Safe and Sound Settlement

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Dealing with disputes and litigation can be fraught with difficulty and risk but so can be concluding and documenting a successful compromise or resolution. Creating a binding, solid settlement can itself be a complex matter and several recent cases highlight important points to be aware of.

Reaching a reliable resolution

The case of Frost v Wake Smith and Tofields Solicitors [1] concerned a long-running and acrimonious dispute between two brothers, Mr David Frost (the Appellant) and Mr Ron Frost (RF), over the division of their shared property and business interests. The Appellant had instructed Wake Smith and Tofields Solicitors (WST) to act on his behalf. A mediation took place in November 2003, during which a form of agreement was reached between the parties. The solicitor at WST drafted an agreement which laid out the basis of a resolution of many of the issues (the Agreement), which was signed by both parties. The Appellant believed that an agreement had been reached from which RF could not resile. Following the mediation, however, it became clear that RF did not regard himself as bound by the Agreement. WST received advice from Counsel that the Agreement was unenforceable because of its vagueness and the fact that it dealt with the interests of third parties.

In 2009, the Appellant issued a negligence case against WST. The appeal concerned whether the solicitor at WST was in breach of duty in failing to ensure the legal enforceability of the Agreement. The Court of Appeal dismissed the case and held that WST had not been negligent. Key to this ruling was the fact that the agreed terms were not yet sufficiently certain and complete to constitute an agreement which was capable of being legally binding in any event.

Settlement barred set-off, but not counter-claim

IG Index Ltd v Ehrentreu [2] was an unfortunate case which involved a binding settlement agreement, but which nevertheless did not actually constitute a resolution to the dispute.

The parties had entered into a contract for betting on the Stock Exchange. One of the defendant’s bets went catastrophically wrong, to the tune of some £1.2 million. The parties entered into a settlement agreement, in which the defendant acknowledged the full debt and agreed to pay in instalments. However, when the defendant did not pay and the claimant issued enforcement proceedings, the defendant argued that its liability was reduced or extinguished by way of set-off or counter-claim, as a result of the claimant’s conduct in connection with the bad bet.

To understand the case it is essential to understand the subtle differences between each of the pleaded concepts in the defendant’s arsenal. Set-off is a mere ground of defence, often described as a shield not a sword, which arises purely out of, and inherently connected to, a claim. A counter-claim, however, is a weapon of offence which, although often raised in reaction to a claim, is actually an action in itself.

The Court of Appeal held that the settlement agreement had excluded the ability for the defendant to rely on set-off (even though there were no clear words to that effect) because the agreement dealt not only with an acceptance of liability, but also with timings for payment and cash-flow, with which all forms of set-off are concerned. However the settlement agreement did not deal with, and did not extinguish, the defendant’s counter-claim, which he remained free to pursue.

The Ehrentreu case flags the danger for those negotiating and agreeing settlements of misunderstanding or overlooking the subtleties of tactical comebacks open to defendants, such as the ability, here, to counter-claim.

Status of ‘Subject to Contract’

Phrases such as ‘subject to contract’ and ‘without prejudice’ are often brandished in contractual and settlement correspondence without the negotiating parties really understanding their significance and effect.

In Newbury v Sun Microsystems [3] both parties were legally represented when it came to resolving their dispute. Sun Microsystems’ solicitors sent a letter offering to pay a sum to Mr Newbury by a certain date, to settle his claim. The letter stated “such settlement to be recorded in a suitably worded agreement” but it was not marked ‘subject to contract’. Mr Newbury accepted. Later, when the parties were negotiating the wording of the settlement agreement, Sun Microsystems sought to change the payment date, and to include other matters. It argued that this was possible in line with the letter’s requirement to obtain a “suitably worded agreement”. Mr Newbury objected and argued that the letter constituted a complete offer, the terms of which had been accepted and were binding. The High Court agreed, commenting that the absence of the words ‘subject to contract’ was a factor that it had taken into account when deciding the case.

WM Comment

Drafting successful settlements draws on fundamental contractual principles; it requires an understanding of technical and tactical aspects; it often involves a language all of its own; and it frequently arises only at the end of a stressful and long and hard-fought dispute. It is impossible to advise comprehensively in this article as to the pitfalls and points of which all settling parties should be aware, and in any event the facts surrounding any one settlement agreement are often as important as the law itself. However these three recent cases do demonstrate some crucial points to note:

  • for a settlement to be binding it must be clear, certain, comprehensive and capable of binding all of those on which it places obligations
  • settlement practitioners must fully understand, and must properly cater for in any binding agreement, all relevant concepts such as set-off and counter-claim
  • terms such as ‘without prejudice’, ‘without prejudice save as to costs’ and ‘subject to contract’ can have technical meanings and implications which must be appreciated and applied as appropriate in settlement negotiations, correspondence and documents
  • the parties’ agreement of terms to resolve a dispute might not be the conclusion of a case. It can be the beginning of a new negotiation which requires consideration and care in itself, to guarantee a successful completion. Don’t scrimp on settlement – when it comes to fully and finally resolving a case, it is safest to take specialist advice.

[1] [2013] EWCA Civ 1960
[2] [2013] EWCA Civ 95
[3] [2013] EWHC 2180 (QB)