Three recent decisions shed light on interesting aspects of settlement agreements

Settlement agreements are primarily a commerdaltool ana often a financial risk management tool by which the parties compromise claims.

However, these agreements are in essence contractual documents and, as these decisions demonstrate, the parties involved- business people and legalprofessionals alike- ought to wrap the commercialdynamic of the settlement in a rigorous legal mind-set when negotiating and drafting the agreement. Failure to do so June have dire consequences.

The formation of the agreement

An agreement reached by exchange of emails can be binding even though the parties cannot then agree on further terms of the settlement.

In Bieber and others -v- Teathers Ltd'. the claimants had invested in investment schemes, set up by the defendants, which turned out to be failures. The claimants claimed their losses. After an unsuccessful mediation and shortly before trial, the parties - through their respective solicitors - made another attempt to settle their dispute this time by email communication.

The negotiation tumed on the amount of the settlement, the payment terms and the scope of the settlement. Having agreed on the last two points, the later email exchanges were on the level of settlement, as follows: the defendants solicitor made a revised offer ('I'm afraid this is a take it or leave it offer at [amount)'): the claimants' solidtor accepted the offer ('[M]y client will accept the [amount] offer. We will send round a draft consent order'): the defendant acknowledged ('Noted, with thanks'). 

The draft consent order (i.e. an order to stay the legal proceedings on agreed terms which are set out ina schedule to the order) prepared by the daimants was rejected by the defendant who then submitted a long fonm agreement induding an additional point - namely the inclusion of an indemnity clause- that had not been raised before. The parties could not agree on the contents of that document and, in the ensuing impasse, the claimants' solicitor asserted that the claim had been settied by agreement contained in the exchange of emails.

The judge held that a binding settlement had been reached through email communication. Even though the parties had contemplated that there would be a consent order to carry the settlement into effect, the settlement was not conditional upon the agreement of the terms of that order or indeed of a settlement agreement, as submitted by the defendant.

In that respect, the judge found that the terms used in the email communication were 'flatly contradictory to the notion that the discussions were taking place subject to contract'. Notably, the judge was of the firm view that the defendant would not have responded 'Noted, with thanks' if his understanding was that other terms needed to be discussed before a final agreement could be made.

If parties in negotiation do not intend to be bound by an agreement, the usual way is to add the words 'subject to contract'. But it is not essential to use express words if it is the mutual understanding of the parties that the negotiations are non­ binding and 'subject to contract2.

In this case, the judge found that, considering the whole course of the parties' negotiations and the context in which it took place (the parties were under time pressure as further and substantial costs were about to be incurred in preparing for trial), the parties had concluded an agreement with the intention to be bound by it.

It is worth noting here that the court will look at the parties' intention objectively and on the basis of the words and conduct of the parties. The subjective state of mind of one party,where it is not communicated to the other party, is irrelevant in appraising whether the parties intended to be bound. 

A further and critical point in reaching this·decision was that through their email communication, the parties had agreed on the essential terms of a settlement: thesum to be paid, the time by which payment was to be made and the effect of the settlement on the dispute. These elements, combined with the intention of the parties.were enough to create a binding agreement. The same principle applies to any contractual situation: an agreement can be binding on the parties if the terms necessary to make the contract enforceable (that is workable) have been agreed, even if other and important terms remain to be discussed and agreed.

Comment

This decision stresses the point that negotiation on the draft settlement agreement does not necessari y mean that the parties have not already entered into a binding agreement to settle their dispute. It is therefore critical to be clear whether negotiations are subject to contract.

The finality of the agreement

The second decision brings us to the other end or the spectrurn the finality or the agreement.

In Hayward V Zurich Insurance Co Plc'3 the Court of Appeal refusedd to set aside a settlement agreement despite new evidence that the claimant's claim was fraudulent.

The decision emphasises the importance the state of knowledge and belief of the parties at the time of entering a settlement.

Hayward, an employee,made a claim against his employer further to a back injury resulting from an accident at work. The employer readily admitted liabilty for the indent, but disputed  the severity of the injury and therefore the  monetary value of the claim.They specifically asserted that the employee had exaggerated his physical condition for financial gain but had at that time  no sufficient evidence to support this assertion.The employer's insurers then settled the claim.Two years later,the insurers obtained new evidence that the employee had fully recovered from  this injury at least a year before the settlement was reached.The insurers sought to have the settlement set aside on the basis of the employee's fraudulent misrepresentation.

To succeed in a im for msrepresertation, the claimant (representee) must demonstrate that the statement made by the other party (representor) was false but that, relying on the truth of that statement, the representee was induced to enter

into the (here a settlement).

