Contract negotiations: pitfalls to avoid

A High Court decision provides a classic example of why, when offering or negotiating a settlement of any dispute, it is important to add the words “subject to contract” to correspondence where it is intended that the settlement should not be considered binding until a formal written agreement has been executed. Where a party does not use the words “subject to contract”, it should ensure that all the terms it wishes to include in the settlement are clear from the offer letter. Once the offer is accepted, it will be too late to negotiate further terms.

In this case, the court held that a letter from an employer’s solicitors setting out the terms of a proposed settlement sum, and a subsequent letter of acceptance from the employee’s solicitors, constituted a binding agreement settling the parties’ respective claims. Once the employee had accepted the terms in the letter, the employer was not in a position to negotiate further terms relating to confidentiality or the tax position. The letter should have included the words “subject to contract” if the employer intended further negotiations to follow before a binding settlement was reached.

Whether or not the expression “subject to contract” is effective to exclude an intention to create legal relations will always be a question of fact. Nevertheless, businesses should ensure that correspondence is always be labelled “subject to contract” until they are sure that all terms have been agreed.