Using the ‘wrong’ words can be costly

Two recent court decisions remind us of the need to be careful with our choice of language when dealing with contractual matters. Unfortunately, applying ‘common sense’ or saying “well the other party knew what I meant” will not necessarily lead to the outcome that was intended.

The High Court said that an exchange of letters between an employer's solicitors and an employee's solicitor's was binding even though the employer’s solicitor letter said, the offer was to be "recorded in a suitably worded agreement". Once the employee had accepted the terms in the letter, it was too late to negotiate further on tax or confidentiality. This case is a classic example of why, when offering or negotiating a settlement of any dispute, you should  add the words "subject to contract" to correspondence where you do not want to be bound by an acceptance before there is a formal written agreement. Where the words "subject to contract" are not used you should ensure that all the terms you wish 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.

The same point applies to all commercial negotiations. It is always a matter of fact as to whether using the words ‘subject to contract’ is effective to prevent an offer being capable of acceptance. Special care is needed when corresponding through e mail as it is all too easy to slip into casual language. Use of language also caused a problem in a case about a performance bond. A bank had given a bond to a buyer of a ship. In the bond, the bank promised to pay compensation to the buyer if delivery of the ship was delayed. However, there were very clear requirements for the form of notice the buyer had to serve on the bank and the buyer failed to follow the exact wording and so although the ship was not delivered on time the bank was able to avoid paying under the bond. The court said that the bank could not tell from the demand whether or not the buyer was actually entitled to end the contract because bank was not party to the shipbuilding contract it could not be expected to investigate the position between the buyer and the shipbuilder.

This case suggests that it is a good idea to slavishly follow the language set out in any contract which provides for notice of a particular form.

For more advice on contracts, please contact Clare Magill on 01752 663295.

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