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Thursday, April 17, 2014

An Offer He Can’t Refuse: A Lesson in Contract Disputes

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Credit: Kittisak for freedigitalphotos.net

Perhaps this should be a golden rule of business survival: Do right and fear no man; don’t write and fear no lawyers and their litigious clients.

A London court recently held that settlement terms of a contract dispute, proposed in a letter by defendant and accepted by the claimant, constitute a binding legal agreement.

British law is not U.S. law, of course, but its logic has similarities, which is why the story behind this case is worth knowing when it comes to settling claims — such as those involving a supply chain dispute between buyer and vendor.

Newbury v. Sun Microsystems involved a claim by Malcom Newbury that he was owed a commission of more than US $2 million by Sun Microsystems. The company, acquired by Oracle Corp. a year after Newbury’s work for Sun, countersued for what it said was an overpayment to Newbury.

Prior to trial, Sun’s solicitors wrote a letter offering an out-of-court settlement of  more than £780,000 (around $1.25 million) payable within 14 days of Newbury accepting the deal. The letter stated that if accepted, the settlement would be “recorded in a suitably worded agreement.”

Newbury’s lawyers accepted the deal the day they received the letter. However, a dispute arose about the settlement. Nevertheless, Newbury’s lawyers asked the court to declare that the parties had reached a binding contract. Their reasoning: the letter was a legal offer to settle and included terms that they had accepted.

Sun’s lawyers countered that their offer was only “in principle” and therefore non-binding.

The High Court disagreed, ruling that the letter was an offer to settle, the terms were clearly laid out, and if the defendant had meant the proposal to be “in principle,” the letter should have stated that the terms were “subject to contract.”

Commenting on the case on the website Lexology, attorney John Mackenzie warns that in any such negotiation parties must be clear as to whether a proposal is a “starting point for negotiations or if is supposed to be capable of acceptance.”

The law seeks precision in its language, whether in the U.K. or the U.S., to make certain all parties know exactly where they stand in a negotiation. Sun’s lapse in this case may not have averted a payout to Newbury, but it certainly hastened one that a trial verdict might have made less generous.

“Subject to contract is a small phase but one which helps signal that a binding agreement is not intended, otherwise contracting parties may end up with a very different result to what was expected,” Mackenzie wrote.

Ipso facto.

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