The importance of ‘Subject to Contract’ in negotiations

15-08-2013 11:08

The recent case of Newbury v Sun Microsystems in the High Court demonstrated the importance of the heading ‘subject to contract’ in contractual negotiations.

The Claimant argued that a binding agreement on the terms of settlement of the dispute was reached when it accepted certain terms offered by the Defendant in a letter.  The Defendant argued that the offer was an offer in principle and that other terms needed to be agreed and a written agreement needed to be drawn up.

A contract is formed when all the terms of an offer have been unequivocally accepted by the other party. What constitutes an offer and acceptance is viewed objectively; did the parties intend to be bound? If the written documents do not indicate that the terms are negotiable, then a contract may be formed when neither party intended the contract to be formed at that point. A contract may therefore occur where one party is unhappy with the terms of the contract.

However, if the initial terms of the offer are negotiable, then the inclusion of the phrase ‘Subject to Contract’ would make it clear that these terms are negotiable.  On the particular facts of this case, the expression “Subject to Contract” was not used and the Judge held that this was one of the factors in this case that pointed towards a binding contract having been formed.

It is important in settlement discussions to make sure your position is adequately protected.  For more information on this, please contact Emma Hayward.


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