the settlement was "to be recorded in a suitably worded agreement".

This offer was accepted by Mr Newbury's solicitors on the same day, who said that they would forward a draft agreement for approval. However, a dispute ensued as to how the settlement should be recorded; Sun's solicitors preferred choice of agreement (a separate confidential waiver) provided for payment within 14 days of the agreement, rather than the 14 days from acceptance of the initial offer. Mr Newbury consequently applied to the court for a declaration that a binding settlement agreement had already been reached on the terms which were set out in the initial correspondence received from Sun's solicitors.

Sun's argument was that its letter was 'in principle' only and that the court should take into consideration the conduct of the parties after the date of the initial letter, as there had been negotiations surrounding the agreement and thus no binding contract had been reached.

Decision

The High Court found that the initial letter from Sun's solicitors, combined with Mr Newbury's solicitors' response did in fact constitute intention to create a legal relationship and so there was a binding legal agreement between the parties. The Court's reasoning was as follows:

  • The letter from Sun was an offer of settlement, which set out clearly the terms of settlement and that it was available for acceptance for a specific time only. This was a clear indication that the letter was a binding offer with legal consequences to follow, rather than an offer indicating willingness to negotiate.
  • The reference in Sun's letter to the settlement being "recorded in a suitably worded agreement" was not a reference to the terms of the settlement, but the document itself and on its agreement it would simply reflect the earlier accepted terms. The letter did not state that the execution of the agreement as a condition of the creation of a binding agreement.
  • More importantly, the letter was not expressed to be 'subject to contract'. The Court stated that if those words had been used, it would have been clear that the terms were not binding until a formal contract had been agreed. Therefore, the absence of these words indicated that the offer made by Sun could be accepted and intended to create legal intentions.

The High Court also noted that where a contract is said to be contained in documents and not oral, the Court cannot take into account conduct which has occurred after the date of the documents in order to ascertain parties' intentions.

This case is a strong example of why parties should ensure the insertion of the words 'subject to contract' to all correspondence and documents in situations where they do not wish to create a binding legal agreement and are intent only on negotiating the terms of the contract. If this phrase is introduced to the negotiations, it can only be rebutted if the parties expressly agree that it should no longer apply. Whilst the courts will usually take into account the substance of communications when ruling on the parties' intentions, it is very useful to include the words 'subject to contract' as an aid to showing that a binding legal agreement has yet to be reached and that the parties are still in the negotiation stage.

It is clear that the outcome of this case would have differed significantly had these three words been included in the correspondence between the parties, as both parties would have been of the understanding that there was no binding agreement until all of the terms had been formerly agreed.

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