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Avoiding the Accidental Settlement

Tue, 13 Jan 2015

Barrister - philip mantle

The question of whether two Parties have entered in to a binding settlement compromising a case is often just as (if not more) acrimonious matter as the substantive case. In particular as the devil is often in the detail of any settlement, the intention is often that even where settlement is agreed in principle, one party does not wish to be bound to the settlement until all the terms are agreed and embodied in a signed document. If this is the intention then it is important that the same is made well known to the other negotiating party, in order to avoid the pitfall of finding oneself having inadvertently entering in to a binding settlement, prior to concluding those subsequent negotiations

In Bieber & Ors v Teathers Limited (In Liquidation) [2014] EWHC 4205 (Ch) the Court provided both a useful reminder as to the applicable principles as well as highlighting the potential for such inadvertent settlement to be reached, in that case through the exchange of emails.

The Facts

Bieber concerned an action by multiple investors in film and television productions set up by the Defendants. The claim was valued at £20 million and, following the liquidation of the Defendants, approximately £10 million was available in assets in order to meet the claims through an insurance policy.

Mediation was unsuccessfully attempted and the matter was set down for a 15-day trial commencing 21 July 2014.

On 18 June 2014, solicitors for the Claimant's email the Defendant's solicitors indicating a willingness open dialogue between the Parties with a view to settling the proceedings. Subsequent to that initial email, a negotiation ensued between the Parties, from which (at trial) a key factual dispute emerged as to whether the Parties had negotiated upon the basis that any agreement reached would be subject to a formal written agreement being concluded. In particular, both at the mediation and then in the subsequent negotiation, the Parties had been unable to agree on the inclusion of a term relating to the Claimants providing an indemnity to the Defendants with respect of any third party claims against the Defendant that might arise post settlement. The Defendants contended that it was understood that no binding settlement would be concluded until the Parties had reached agreement on a formal written agreement, including clauses with respect to the provision of indemnities.

Following further discussion, on 20 June 2014 the Claimants made an offer to settle the claim for the payment of a sum (identified in the judgment as X-2) payable in 28 days. The payment sought pursuant to this offer was described as being “in full and final settlement of all claims…., including any claims for costs and counterclaims”. Further if the offer was acceptable “in principle”, the Claimants proposed to produce a Tomlin order recording the amounts due to each of the Claimants but proposed to leave the question of the amount to be borne by the liquidator and insurer respectively to the Defendant.  

That offer was rejected by the Defendant on 23 June 2014, who made a counter offer (for a sum described as Y+1) expressed to be a “cash payment made to your clients within the 28 day period

Although the Defendant subsequently attempted to argue that the reference to the offer dated 20 June 2014 as being one that was acceptable “in principle” suggested that it was not intended that this offer was capable of acceptance, the Court rejected that analysis determining that had the offer been accepted, the essential terms (the sum to be paid, the time for payment and the effect on the litigation of the agreement) would have been agreed and that this was sufficient to amount to a binding agreement. Likewise the Court rejected the suggestion that the simple cash offer to settle in the terms of the offer of 20 June 2014 could not have been intended (without further negotiation on specific terms including the indemnity position) to have been sufficient to resolve a complex dispute. Although the underlying dispute was complex the terms of the offer were not.

On 27 June 2014 the Defendants made what was described as a “take it or leave it offer” (at a sum described as Y+2). The Claimants’ request that the Defendants seek further instructions (on an improved offer) was rejected by the Defendant. Accordingly on 29 June 2014 the Claimants’ solicitor emailed in the following terms;

In the circumstances, my clients will accept [the offer at Y+2]. We will send round a draft consent order in the morning”.

Upon receipt, the Solicitor for the Defendant replied;

Noted, with thanks”.

Thereafter on Monday 30 June 2014, the Claimant’s solicitor provided a draft consent order incorporating the standard Tomlin provisions. The draft Order provided for the payment of Y+2 within 28 days, in full and final settlement of the claim and counterclaims. The Defendants were invited to sign and return the same. Instead of doing so, the Defendants circulated a longer form settlement agreement (first prepared for the unsuccessful May mediation), which contained, amongst other matters, clauses concerning the provision of indemnities.

The Parties remained at odds over the terms of the formal settlement agreement. The Claimants applied to the Court seeking a declaration that a binding settlement was reached by the exchange of emails between the solicitors on 29 June 2014, by which the Claimants had agreed to settle the proceedings for a payment of (Y+2).

The Principles

Although appearing prior to the Court’s recitation of the facts, the judgment in Bieber provides a helpful summary (at Paragraph 14) of the principles that are to be applied when considering whether a binding settlement has been concluded.

