Under contract law, the parties to an agreement are bound by that agreement once an offer has been made and accepted. In Newbury v Sun Microsystems, the High Court held that the parties were still bound by an agreement unless it clearly stated that it was “subject to contract”.

Basic facts

Days before a court hearing, the company’s solicitors offered settlement terms to Mr Newbury in a letter dated 3 June 2013 which it said were to be “recorded in a suitably worded agreement”, if he accepted it.

Mr Newbury did accept and two days later, his solicitors forwarded a draft agreement reflecting the offer terms. The company sent back the draft order with a few amendments, along with a waiver deed requiring Mr Newbury not to discuss or divulge the existence or the contents of the order, the agreement or negotiations to any one, subject to certain exceptions.

Mr Newbury refused to sign the waiver, arguing that the offer which he accepted on 3 June was binding. As this just referred to a “suitably worded agreement” (in other words, an agreement which reflected the agreed terms) and did not mention any conditions for that agreement to come into effect, he said that the company could not now impose the waiver clause.

For its part, the company argued that it had not reached a “concluded agreement” with Mr Newbury in the correspondence dated 3 June. Instead, that letter was just an offer seeking to resolve a dispute and was an agreement in principle only which depended on “other matters”. Alternatively, it argued that, as the offer was subject to a “suitably worded agreement” there was no binding agreement between the parties until it was signed.

High Court decision

The High Court judge said that in order to decide whether they had reached agreement, he had to consider “the whole course of the parties' negotiations” and apply an objective test.

In this case, viewed objectively, the letter of 3 June gave rise to a binding legal contract between the parties. It offered to settle the claim on certain terms, which, if accepted, were to be “committed to writing as an authentic record of that which has already been agreed”.

Those terms were simply that the company would pay a certain amount of money to Mr Newbury in full and final settlement of his claim by a specified time. That, in turn, would be recorded in a suitably worded agreement. In other words, one which reflected the terms of the agreement.

However, “execution of that agreement was not a condition of the creation of a binding agreement but was simply intended to record more formally the contract that had been reached”.

In other words, it was simply a reference back to the terms set out in the earlier part of the paragraph and was not a reference to terms still to be negotiated and agreed. It clearly stated that, if accepted within the specified timeframe, payment would be made within 14 days of acceptance.

Those factors, said the judge, were a clear indication that the letter was intended to be a binding offer capable of acceptance with certain legal consequences following from acceptance.

Finally, there was no mention in the letter that it was "subject to contract". Had those words been used, it would have been clear that the terms were not yet binding or agreed until a formal contract was agreed. The fact that the company did not use those words indicated that the letter was an offer of terms capable of acceptance as it stood. It was not intended to be subject to discussion and agreement on additional or different terms.