Negotiating a settlement of a dispute

The tip

When negotiating a settlement agreement keep in mind the general principles of contract formation.

It is essential to ensure that your client's intention concerning when, and under what circumstances, it has agreed to be bound, is clearly communicated to the other party. In particular, if you intend that the terms of the settlement to be conditional upon execution of a formal document you should make this clear in your correspondence.

In June 2015 we circulated a 'View from the Courts' entitled “Formation of contract and 'subject to execution'" - in that update we provided a summary of a Queensland case in which the Supreme Court of Queensland considered whether a contract had been formed for the sale of a service station by exchange of emails.

The Supreme Court of New South Wales has recently considered this issue in the context of negotiations to settle court proceedings.

The recent case

In Capital Securities No 1 Pty Ltd v Roger Saliba [2016] NSWSC 1093, the New South Wales Supreme court was asked to decide whether an exchange of emails between solicitors constituted a binding agreement to settle a dispute between their clients, in circumstances where the parties did not execute a formal document.

His Honour, Garling J, began with a reminder about the categories of contractual negotiations identified by the Courts where parties have agreed terms but have also agreed that those terms will be dealt with by subsequent formal documentation. The first three categories were identified in Masters v Cameron [1954] HCA 72 and the fourth in Baulkham Hills Private Hospital Pty Ltd v G R Securities Ltd (1986) 40 NSWLR 622. The categories are as follows:

  1. The parties have reached finality in arranging the terms and intend to be immediately bound, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
  2. The parties have completely agreed upon the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.
  3. The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
  4. The parties are content to be bound immediately and exclusively by the terms which they had agreed upon, whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

In the first, second and fourth categories the courts have found that there is a binding contract, but in the third there is not.

In the present case his Honour explained that whichever category of contractual negotiation one is considering it is important to identify the intention of the parties, and that this intention is to be in ascertained objectively.

The court observed that in the circumstances of this case, the parties' intention was not to be ascertained by reference to a single document, but rather to the words and phrases used in the various email exchanges between the parties' solicitors.

The court reviewed the negotiations (the exchange of emails) in the context of the existing litigation, and in doing so asked itself three questions:

  1. Did the parties arrive at a consensus;
  2. If so, was such a consensus capable of forming a binding contract; and
  3. If it was, did the parties intend that the consensus at which they arrived should constitute a binding contract.

In determining whether the email exchanges of the solicitors’ constituted a binding agreement, the Court also said that was proper to take into account subsequent communications between the parties and whether those communications were consistent with a binding agreement.

His Honour concluded that an immediately binding agreement to settle the proceedings had been reached by the solicitor’s exchange of emails and the attached documentation. He said that the agreement was not one which the parties intended to be consummated in subsequent formal documentation.

Interestingly, one of the parties contended that because the ‘Terms of Settlement’ document (which was circulated by the solicitor for one party and signed by the solicitor for the other) contained a heading ‘Draft - Without Prejudice – for Consideration Only’ an objective observer would conclude that there was no intention for the contract to be binding. They argued that such negotiations fell within the third category of Masters v Cameron and required further formal documentation. However, the court concluded that the heading was simply part of the original document which ought to have been, but which was not, removed and that it could not stand in the way of a conclusion that an agreement had been reached.

For more information

A link to the case can be found here.