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Hong Kong – Take Care When Agreeing Settlement Terms!

14 March, 2014

 

The English case of Malcolm Newbury v Sun Microsystems Ltd, [2013] EWHC 2180 (Q8) illustrates the importance of carefully wording settlement offers. Although not a construction case, this of course applies equally to construction cases. 
Malcolm Newbury (“Mr Newbury“) commenced legal proceedings against Sun Microsystems Ltd (“Sun“) for just over USD 2m, being commission payable under a contract, and Sun counterclaimed for an alleged overpayment.
Sun’s solicitors made a settlement offer to Mr Newbury’s solicitors, in a letter (“the Offer Letter“), as follows:

 

“To reach a compromise between the parties, our client has agreed to make a further offer of settlement to the Claimant …

 

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 … 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.

 

This offer is open for acceptance until 5pm this evening after which it will be automatically withdrawn without further notice to you.”

 

Mr Newbury’s solicitors responded to the offer by letter (“the Acceptance Letter“), as follows:

 

“We are instructed that the Claimant accepts the terms of your client’s offer, being payment of the Settlement Sum of £601,464.98 plus £180,000 in relation to his legal costs.

 

We will forward a draft agreement for your approval on Tuesday 04 June.”

 

Subsequently, Mr Newbury’s solicitors sent a draft Tomlin Order to Sun’s solicitors that was said to record the agreement terms. Sun’s solicitors then sent back an amended draft order and which referred to the claim being stayed on the terms set out in a waiver deed. The draft waiver deed not only contained the agreed terms, but also some additional provisions, including a confidentiality clause. Mr Newbury’s solicitors argued that that the waiver deed did not record the settlement terms. Sun’s solicitors argued that the Offer Letter had said that the settlement was to be recorded in a “suitably worded agreement” and that the waiver deed was the “suitably worded agreement”.

 

A dispute therefore arose between Mr Newbury and Sun as to whether a binding agreement had been reached on the terms set out in the Offer Letter. The Court held that the Acceptance Letter gave rise to a binding agreement between the parties. The terms of that agreement were, the Court said, that Sun would pay certain sums to Mr Newbury in full and final settlement of the claim and counterclaim by a specified date and that the agreement would be recorded in a suitably worded agreement i.e. one which reflected the agreement terms. Execution of that suitably worded agreement was not, the Court said, a condition of the creation of a binding agreement, but was simply intended to record more formally the agreement that had been reached. The Court reached this decision for the following reasons:-

 

  1. The Offer Letter was expressed in terms of constituting a settlement offer and set out the settlement terms.
  2. The offer was stated to be available for acceptance by a specified time and, if accepted by that time, payment would be made within 14 days of acceptance. This was a clear indication that this letter was intended to be a binding offer, capable of acceptance, with certain legal consequences following from acceptance.
  3. The Offer Letter referred to “such settlement to be recorded in a suitably worded agreement”. The reference to “such” settlement was a reference back to the terms set out in the earlier part of the Offer Letter. If the offer was accepted, the terms set out would constitute the terms of the settlement agreed between the parties. The reference to “such settlement” was not a reference to terms still to be negotiated and agreed.
  4. The above conclusion was reinforced by the reference to the terms being “recorded” in a suitably worded agreement. Read objectively, the Offer Letter offered to settle the claim on certain terms and if accepted those terms were to be “recorded” i.e. committed to writing as an authentic record of that which had already been agreed. The Offer Letter therefore constituted a binding offer of settlement on terms, which was accepted.
  5. The Offer Letter was not expressed to be “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 those words had not been used, indicated that the Offer 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 terms.
  6. The offer and acceptance was to be recorded in a suitably worded agreement, but execution of that suitably worded agreement was not a condition of the agreement. Instead, it was an expression of the wishes of the parties that there be a formal record of what had been agreed.

 

The Court rejected Sun’s argument that the parties’ subsequent conduct demonstrated that they were still negotiating and had not reached a binding agreement. The Court said that where a contract is said to be contained in a document(s), it was not legitimate to have regard to the parties’ subsequent conduct for the purpose of considering whether those documents gave rise to an agreement. The question for the Court was whether, considering the whole course of events up to and including the document(s) in question, the parties objectively had reached the agreement and that would involve consideration of the meaning of the document(s) viewed against the whole of the relevant background to the negotiations. Once the parties had, to all outward appearances, agreed in the same terms and subject matter, the Court said, a contract would have been formed and their conduct after that was not a legitimate aid in determining whether or not the parties had reached an agreement by that date.

 

This case serves as a reminder of the need to take care when wording not only settlement offers, but also in tender negotiations when it is not clear from the conduct of the parties whether the parties have entered into a binding contract . If their intention is to only make an offer in principle, with the precise terms of such to be agreed later, they should make it clear by putting “subject to contract” on correspondence, although the court will always look at the substance of the correspondence, not label.

 

Deacons

 

For further information, please contact:

 

Kwok Kit Cheung, Partner, Deacons

kwokkit.cheung@deacons.com.hk

 

Deacons Dispute Resolution Practice Profile in Hong Kong

 

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