30 Apr 2019

Does a settlement agreement bring finality to a dispute? It should. But there are occasions when a party will seek to 'unpick' an agreement. So once a deal has been struck, how can you be sure that the claim has really gone away? With settlements increasingly negotiated directly between claimants and insurers, here are our top tips for claims handlers finalising settlement agreements. 

Make it "subject to contract"

In the heat of negotiating a settlement, remember to make it clear that any deal is "subject to contract". This will avoid the situation where an interim settlement agreement becomes binding immediately as happened in Balbir Singh Chaggar v (1) Raghbir Singh Chaggar (2) Hi-Tech Autoparts Limited [2018] EWHC 1203 (QB).

In that case, the claimant and his brother, the second defendant, had a long-running dispute over the running of their business. This led to the claimant instructing the bank to freeze the business bank account. The brothers subsequently agreed to a deal whereby the claimant's share of the business would be bought out by his brother for £1.6 million. As part of the deal, the claimant agreed to instruct the bank to unfreeze the business bank account upon payment of an initial dividend. The brothers entered into an initial settlement agreement setting out these key terms which enabled the bank account to be unfrozen following payment of the initial dividend. However, the brothers were unable to agree detailed settlement terms as envisaged and the deal did not complete. The claimant issued proceedings to recover the amount agreed under the initial agreement. His brother contended, amongst other things, that the initial settlement agreement was not binding. The court disagreed. It held that the parties to an agreement might intend to be bound immediately even though there were further terms still to be agreed or some further formality to be fulfilled. The absence of a detailed settlement agreement was not an issue because the initial agreement was workable and certain, and consequently enforceable by the claimant.

Whose agreement is it?

It may sound obvious but check that the agreement names the correct parties. 

From a defendant's point of view, the settlement agreement should set out all the potential claimants to a claim. For example, in a professional negligence claim arising from a corporate transaction, check that you have got the right corporate entity and also name any other entity with a potential right to claim. 

Equally, has the correct defendant been named? If the claim is against a firm, the correct party will be the party at the time the cause of action accrued. However, consider whether you should name the successor firm or LLP as well to avoid any doubt. Joint defendants and third parties may also need to be added if they are party to the settlement.

If a claim has been assigned, review the assignment agreement and consider whether anyone else with an interest in the claim should be named in the settlement. Similarly, related parties such as a parent company, subsidiary or director may need to be included. 

Do they have authority to settle?

Once you have identified the correct parties, check whether the person purporting to bind the party has authority to do so. It is usually safe to assume that a director of a company, a member of an LLP and a partner of a firm has authority but, if there is any doubt, check the point.

Equally, individuals must have capacity to enter into an agreement. This means under 18s and those lacking capacity because of illness or disability cannot enter into a binding agreement.

What are you settling?

Are you settling just the claim or is there a counterclaim, a right of set-off or a potential claim to consider? This is also relevant when drafting the release clause which is discussed below. 

The claim could be defined by reference to a Letter of Claim but consider whether this is wide enough. For example, have other issues been raised in correspondence which should be settled too? 

What about a professional defendant's outstanding fees? Check that the defendant agrees to forfeit these fees.

What about future claims? The defendant will generally want to settle all potential future claims which the claimant may have against it. This will often be acceptable to the claimant but sometimes a claimant will require a carve-out for a claim which it is not yet able to pursue for whatever reason. 

Sometimes relationships will be so strained that the parties will want to settle all claims or matters connected with the very relationship between them. In that case, the definition of claim should be extended as appropriate. 

Who does what and when?

Normally a settlement agreement requires one party to pay another an agreed sum by a certain date. Sometimes the claimant will require the settlement to be conditional on the payment of the settlement sum by a particular date or other agreed action.

Again this is stating the obvious but check the settlement sum. Is the figure correct? Does it include interest, legal costs and VAT? If so, say so. 

Conversely, if the settlement is not fully inclusive, the agreement should say so. If costs are to be assessed if not agreed, consider the impact of the fixed costs regime in lower value claims; make it clear whether the agreement to pay costs is subject to fixed costs or standard costs. If the claim is being litigated, remember to deal with any interim costs orders.