The Cambridge County Court agreed with the insurer on the basis that, in a litigation context a party to whom a representation is made is unlikely to believe in its truth, yet will have to take into account the risk that it will be believed by the judge at trial. In that sense the representation made influenced that party in their decision to enter into a settlement and to agree on the amount of the settlement.

The judge had held that the insurers were influenced by Hayward's misrepresentation into agreeing a higher level of settlement than they would otherwise have made and ordered Hayward to re-pay the sum paid under the settlement, less the level of damages awarded to him.

This decision was overturned by the Court of Appeal.

Whieagreeingwith thecourt below that the defendant willbe influenced by the statement made by the claimant and the risk that It June be believed by a judge, the Court of Appeal said that this did not constitute reliance as Is required to set aside an agreement on the basis or misrepresentation.

The court commented that.as regards misrepresentation in general,where the representation relied on consisted of the very allegations which the Claimant made in advancing its claim. the defendant who deddes to sett e such claim will be taken to have accepted the risk that those statements were infact untrue and to have agreed not thereafter to seek to have the settlement set aside on that basis.

However, in this case,the representation made was not simply untrue. It was fraudulent (that is, the claimant knew that its claim was unfounded and, by settlement derived an advantage under it) and, in principle. fraud unravels all'.

The Court of Appeal stated that the position will then depend on the circumstances. If it is apparent that the defendant intended to settle notwithstanding the possibility that the claim was fraudulent, the court was of view that there is no reason in principle why he should not be held to tis agreement, even if the fraud subsequently becomes demonstrable.

In other words, when the defendant made the deal' with his eyes open to the possibility of fraud' he cannot walk away from it when he later obtains better evidence. To hold otherwise would undermine the finality of settlement agreements and..more generally, the public policy which encourages settlement of litigation.

The settlement agreement remained binding.

Comment

This decision, based on the need to preserve the certainty of contracts (a core principle of English law), leads, as the court conceded, to the unattractive result that the claimant made a substantial benefit out of a largely exaggerated claim.

The principles laid down in this decision are of course of general application and relevant in particular, in the context of businesses facing unmeritorious or spurious claims. If settlement is then deemed preferable to defending the claimant's claim in court careful wording should be inserted inthe settlement agreement to make dear that the settlement is entered into on the basis of the representations made and that the defendants rights remain reserved, should it later appear that these representations are untrue.

The scope of the settlement agreement

Ina variation on the same theme.the court dedded In Brazier -v- News Groc.p Newspaper Ltri'4 that the soepe of a settlennent agreement. wtichhad the effect of settling existing legal actions, included future claims that the claimant anticipated, notwithstanding that he did not know the full extent of them at the time of such settlement.

In this case, two claimants had brought proceedings against NGN for phone hacking activities and, before full disdosure, entered into an agreement in 'ful and final settlement of the claimants claim in proceedings (court reference]'. There was no mention of future claims in the settlement agreement.

The claimants then brought fresh claims against NGN after they had obtained new evidence, unavailable at the time of the settlement of distinct sets of phone  hacking.

The defendant applied to the court to have these new claims struck out onthe basis that they had been compromised by the earlier settlement ageements.

The judge agreed with the defendant. He held that, on the construction of the particulars of claim of the initial proceedings to whicn the settlement agreement referred, the scope of the daims was broad enough that the new instances of phone hacking would have been included had they come to light at trial because the daimants were, in effect claiming in respect of all such activities.

The judge noted that there is no principle, nor presumption, that parties could not be taken to have settled unknown claims. There is however a distinction to be drawn between the situayion where a party is truly ignorant or future claims (that is the unknown unknowns') and the situation where a party anticipates the possibiity of future claims, but is ignorant of the details (that is the 'known unknowns'). The court would be slow to find that a party had intended to compromise future claims in the former situation.

Each case therefore tunns on the wording of the release clause in the settlement agreement and the circumstances in which It had been entered into.

In this case, the claimants had chosen to settle their claims before they knew the full extent of their cause of action but had been aware of their lack of knowledge. Their ignorance did not affect the construction of the- broad - terms of the settlement agreement.

Comment

Similar to the previous case. the knowledge of the parties at the time of settlement matters. Here, the claimants decided to settle with their 'eyes open' to their lack of knowledge (and they would have become better informed had they settled atter the disclosure phase in their proceedings). This decision stresses the need for care when drafting settlement agreements to ensure their scope accurately reflects what the parties intended to settle, and no more. 

One of the claimants is appealing this decision, with the appeal to be heard in early 2016.

Concluding remark

The thread underlying these three decisions is that settlement agreements can be complex legal instruments, which can sometimes lead to unforeseen results or issues for one or other of the parties. Their negotiation and drafting therefore call for close scrutiny and attention if they are to protect the business interests that prompted their initiation.