Settlement in litigation – the devil is in the detail

In my previous two legal updates (What is Mediation and Why Mediate?), I’ve focused on one form of alternative dispute resolution: mediation. However, the most basic way to resolve a dispute is to make an offer of settlement.

Three key principles to remember

Making an offer of settlement can be as simple as saying: “I’ll give you £5,000, or I’ll accept £5,000” but the devil is in the detail. To make an offer of settlement a pathway to a definite resolution, you should keep these three key principles in mind:

1. What exactly are you offering? Typically this could be money, a new contract, discounts on future business.

   Whilst most offers of settlement centre around money, parties are at liberty to settle their disputes on whatever terms they wish. This is particularly relevant in the business environment, where money is not always the key concern; winning contracts, doing business, stopping another business from encroaching – these factors can be just as important as money.

2. What are you expecting in return? Examples include swift payment, no further contact, discontinuation of legal proceedings.

   On your offer, always be clear what you are expecting in return. Often parties are seeking to settle litigation, but you should consider whether it is just the current litigation or, whether you are severing all relations with the other party. In that case the settlement may be for all claims between the parties rather than just this one. As set out above, the offer need not just be monetary, however you will need to be specific so there are no misunderstandings.

3. Practicalities, how is it going to work?

   Whether it is money, or a commercial solution you are offering, the key message is to be clear, and to be specific. Too often parties appear to have reached settlement, only for it all to fall apart on the details – timelines for payment, whether interest is included, deadlines for renewing contracts.

Consider the following:

• is the payment to be made in a lump sum or instalments;
• will the contract be renewed for a year or on a rolling basis;
• is the ‘no poaching’ agreement for a set period of time;
• is there a penalty for breaching the terms of the settlement;
• have you stated the renewal terms of a new contract and does it differ from the previous contract?

Protecting your position

“Without prejudice save as to costs”

Settlement offers should always contain an element of compromise – something to induce the other party into accepting the offer, rather than continuing on with the dispute/litigation. This often means that settlement offers run contrary to parties open or pleaded position. For example, a defendant may file a defence denying all liability, but may in an offer of settlement admit to partial liability. To protect parties from being bound in open court by concessions made in offers of settlement; offers can, and in most cases should, be marked as “without prejudice save as to costs”.

This label is extremely important as it provides protection on two levels. Firstly, the phrase “without prejudice” means that the other party cannot show the offer to a judge in the event that the matter does not settle and goes all the way to trial, so it will have no bearing on the questions of liability (who wins) and quantum (how much money they get). This means that any concessions you make in an offer of settlement, like admitting liability, cannot be held against you at trial.

Once a judge has made their ruling as to liability and quantum, they will then look at who pays who’s legal costs. The usual rule for costs is that the loser pays the winner’s costs. However, this rule can be challenged on the basis of the conduct of the parties, including what offers of settlement have been made and rejected. This is where the second level of protection comes into play, as the “save as to costs” phrase means that the offer is hidden from the judge, only until it is time to decide who pays who’s legal costs and in what amount. This means that if you made a good offer, which the other party rejected, and then they did not do as well at trial but still ‘won’, a judge can take this into account when deciding whether you should still pay their costs and/or the amount you should pay. Cost awards are discretionary and for the judge to decide on each case; they also depend on whether a Fixed Costs Regime (FRC) applies or whether parties have used the Court mandated Part 36 Rules to try and settle the cases, but these are things your legal counsel can discuss with you in depth as needed.

Subject to contract

Another label to consider adding to offers of settlement is “subject to contract”. This label protects parties from becoming bound by a vague offer, as it allows the parties to negotiate the finer details later after an offer has been accepted.

As noted above all of the key and non-negotiable points should be clearly set out in the offer, but the finer details can be negotiated and finalised in a formal written settlement agreement.

Formal written settlement agreement

The next step after accepting an offer of settlement, or having your offer accepted, is to record it all in a formal written settlement agreement.

The benefits of using a formal written settlement agreement are twofold. First, it forces the parties to consider and agree the finer details and practical points of how the settlement will work – for example payment terms, account details, what happens if a party fails to comply with their obligations etc.

The second benefit comes later, if one party fails to abide by the terms of the settlement. If everything is documented in a written settlement agreement, which is signed by both parties; then in the event of breach, it is easier, swifter and less expensive to enforce a clear written settlement agreement than it is to enforce a one paragraph settlement offer. With a clear written settlement agreement, there is no wiggle room for a party to say “I thought we agreed X instead” or “I didn’t have to do that as it wasn’t in the offer”. Clear obligations with resultant consequences for not meeting those obligations, makes enforcement much more straightforward.

Making an offer of settlement is one of the easiest and most cost effective ways to resolve a dispute as long as you remember: be clear and specific in what you are offering and what you expect to receive; keep an eye on the practicalities of how it will work; label it correctly and document it in writing. Crucially of course, make doubly sure you are happy with what you are offering, as the other party may well accept it.

If you have a dispute that you think may benefit from settlement advice, please contact a member of our highly experienced Dispute Resolution Team.