Successful settlements

11th July 2018

Dealing with disputes can be fraught with difficulty and risk, but so too can concluding and documenting a successful resolution. Creating a binding, solid settlement can itself be a complex matter, as a recent case shows. A director in Walker Morris’ Commercial Dispute Resolution Team, explains and shares some top tips for successful settlements.

Technical traps for the unwary

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. Similarly, without a detailed knowledge of contract law per se, parties can often mistakenly believe that they have made or accepted settlement offers, when actually they have not done so at all.  These issues were addressed in the recent case of Goodwood Investments Holdings Ltd v Thyssenkrup Industrial Solutions AG [1].

Facts

The case concerned a substantive dispute between the purchaser of a superyacht and a shipbuilder. The substantive dispute was being dealt with by arbitration as opposed to litigation, but when a secondary dispute arose as to whether or not the substantive dispute has been settled in ‘without prejudice’ correspondence, the parties applied to the court under section 45 of the Arbitration Act 1996 for the determination of that preliminary point of law.  The arbitration was adjourned as a result, on the basis that it could be resumed if necessary.

The shipbuilder’s ‘offer’ was stated to be ‘without prejudice save as to costs’ and subject to the execution of a formal settlement agreement and approval of the shipbuilder’s board. The purchaser’s ‘acceptance’ comprised various pieces of correspondence which, together: acknowledged that the ‘offer’ was subject to board approval; sought certain clarifications; introduced additional terms as to the where/when and other logistical arrangements of the settlement; and included a draft settlement agreement which was stated to be ‘subject to contract’.

The question was whether a binding settlement had been reached.

Law

It is in the public interest that disputing parties should be able to negotiate freely, without fear of future prejudice in court, with a view to settling their disputes wherever possible. For a communication to attract without prejudice privilege, which means that it will not be admissible in court, there must be a real issue between the parties and the communication must be, or form part of, a genuine attempt to negotiate a resolution. Crucially, it is the substance of the communication that matters – not whether or not the document, meeting or phone call has been labelled or stated to be ‘without prejudice’. To determine this, the communication must be analysed objectively in its context.  If a communication is part of a genuine settlement negotiation and it is labelled ‘without prejudice save as to costs’, then it will not be admissible in court except until after the dispute itself has been resolved, and the parties require to determine the question of costs.

Understanding without prejudice privilege and conducting settlement correspondence correctly can therefore have far-reaching implications in terms of the admissibility of evidence in the case if/when settlement attempts fail, and when it comes to costs protection/costs recovery.

A contract is formed when all of the key elements are present: offer; acceptance; consideration (that is, money or money’s worth); intention to create legal relations; and certainty of terms. You might think that the point at which a contract has been formed is easy therefore to establish.  However, this is a common source of dispute.  Particular areas of contention include whether a purported offer is valid and capable of contractual acceptance; and whether a response to an offer constitutes an acceptance or a counter-offer.  These issues can be crucial because, for example, they can determine on whose terms a business deal proceeds, or whether, or on what terms, a dispute is settled.

Decision

In this case, the High Court concluded that the shipbuilder’s ‘offer’ was not an offer, the purchaser’s ‘acceptance’ was not an acceptance and no binding settlement had been achieved

Because the ‘offer’ was subject to both board approval and completion of a further settlement agreement, it was not an offer which was sufficiently certain and complete as to be capable of being accepted to form a binding contract.  The ‘acceptance’, with its introduction of new terms could have constituted a counter-offer, however acknowledgment that settlement was subject to board approval and its ‘subject to contract’ label meant that it was also too uncertain and incomplete to amount to a contractual offer.  As a final nail, the court concluded that the fact that the arbitration had been adjourned on the basis that it could be resumed if necessary was consistent with the parties having so far reached only a non-binding agreement in principle.

Top tips for successful settlements

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 following stressful, long and hard-fought substantive dispute. Here are some points to consider:

• For a settlement to come into being, any offer and acceptance must clear, certain, comprehensive and capable of binding all of those on which it places obligations.
• If you are making an offer, make sure that it clearly and comprehensively sets out all of the key terms that are important to you.
• If you wish to accept an offer, make sure that you are entirely happy (a) with all of the terms proposed; and (b) that there are no other terms which need to be included. When accepting an offer, do so clearly by accepting unequivocally and without qualifications.
• If your acceptance is conditional on other events or circumstances, be careful to say so clearly by setting out what these are.
• Remember that terms such as ‘without prejudice’, ‘without prejudice save as to costs’ and ‘subject to contract’ have technical meanings and can have significant implications. These must be appreciated and applied appropriately in settlement negotiations, correspondence and documents.
• Sometimes a ‘without prejudice save as to costs’ settlement offer will state that, if it is not accepted, the offeror will subsequently bring the offer to the attention of the court and ask for an award of indemnity costs [2]. Offerees should be alive to the fact that, unless any such ‘offer’ was genuinely capable of immediate and binding settlement, entitlement to indemnity costs should not arise.

The parties’ in principle 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 will require 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] [[2018] EWHC 1056 (Comm)
[2] An indemnity costs award is one which is made not subject to the limit of proportionality.