Practical Law

Two recent High Court decisions (AB and another v CD Ltd and Newbury v Sun Microsystems) illustrate the importance of knowing early each and every settlement term either desired by your client or necessary to make the settlement work.

AB and another v CD Ltd [2013] EWHC 1376 (TCC)

This case concerned a professional negligence claim about work the defendant architect had carried out in relation to the construction of a new yard at the claimants’ property. Shortly before trial, the parties entered into a mediation agreement with a mediator and attended a mediation day. No settlement was reached on the day, but it ended with the claimants leaving their offer open.

In the subsequent weeks, the parties’ representatives and the mediator continued to correspond and talk on the phone. At one point, the defendant made an offer (via the mediator) by email marked “without prejudice and subject to contract”. The claimants’ representative responded (via the mediator) saying that he was unsure what the reference to the offer being “subject to contract” meant because an agreed settlement would simply need to be reflected in a Tomlin order.

On a later date, the defendant’s solicitor telephoned the mediator and made a further offer. Several telephone conversations took place that same day. Notably, the defendant’s solicitors did not say anything about the defendant’s offers being “subject to contract” during any of those. This day culminated in the claimants’ solicitor telephoning the mediator to say the defendant’s offer was accepted.

When the claimants’ solicitor provided a draft Tomlin order, the defendant returned it heavily amended to include, for example:

• A term that the payment was in full and final settlement of all claims “and any and all claims and causes of actions, of which the claimants are aware or should reasonably be aware at the date of the Tomlin order”.
• Clauses about confidentiality and the costs of the mediation.

The claimants’ response was that the deal had already been done and none of the proposed amendments were agreed or implied. They applied for a declaration that the claim had been settled by an agreement on certain terms. The defendant admitted some of the terms were agreed but, crucially, argued that the agreement was not binding because:

• There was no intention to create legal relations until the agreement was reduced to writing and signed by the parties as the mediation agreement said, as many standard mediation agreements do:
  

  “If agreement is reached between the parties, the same shall not be legally enforceable unless incorporated into a written settlement agreement signed by them or their representatives who shall be deemed to have full authority to enter into such settlement agreement on their behalf.”

• The defendant’s offer was made “subject to contract” and there was no such contract.
• What the defendant did admit was agreed, was too uncertain or incomplete to be a valid agreement.

Meaning of the mediation agreement

To resolve the first question the court had to interpret the mediation agreement. It held that the defendant’s offer made during  communications after the mediation day ended was not caught by the terms of mediation agreement. In support of this, the court referred to the following term of the mediation agreement:

“The hearing shall take place at the date, time and place set out in the mediation particulars. If the dispute has not been resolved at the end of the time allotted for the hearing, then, with the agreement of all the parties and the mediator, the hearing may be continued or may be resumed at such time and place as the parties and the mediators may agree.”

This clause contemplated further hearings in the presence of the parties, not a process of communications by the exchange of letters or emails.

Notably, the court considered that the claimants’ agreement to leave open the offer they made during the mediation day and the defendant’s agreement to consider it,

“did amount to an agreement by the parties to continue the mediation until the defendant either accepted or rejected the offer or it was withdrawn”

but held that:

“there [was] no evidence before the court that the parties agreed to extend the mediation process beyond this.”

Instead, the court concluded that the parties had agreed thereafter to use the services of the mediator on an ad hoc basis: “the mediation process will normally end at the conclusion of the hearing”.

Offer not “subject to contract” and settlement terms not vague

The court rejected the defendant’s argument that its offer had been made “subject to contract”. The court referred to the fact that although the claimants’ solicitor had questioned what “subject to contract” meant in the context of a Tomlin order, he had received no response from the defendant:

“The defendant could have reinstated it, but, by failing to do so or to respond to the claimant’s solicitor’s query, I conclude that the defendant can no longer be taken, by reference to an objective assessment of its conduct, to be relying on the “subject to contract” umbrella. It was, of course, open to the defendant to reimpose it, but it did not do so.”

Finally, the arguments that the agreement was not binding because certain terms were not agreed also failed, which resulted in the claimants’ application being granted.

Newbury v Sun Microsystems

In Newbury v Sun Microsystems, the defendant sent the claimant an offer in a letter, which the claimant accepted. The defendant then sent a draft agreement containing further terms. The claimant rejected that draft and said that a binding agreement had been concluded when it accepted the defendant’s offer. It applied to the court for a declaration to that effect.

The defendant argued that its letter made an offer in principle; the parties still had to negotiate other terms and its offer letter stated “such settlement to be recorded in a suitably worded agreement” and, until then, there was no binding contract.

By reading the offer and acceptance letters objectively, the court came to the conclusion that they were intended to create legal relations and the parties had agreed upon all the terms that they regarded as essential for the formation of a legally binding agreement.

As to the meaning of “such settlement to be recorded in a suitably worded agreement”, the court rejected the defendant’s submission that this meant an agreement on terms acceptable to each party and held:

“The reference to ‘such settlement’ is not a reference to terms still to be negotiated and agreed… that conclusion is reinforced by the reference to the terms being ‘recorded’ in a suitably worded agreement. Read objectively, the [Defendant’s offer] letter of 3 June 2013 offers to settle the claim on certain terms. If accepted, those terms will be ‘recorded’ that is, they will be committed to writing as an authentic record of that which has already been agreed.”

A further reason for this conclusion was that the defendant’s letter was not expressed to be “subject to contract”:

“Had those words been used, it would have been clear that the terms were not yet binding or agreed until a formal contract was agreed.
…
The fact that the Defendant did not use those words in the letter is in my judgment a relevant factor. It indicates that the letter was an offer of terms capable of acceptance as it stood. It was not intended to be subject to discussion and agreement on additional or different terms.”

Finally, in support of its argument that the terms of any settlement still needed to be negotiated, the defendant argued that the question of whether, objectively, the parties had entered into a contract was to be determined by the totality of events; not simply by reference to the documents said to amount to an agreement. The claimant argued that where it was alleged that certain written documents gave rise to a binding agreement, the court’s task was to construe those documents to determine whether, objectively, they gave rise to a binding legal agreement.

The court agreed with the claimant:

“…where a contract is said to be contained in a document or documents, I do not consider that it is legitimate to have regard to the parties’ subsequent conduct for the purpose of considering whether those documents give rise to a binding agreement.”

Drafting in advance

One way to gain an early understanding of what the desired or necessary terms of any settlement are is to draft a settlement agreement in advance of the mediation. This should set out the “ideal deal” and, perhaps in a separate draft, the deal that you or your client can live with. This process of early drafting allows time to consider a number of things, including:

• The precise scope of the dispute being settled (such as, in a defects claim, whether the claim set out in the pleading or letter of claim is being settled or something more, such as defects which are yet to be discovered or yet to be pleaded).
• What the form of the agreement should be and if any steps need to be taken for an agreement to work (such as, in a boundary dispute, consulting a conveyancing professional about any steps that may need to be taken with the Land Registry).
• Each and every term that is required to be included in any deal (such as a confidentiality clause or a clause allowing payment in instalments).
• Where the desired terms fit in the pecking order and which are “deal breakers”.

Of course having such a draft agreement (or agreements) ready in your mediation or negotiation toolkit does not mean that the terms of that draft are set in stone. Also, the draft (or drafts) do not ever need to be disclosed to the other party.

Such advance planning also assists the mediation or negotiation process: even requirements which may seem minor (such as when or how payment will be made) can derail the mediation process if raised late in the mediation day.