In the UK’s County Courts alone, 1.4 million claims get issued each year (Of those, about 49% are small claims, 39% go on to the fast track and 12% are multi-track claims. The data suggests a settlement rate of 96% to 97%. Many more disputes are resolved without a claim even being issued. As George Herbert once said: "A lean compromise is better than a fat law suit."
Many disputes are resolved before external lawyers are involved. This article is prepared with people in business in mind such as in-house lawyers or commercial directors who may have the invidious task of picking up contentious or quasi contentious work in-house. It contains practical advice concerning what you need to think about to get the best settlement and how to go about protecting your business.
Whether to settle
There are a number of factors in play in deciding whether to settle. They include, most obviously, the merits of the case (ie whether you are in a strong or weak position in terms of the facts and evidence to support the case and the legal premise(s) upon which it is brought). You also need to consider what is at stake. Often, but not always exclusively, it is about money. Legal advisers need to ensure that right at the outset, they look at the cost-benefit analysis of fighting a case. However, that analysis needs to be kept under review as more information comes to light or if your business drivers change). The extent of your own resources may dictate whether it is feasible to continue to pursue or defend a claim in the hope of achieving a better result than could be achieved by way of settlement. Likewise, the extent of your opponent's resources will be a factor in this analysis. It is somewhat pointless to obtain a Judgment if your opponent will be unable to pay the sum awarded unless, perhaps, there is value in setting a favourable precedent and sending out a message to the market about a particular issue.
Other issues can include:
- The likely amount of costs you have already incurred against additional costs that you will incur in continuing to pursue the claim
- The amount of management time involved in gathering facts, making decisions and generally getting involved in the claim. This can be a distraction from the core business
- Publicity may also be a factor. Is the business concerned about the potential publicity with going to trial? Would settlement, if negotiated on a confidential basis, be a way to deal with that?
- Last but not least, is there a continuing relationship between the parties and might a negotiated settlement have a better chance of preserving that relationship?
Taking all these together, some have likened litigation to the world's most expensive one armed bandit. This is not to say, of course, that every dispute will settle.
Getting the timing right
As a general rule of thumb, it may be better to settle sooner rather than later. Once a claim has been issued at court and moves through the stages of the court process, further barriers to settlement can arise. For example, it is not uncommon for the parties to feel more strongly about their position and become more entrenched. Separately, the net return to be gained through settlement, when set against ever-rising legal costs, can diminish. Settling before a claim is issued has the benefit of avoiding the court issue fee (for a claimant) and also avoids a route which is overtly adversarial.
However, other issues need to be considered too. Issuing a claim does show the defendants that you are taking the matter seriously (which can potentially assist in the negotiation of a better settlement) and can help to clarify precisely how the claim is being brought. The defendant has little choice but to react (either by settling or filing a defence) to avoid a Default Judgment. Defendants who are not sure whether the claimant is bluffing or not sure how the claim is being articulated, may prefer to wait to see if a claim is issued before making any decisions about settlement.
Disclosure can on occasion be a useful tool to gain some negotiating leverage. If you consider that disclosure is likely to be favourable (whether you are a claimant or defendant) in that it may expose gaps in your opponent's case, you may prefer to wait until after disclosure before settling. Other parties may prefer to settle before disclosure if its scale is likely to be significant in terms of time and cost but it is not felt that it will add materially to the parties' knowledge of the underlying facts.
Some cases are very fact specific and the witness evidence of individuals could play a large part. Some parties can struggle to persuade witnesses to give evidence, especially if key individuals have moved on. A cost saving can be achieved prior to the preparation and exchange of witness statements. Conversely, if you believe that your witness evidence is likely to be strong, you may prefer to wait until after exchanging before pursuing settlement.
In some cases, the expert evidence is likely to have a significant impact upon the outcome, either in terms of liability or quantum. However, the preparation of such evidence will also add a layer of expense. Parties should consider the tactical advantage of making an offer pre or post exchange of expert reports depending on whether they consider that the costs versus benefit analysis of producing that report is likely to stack up.
There are, of course, other times you may wish to settle, be it in the lead up to trial to try to avoid trial costs, immediately before trial (typically where one party belatedly realises the weaknesses of its position), during the trial (typically where it becomes apparent that one party's witnesses or experts are performing materially better or if there was an indication from the Judge as to the merits of the parties' cases) or even after trial, but before Judgment has been handed down. Settlements after the trial are rare but might happen where one party feels that the trial went badly for them and wishes to avoid the adverse publicity of a Judgment.
Having decided you wish to settle a dispute and that the timing is right, there are in any given case, a smorgasbord of dynamics that come into play. In no particular order, these are as follows:
- It is important to understand any strong personalities driving the case. Who are the decision makers? Will they get involved in the nitty gritty or just want to sign off the deal in principle? What is their settlement authority? Do they have enough background knowledge or were they too closely involved with the subject of the dispute to be sufficiently objective? In each case, you may need to assess where the best relationship is in terms of who should pitch any settlement proposal.
