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Lake Tekapo
1 September 20168 minute read

Back to basics: Settlement of disputes

By far the majority of cases settle, but ensuring the settlementyou thought you had agreed is accurately reflected in asettlement agreement can be more complicated than it firstappears. What are the pitfalls to watch out for during and afterthe negotiations?

What settlement means 

Settlement means that the parties to a dispute have decided toput an end to that dispute. The parties can agree to settle theirdispute at any time, including before proceedings are commencedand even after trial before the judgment is handed down.Negotiating a settlementSettlement negotiations, if pursued by the parties in good faith,are usually considered to be on a 'without prejudice' basis. Thismeans that the detail of the negotiations cannot usually be usedin court as evidence of any admissions by either party, unless itbecomes necessary to ascertain whether a settlement has beenreached. If the parties choose to mediate, discussions in the courseof that mediation are also treated as being without prejudice. 

While negotiations are taking place, it is important to ensurethat you do not inadvertently enter into a binding agreementbefore the terms of the deal have been finalised. Ensure that allcorrespondence is not only headed 'without prejudice', but isalso headed 'subject to contract' until you have approved thefinal terms of the settlement. The 'subject to contract' wording isused to indicate that the parties do not intend any terms agreed tobecome binding until a formal written document is signed. 

If proceedings are not yet underway, keep in mind limitation.The clock does not stop ticking just because you are tryingto negotiate a settlement. Consider entering into a standstillagreement to stop the limitation period from running whilenegotiations are on-going. 

Formalising a settlement 

Once a settlement has been reached, it may be formalised anddocumented: 

  • in an email or letter, or 
  • in a settlement agreement or deed, and/or 
  • in a consent order or judgment, if formal proceedings have already started. If the settlement is documented in this way, the agreement can be enforced within the existing proceedings rather than having to start new proceedings to enforce. 
The settlement agreement 

In order to have as much certainty as possible, document yourdeal in a settlement agreement. A settlement agreement isa contract just like any other, so the usual requirements for avalid agreement apply. In the context of settlement, the keyrequirements are that there must be: 

1. Consideration – often in the form of a monetarysettlement, but can be in the form of an exchange ofpromises (consider making the settlement by deed, ratherthan by a simple contract, if there is no clear considerationpassing between the parties to the settlement – eg wherea parent company is contracting on behalf of a subsidiarywhich is not a party). 

2. Certainty of terms – if an issue in the dispute is not dealtwith, or if the terms are not sufficiently clear, then thecontract may be difficult to enforce; the court will attemptto give effect to the parties’ agreement, but it will not go sofar as to re-write it for them. 

3. Intention to create legal relations – in other words, itmust be clear that the parties intended to achieve a finaland binding settlement of their dispute. 

Ten key settlement considerations 

The terms of any settlement will be specific to the circumstancesof each particular dispute, but there are certain key pointswhich apply in any settlement, and which should be carefullyconsidered in addition to the legal requirements above, to ensurethat the agreement deals clearly and explicitly with every detailof the proposed deal: 

1. Parties – only those who are party to the agreement will beobliged to comply with its terms. Provide a clear descriptionof the parties involved and think about who should be boundby it. For example, is there any person or party potentiallyconnected with the dispute that should be included as a partyto the agreement? Where proceedings have been started,are there other co-claimants or co-defendants and, if so, arethey prepared to be included in the settlement and boundby it? Defendants should try to ensure all claimants andpotential claimants are tied in, and a defendant who wantsto prevent a claimant from suing an associated company orofficer after the settlement should provide that such entitiesmay also rely on the settlement agreement (either by makingthem parties or pursuant to the Contracts (Rights of ThirdParties) Act 1999). Such entities should be identified in thesettlement agreement by name, as a member of a class or asfalling within a particular description. 

2. Indemnities and undertakings – if there is a risk thatthe claimant will bring proceedings against a third party inrelation to the same loss, and that third party may in turnseek a contribution from the defendant, the defendantshould seek an undertaking from the claimant that it will notbring such proceedings, and an indemnity against any liabilityto which it might become subject as a result of the claimantbringing such a claim. 

3. Scope of settlement – be clear about what is being settled,and consider carefully which claims the settlement agreementcovers. For example, if you want to make sure you coverexisting, unknown and future claims, use wording such as, "full and final settlement of all claims which the parties have or mayhave against each other arising from [specific event]". If you onlywant to settle a more narrow issue in dispute, say so. 

4. Payment – a settlement will usually be on the basis that one ofthe parties makes a payment. It is important to specify to whomand by whom the payment is to be made (particularly wherethere are numerous parties), by what method and to whichaccount, in which currency and by when. Consider whetheryou want to make a provision for interest on late payments andensure you have checked the tax position on any payment. 

5. Legal costs – you or the other party may well haveincurred solicitor or barrister costs, court fees or costsof third parties such as experts. If you have agreed thatone party will pay the other’s legal costs, it is importantto deal with this specifically in the settlement agreement.If the dispute has been settled for a specific amount, butthere has been no mention of costs, an agreement as tocosts cannot be inferred. Try to agree the amount to bepaid in respect of costs – although if you are unable to, itis possible to apply to the courts to decide this, whetherproceedings have commenced or not. 

6. Confidentiality – most parties would prefer the settlementagreement to be confidential. Ensure you include an expressconfidentiality provision in the settlement agreement, whilstpermitting certain necessary exceptions (for example,pursuant to an order of the court or limited to the parties’respective auditors, insurers and lawyers). If proceedings havecommenced and you would like to ensure that confidentialityis maintained, the agreement will need to be referred to inthe schedule to a Tomlin order rather than a consent order.Ensure that there is no reference to sensitive terms eitherin the body or schedule of the Tomlin order and make surethat your reference to the separate agreement identifies itwith sufficient certainty. Where the matter is high profile orof interest to a particular industry, it is also sensible to agreesome form of public statement/press release, particularlywhere the actual settlement terms are confidential. 

7. Governing law and jurisdiction – as with any contract, it isimportant to consider the governing law and jurisdiction of thecontract, so that it is clear how to resolve any disputes thatarise. If any of the parties is based abroad, include a processagent clause as well so that you are able to serve proceedingson that party without the need for further formalities. 

8. Consents – if consent from a third party (such as aninsurer) is needed, make sure you obtain it in good time. 

9. Execution – ensure that the person who will be signing thesettlement agreement has authority to bind the party he orshe represents, and if the settlement is by way of deed, thatany formalities for execution of deeds are complied with. 

10. Logistics – if there are any practicalities to be dealt withprior to signing of the agreement (for example, documentsbeing served, counterparts being executed), ensure they aredone promptly. Do not forget any follow-up, such as filinga consent order with the court and/or informing the courtthat any trial date can be vacated. 

Final review 

After a hard-fought negotiation process, it can be easy tooverlook elements of the deal when drafting the settlementagreement, but it is important to carefully review yoursettlement agreement before signing it to make sure thatall elements have been captured. Where there has been amistake in the signed agreement, it is possible to apply tothe court for rectification, but this is a difficult process sogetting it right in the first place will save a lot of troubledown the line.