'Subject to contract' no longer effective once agreement reached

The High Court has ruled that, once the parties to a dispute have agreed terms to settle it, any previous 'subject to contract' correspondence becomes admissible in court, stopping either of them from changing their minds.

Two businesses in dispute agreed a settlement just before the court trial of the issues. Negotiations had been intensive and detailed, and the terms were recorded in emails and telephone discussions. The negotiations had been 'subject to contract' and 'without prejudice' up to that point. However, one side then sent an email referring to the fact 'agreement had been reached, that was not marked 'subject to contract'. Both sides withdrew their legal teams and told the court the case had been settled.

Before a formal document could be drawn up, one side argued that they had not actually settled and claimed a further £25,000. It said that, because previous correspondence had been marked 'subject to contract' and/or 'without prejudice', it could not be referred to at the trial.

Use of the words 'subject to contract' means you are saying agreement has not yet been reached. However, once agreement has been reached, the words are no longer appropriate. Adding them to correspondence or documents means nothing.

The effect of proper use of the words 'without prejudice' is that what you say in correspondence or verbally can't be used against you if the dispute turns into court proceedings.

However, importantly, if you have a potential dispute with an employee or a customer, just using the words 'without prejudice' in a discussion or on correspondence does not automatically make it confidential. Your words could still be made public in court or the employment tribunal - they are not 'without prejudice' at all - unless you satisfy certain conditions. These are:

• there must be a dispute underway;
• what you say must be part of a genuine attempt at settling the dispute; 
• you must not reveal the content of 'without prejudice' negotiations, or you can forfeit your right to confidentiality.

In this case, the High Court said that agreement had been reached in fact - signing a document was a mere formality to record what had been agreed, as everyone knew what the settlement terms were. The behaviour of both sides backed this up. Neither the 'subject to contract' nor the 'without prejudice' provisos applied once agreement was reached in fact, even though the words continued to be used in correspondence and on documents.

Recommendations
Businesses should avoid using words like 'subject to contract' and 'without prejudice' without thinking whether they actually apply - merely using them does not make negotiations confidential.

Once agreement is reached, draft and sign any formal record of it as fast as possible, to avoid disputes like this one.

Case ref: Jirehouse v Beller [2009] EWHC 2538 (Ch).