By far the majority of cases settle, but ensuring the settlement
you thought you had agreed is accurately reflected in a
settlement agreement can be more complicated than it first
appears. What are the pitfalls to watch out for during and after
Settlement means that the parties to a dispute have decided to
put an end to that dispute. The parties can agree to settle their
dispute at any time, including before proceedings are commenced
and even after trial before the judgment is handed down.
Negotiating a settlement
Settlement negotiations, if pursued by the parties in good faith,
are usually considered to be on a 'without prejudice' basis. This
means that the detail of the negotiations cannot usually be used
in court as evidence of any admissions by either party, unless it
becomes necessary to ascertain whether a settlement has been
reached. If the parties choose to mediate, discussions in the course
of that mediation are also treated as being without prejudice.
While negotiations are taking place, it is important to ensure
that you do not inadvertently enter into a binding agreement
before the terms of the deal have been finalised. Ensure that all
correspondence is not only headed 'without prejudice', but is
also headed 'subject to contract' until you have approved the
final terms of the settlement. The 'subject to contract' wording is
used to indicate that the parties do not intend any terms agreed to
become 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 trying
to negotiate a settlement. Consider entering into a standstill
agreement to stop the limitation period from running while
negotiations are on-going.
In order to have as much certainty as possible, document your
deal in a settlement agreement. A settlement agreement is
a contract just like any other, so the usual requirements for a
valid agreement apply. In the context of settlement, the key
requirements are that there must be:
1. Consideration – often in the form of a monetary
settlement, but can be in the form of an exchange of
promises (consider making the settlement by deed, rather
than by a simple contract, if there is no clear consideration
passing between the parties to the settlement – eg where
a parent company is contracting on behalf of a subsidiary
which is not a party).
2. Certainty of terms – if an issue in the dispute is not dealt
with, or if the terms are not sufficiently clear, then the
contract may be difficult to enforce; the court will attempt
to give effect to the parties’ agreement, but it will not go so
far as to re-write it for them.
3. Intention to create legal relations – in other words, it
must be clear that the parties intended to achieve a final
and binding settlement of their dispute.
Ten key settlement considerations
The terms of any settlement will be specific to the circumstances
of each particular dispute, but there are certain key points
which apply in any settlement, and which should be carefully
considered in addition to the legal requirements above, to ensure
that the agreement deals clearly and explicitly with every detail
of the proposed deal:
1. Parties – only those who are party to the agreement will be
obliged to comply with its terms. Provide a clear description
of the parties involved and think about who should be bound
by it. For example, is there any person or party potentially
connected with the dispute that should be included as a party
to the agreement? Where proceedings have been started,
are there other co-claimants or co-defendants and, if so, are
they prepared to be included in the settlement and bound
by it? Defendants should try to ensure all claimants and
potential claimants are tied in, and a defendant who wants
to prevent a claimant from suing an associated company or
officer after the settlement should provide that such entities
may also rely on the settlement agreement (either by making
them parties or pursuant to the Contracts (Rights of Third
Parties) Act 1999). Such entities should be identified in the
settlement agreement by name, as a member of a class or as
falling within a particular description.
2. Indemnities and undertakings – if there is a risk that
the claimant will bring proceedings against a third party in
relation to the same loss, and that third party may in turn
seek a contribution from the defendant, the defendant
should seek an undertaking from the claimant that it will not
bring such proceedings, and an indemnity against any liability
to which it might become subject as a result of the claimant
bringing such a claim.
3. Scope of settlement – be clear about what is being settled,
and consider carefully which claims the settlement agreement
covers. For example, if you want to make sure you cover
existing, unknown and future claims, use wording such as, "full and final settlement of all claims which the parties have or may
have against each other arising from [specific event]". If you only
want to settle a more narrow issue in dispute, say so.
4. Payment – a settlement will usually be on the basis that one of
the parties makes a payment. It is important to specify to whom
and by whom the payment is to be made (particularly where
there are numerous parties), by what method and to which
account, in which currency and by when. Consider whether
you want to make a provision for interest on late payments and
ensure you have checked the tax position on any payment.
5. Legal costs – you or the other party may well have
incurred solicitor or barrister costs, court fees or costs
of third parties such as experts. If you have agreed that
one party will pay the other’s legal costs, it is important
to deal with this specifically in the settlement agreement.
If the dispute has been settled for a specific amount, but
there has been no mention of costs, an agreement as to
costs cannot be inferred. Try to agree the amount to be
paid in respect of costs – although if you are unable to, it
is possible to apply to the courts to decide this, whether
proceedings have commenced or not.
6. Confidentiality – most parties would prefer the settlement
agreement to be confidential. Ensure you include an express
confidentiality provision in the settlement agreement, whilst
permitting certain necessary exceptions (for example,
pursuant to an order of the court or limited to the parties’
respective auditors, insurers and lawyers). If proceedings have
commenced and you would like to ensure that confidentiality
is maintained, the agreement will need to be referred to in
the schedule to a Tomlin order rather than a consent order.
Ensure that there is no reference to sensitive terms either
in the body or schedule of the Tomlin order and make sure
that your reference to the separate agreement identifies it
with sufficient certainty. Where the matter is high profile or
of interest to a particular industry, it is also sensible to agree
some form of public statement/press release, particularly
where the actual settlement terms are confidential.
7. Governing law and jurisdiction – as with any contract, it is
important to consider the governing law and jurisdiction of the
contract, so that it is clear how to resolve any disputes that
arise. If any of the parties is based abroad, include a process
agent clause as well so that you are able to serve proceedings
on that party without the need for further formalities.
8. Consents – if consent from a third party (such as an
insurer) is needed, make sure you obtain it in good time.
9. Execution – ensure that the person who will be signing the
settlement agreement has authority to bind the party he or
she represents, and if the settlement is by way of deed, that
any formalities for execution of deeds are complied with.
10. Logistics – if there are any practicalities to be dealt with
prior to signing of the agreement (for example, documents
being served, counterparts being executed), ensure they are
done promptly. Do not forget any follow-up, such as filing
a consent order with the court and/or informing the court
that any trial date can be vacated.
After a hard-fought negotiation process, it can be easy to
overlook elements of the deal when drafting the settlement
agreement, but it is important to carefully review your
settlement agreement before signing it to make sure that
all elements have been captured. Where there has been a
mistake in the signed agreement, it is possible to apply to
the court for rectification, but this is a difficult process so
getting it right in the first place will save a lot of trouble
down the line.