These are;

(a)   The question of whether a binding settlement has been reached is to be determined objectively by considering the whole course of the parties’ negotiations. Importantly once, objectively considered, the parties concerned have reached agreement in the same terms on the same subject matter, a contract will have been formed even though it is understood that a formal agreement will be entered in to subsequently that records (or potentially even adds) to the terms agreed;

(b)   Generally the subjective state of mind of the negotiating parties, and by extensive any subjective (but not communicated) reservations of one party will be irrelevant and evidence as to the same is inadmissible;

(c)    If, on an objective analysis of the parties’ conduct the parties intended to conclude a legally binding agreement, the fact that certain terms of economic or other significance have not been agreed does not prevent it being determined that the parties have reached a concluded agreement. The minimum requirement is that the parties shall have agreed all the terms necessary for there to be an enforceable contract- so a failure to agree terms such as confidentiality clauses will not prevent the conclusion being reached that the parties have entered in to a binding settlement;

(d)   Where the parties wish to ensure that an agreement that might be made orally (or in the context of this case by the exchange of email) does not become binding until all the terms are embodied in formal legal document, then they may do so by expressly stipulating that their negotiations will take place “subject to contract”;

(e)   The express stipulation “subject to contract” is not required where it was the mutual understanding of the negotiating parties that this was how the negotiations were being conducted;

(f)     Whilst “subject to contract” negotiations are most often found in the context of land, the rule may apply equally in any form of contractual negotiation;

(g)    Whether there was a mutual understanding that negotiations would proceed on a “subject to contract” basis, is a question of fact for each case;

(h)   Even where negotiations have been initially commenced on a “subject to contract” basis, it is open to either party to remove or otherwise waive that stipulation.

The Finding

Applying the above principles, the first question for the Court was whether considered objectively, the parties had reached a concluded agreement in the exchange of emails on 29 June 2014. The Court concluded that they had. Although the underlying litigation was complex the terms of the settlement- found initially within the 20 June 2014 letter and latter refined by the exchanges of correspondence up to the email exchange of 27/29 June 2014 was comparatively simple and evidently an offer that was capable of acceptance, notwithstanding the outstanding issue between the Parties as to the position on the third party indemnities.

Further, the Court rejected the Defendant’s analysis that the negotiations were to be concluded on a “two-stage” basis- with the amount to be paid agreed first but no binding agreement completed until the second stage (where the precise terms of the settlement) had been agreed upon. Had this been the position, then the Defendant’s email of 29 June 2014 would have drawn attention to the fact that the Parties now had agreement on the settlement sum but further agreement was needed on the precise terms before a binding settlement was concluded. The phrase “Noted, with thanks” did no such thing. 

Indeed the fact that the Parties were prepared to negotiate further as to the precise terms of the settlement (it ought to be noted that it was the Claimant who proposed the circulation of a consent order) did not prevent a binding settlement from arising. Firstly, neither by use of the express term nor as a matter of objective observation was it the case that the Parties had intended their negotiations to be “subject to contract”. In particular there was nothing in the email exchange of 29 June 2014 that was suggestive that there were crucial elements of the settlement that remained outstanding.   

Finally the Court considered the question of whether the Parties’ conduct in the period post 29 June 2014 was admissible as a matter of law for the purpose of deciding whether a contract was concluded on that date. Citing Newbury v Sun Microsystems [2013] EWHC 2180 (QB)- itself a useful example of the fact that, if one wishes to negotiate on a “subject to contract” basis, adopting that term expressly removes all doubt- the Court concluded that it was not. Once it outwardly appeared that the parties to a negotiation had agreed, on a particular date, in the same terms on the same subject matter then conduct after that date will not be a legitimate aid in determining whether or not the parties reached agreement on that particular date. Such conduct may be relevant if it is alleged that there has been a variation or new agreement and indeed may be admissible where it is alleged that the agreement is partly in writing and partly oral to test the question of whether the terms were agreed. However where it is said that an agreement was reached, contained within documents, then once it is objectively considered (on those documents) that agreement been reached, evidence of conduct thereafter is inadmissible.

Comment

Settling a claim can often be a more fraught and difficult process than fighting the same to trial. In any settlement process there is often a considerable desire (and indeed considerable utility) in trying to agree on the broader issues before moving to concentrate on the detail, with the hope that progress will beget progress. This is particularly the case on the Court steps, where considerable efforts are often expended to get agreement on the “big ticket” items thereafter leaving the detail for subsequent negotiation. However merely because a party wishes to see progress does not mean that there is a desire to be bound until all aspects of the settlement have been agreed. This is particularly the case in commercial matters where clauses that might be considered to be ancillary those matters that Bieber identifies as the core elements of any settlement (being the sum to be paid, the time for payment and the effect on the litigation of the agreement), such as indemnities against third party claims, confidentiality etc can be as, if not more, important to the client’s broader commercial objectives than the compromise of the particular case being negotiated.  

Bieber and Newbury offer timely reminders that, where that is the intention, it is vital that this is made clear. Although it is not necessary to include the phrase “subject to contract”, the judgments and the absence of the phrase will not prevent the conclusion being drawn that the negotiations were being conducted upon that basis, both Bieber and Newbury make clear that the use of those words will remove any doubt as to whether agreement has been reached prior to the execution of a formal written agreement. Furthermore, the Court in Bieber placed considerable reliance upon the fact that the Defendants, when acknowledging acceptance of their offer, did not take the opportunity to remind their opponents that the detail of the settlement remained to be agreed and that no binding settlement would arise until those details were agreed upon. Clearly if the desire is to negotiate on a “subject to contract” basis, then it is prudent to make this explicitly known and if there is doubt as to whether your opponent is either genuinely unaware or is perhaps being “selective” in their remembrance of how the negotiations are being concluded- it never hurts to reiterate the point for clarities sake.

 
Written by Philip Mantle.
 
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