Importance of making settlement discussions 'subject to contract'
Stating that a formal contract setting out settlement terms will follow in due course does not mean that parties to negotiations will not be bound if a contract is never signed, according to a High Court decision.
In the case in question, the Claimant issued a High Court claim for US $2 million allegedly due as commission under his contract. The Defendant made a counterclaim. Trial was due to commence on 12 June 2013. On 3 June 2013, solicitors for the Defendant wrote to the Claimant's solicitors as follows:
“Our client is willing to settle the entire proceedings by paying the Claimant within 14 days of accepting this offer, the sum of £601,464.98 (the "Settlement Sum") inclusive of interest by way of damages, by means of an electronic transfer into his nominated bank account, in full and final settlement of the Claim and counter-claim plus the sum of £180,000 in relation to his legal costs such settlement to be recorded in a suitably worded agreement.”
The Claimant’s solicitors replied, accepting these terms, and that they would 'forward a draft agreement for your approval'.
The parties’ attempts to agree the draft agreement floundered. The Claimant applied to the High Court for payment of the Settlement Sum, arguing that a binding agreement had been reached in the exchange of letters on 3 June. The Defendant argued that no agreement had been reached.
The High Court ruled that the letters of 3 June constituted a binding agreement settling the claim and counter claim and setting out the terms of that settlement. That settlement was to be recorded in a suitably worded agreement, that is, in a formal agreement which reflected the terms agreed by the acceptance of the offer of 3 June 2013. The settlement agreement was not conditional upon the execution of such an agreement. The offer and acceptance letters of 3 June 2013 themselves constituted a binding agreement.
The decision illustrates the risks parties take where they enter into negotiations without making clear at the outset how and when they intend to be bound. Unless negotiations are clearly expressed to be “subject to contract”, a contract may be formed at the point at which all the key terms are agreed.
Although there is an important exception regarding statutory employment claims (e.g., unfair dismissal), there is no requirement for a settlement agreement to be formally recorded in order for it to be enforceable. If two parties have reached an agreement (that is, if one has made an offer and the other has accepted the terms of that offer); if it is clear they intended to be bound by the terms of that agreement; and provided they also agreed some form of “consideration” (such as a payment), then a binding contract may have been formed. To avoid the effect of these principles, parties should always make clear at the outset whether negotiations are “subject to contract”. This phrase has a distinct legal meaning and gives rise to a presumption that the parties do not intend to be bound unless and until they sign a formal written agreement.
The exception to this general rule applies to employment claims derived from statute – like unfair dismissal. These claims require the formality of a compromise agreement (re-named ‘settlement agreement’ from 29 July 2013) and any agreement to settle such a claim is unenforceable unless the agreement satisfies the requirements of a settlement agreement
If you would like advice about how the issues in this note apply to your situation, please contact Tony Brown on 01225 740097 or by e mail to firstname.lastname@example.org
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