Does the settlement attract a tax liability? Sometimes VAT is payable. Capital gains tax may be payable on damages over the value of £500,000 although claimants in professional negligence cases can apply for an exemption. However, if tax is payable, consider whether there needs to be a tax indemnity or other provision to deal with this. 

The agreement should set out precisely how the settlement sum is to be paid. This is usually by bank transfer to the claimant's solicitor's bank account. Best practice is to avoid specifying the bank account details in the agreement unless all parties are exchanging the settlement agreement via secure means. Otherwise, the bank account details are at risk of interception by fraudsters. Sometimes a party may prefer payment to be made by a cheque to be received by a certain date. 

Most insurers prefer 21-28 days to process payments and, if there is a following market, longer may be required. For that reason, consider carefully the date payment is to be made by and consult with the paying parties. From insurers' perspective, time of the essence clauses are to be avoided as well as interest for overdue payments. 

Sometimes the parties will agree an alternative form of compensation either in addition to or instead of payment of a settlement sum. This could be, for example, an assignment of a cause of action. The settlement agreement should also record the parties' rights and obligations in connection with any such additional or alternative concession.

What is the effect of the settlement?

At its most basic, the effect of the settlement is that all parties wipe the slate clean in relation to the issues in dispute. 

Quite often a defendant will also want to be released from future potential claims. A wide and clearly drafted release clause can provide a defence to a later claim even though neither party is aware of the potential later claim at the time of the settlement agreement: Khanty-Mansiysk Recoveries Ltd v Forsters LLP [2018] EWCA Civ 89. 

In that case, a firm of solicitors entered into a settlement agreement with a former client following a fee dispute arising out of work carried out in relation to the acquisition of an oil exploration opportunity in Russia. Part of that process involved a share purchase agreement to acquire a Russian company.

The settlement agreement provided that it was:

"in full and final settlement of all or any Claims which the Parties have, or could have had, against each other (whether in existence now or coming into existence at some time in the future, and whether or not in the contemplation of the Parties at the date hereof)". 

The term "Claims" was defined as including "any claim or cause of action ……whether known or unknown, suspected or unsuspected."

It subsequently transpired that the share purchase agreement had never been effected in Russian law. As a result, the former client brought a claim against the solicitor for professional negligence. The solicitor contended that the settlement agreement settled any potential professional negligence claim. The Court of Appeal agreed. The words of the agreement were wide and clear enough to cover a later claim in negligence and breach of contract, regardless of the fact that the parties had not known that there was a claim in negligence. The parties could reasonably have envisaged that a professional negligence claim could arise in connection with the services relating to the invoice. 

However, claims which cannot be known as a matter of law would not be excluded. There is a distinction in this context between claims which cannot be known as a matter of law (which cannot be excluded) and claims which the parties merely did not consider would arise (which can be excluded).

Sometimes a narrower scope of release is more appropriate such as one which limits the release to the claim or service as defined. This may be true, for example, if there is an ongoing business relationship. 

Confidentiality

A confidentiality clause is commonplace especially in disputes involving professionals. Typically, this will be drafted to allow disclosure of the settlement to insurers, brokers, accountants/auditors, HMRC and any other carve-outs deemed necessary. 

No admission of liability

Defendants often insist on a provision making clear that there is no admission of liability. This may be a particular issue where liability has been contested throughout and the claim is being settled on a commercial basis. 

Standard terms 

In addition to the above, most agreements will have standard clauses to cover, for example, governing law and jurisdiction. Consider whether such standard clauses might be used. For example, an indemnity clause may be sensible if there is a possibility of the claim resurfacing in a different form. A clause dealing with the acceptability of counterparts is also useful in most cases. 

Other steps to consider

If there is litigation in the background, settlement will need to be dealt with usually by way of a Tomlin Order, with settlement terms attached as a schedule to the order. 

Sometimes, a deed may be required instead of a settlement agreement. This will be the case if, for example, no consideration is passing between the parties.