- Is there more to this case than just money? If there is, would looking at settlement in a less binary way increase the likelihood of it happening? For instance, one party may be able to provide goods or services at a favourable price in addition to or instead of money. Relevant to this is whether the parties still have the requisite trust and confidence in each other that such goods or services would be delivered in the right way. There can be incidental benefits eg if the services that have been supplied are not up to scratch, the vendor may agree to provide free or discounted consultancy to put the perceived problem right because it might ultimately be better for their business if settlement can be linked to the ongoing supply of services (or goods). The purchaser may prefer that too, provided they can have confidence in the delivery, especially where the costs and time of switching to an alternative supplier would be significant.
- Claimants need to consider whether an upfront lump sum (ie cash) is preferable to instalment payments. Often it will be, but if a claimant can wait, they may potentially achieve a higher amount through a timetable of instalments. If defendants have available cash, they may be able to achieve offering a lower sum as a lump sum one-off payment (although the cost of money in the current climate is not as significant as it once was).
- Whether one party pays some or all of the other party's legal costs can often be a contentious point. Typically the paying party will seek a breakdown so they can attack the proportionality or reasonableness of the opponent's costs and make sure that no VAT is being claimed on them if the receiving party can reclaim the VAT.
- Insurance can complicate things, eg where there is an insurer who has to sign off settlement on behalf of the defendant. This can also cause delay.
- For larger cases, parties may wish to consider the tax implications of how settlement sums are treated. HMRC accept that compensation payments are generally outside the scope of tax, but in certain situations there may be VAT due on payments made under settlement arrangements.
Ways of settling
There are a number of different ways of settling and it is about picking the right tool (or combination of them) for the right job.
Without prejudice offer
“Without prejudice” communications are sometimes referred to colloquially as “off the record” communications. If settlement negotiations are “without prejudice” it is not normally permissible to use such negotiations as evidence of admissions against the interest of the party that made them. The “without prejudice” label is not determinative as to whether the contents of the communication are genuinely without prejudice. However, it does help. It is sensibly used when genuinely trying to settle a dispute. An example of poor use of the label might be when you are just arguing about the merits of a claim and your communication has nothing to do with settlement. A practical tip in that situation might be to accompany a without prejudice letter with an open letter setting out why your case is strong.
There are a number of exceptions to the without prejudice rule and they include the following:
- certain types of without notice application where there is a duty for a full and frank disclosure
- to explain delay (the evidence of the facts of without prejudice negotiations)
- misrepresentation, fraud and impropriety
- to determine if the claimant has acted reasonably in mitigating a loss
- as evidence as to whether a without prejudice communication has resulted in a binding settlement.
The settlement agreement itself is probably not without prejudice once it becomes binding.
Without prejudice save as to costs offer
Communications can been sent "without prejudice save as to costs" which means that whilst a Judge cannot be shown the without prejudice communication before reaching his or her Judgment, such correspondence can be shown to the Judge when he or she comes to determine the issue of costs. This can sometimes be useful in showing that you have acted reasonably.
Claimant Part 36 Offers
A Part 36 Offer is a type of without prejudice save as to costs offer. It is a tool that can be used to put the other party under pressure to settle. If a party fails to accept a realistic Part 36 Offer, it is at risk of being penalised in costs and interest at the end of the case. If a defendant accepts a Part 36 offer, they have to pay a settlement sum plus the claimant’s costs to be assessed if not agreed on the standard basis up to the date of the Notice of Acceptance. If, however, a defendant rejects a Part 36 offer and the claimant goes on to win at trial and equals or beats their Part 36 Offer, then unless it is unjust, a defendant would be ordered to pay the following:
- Interest on the award at 10% above base rate from the date when the 21 day window for acceptance expired
- Legal costs after the 21 day period expired on the indemnity basis
- Interest on those legal costs at 10% over base rate
- 10% of the first £500,000 worth of damages (and 5% of any damages awarded above that figure, up to a limit of £75,000).
If the offer is rejected (or not accepted) and the claimant wins at trial but does not match or beat their offer, then costs are decided in the normal way. The offer has to be open for at least 21 days (and left open subsequently) to have the costs protection and there are rules about withdrawing or varying this type of offer.
A settlement can be made which is an open offer. If a settlement is not reached, it can then be referred to the Court before it determines the trial of a claim. This can be helpful where one party desires to show that it has acted reasonably eg in conceding on an issue or trying to narrow the issues in dispute or settle.
Alternative Dispute Resolution (ADR)
There is plenty of choice around different ADR techniques. Examples include arbitration, adjudication, expert determination, early mutual evaluation, mediation and negotiation.
Negotiation is the most flexible form of ADR. It can happen by telephone, in person, or in correspondence. It can save time and costs over other forms of ADR.
Mediation is more flexible than arbitration. The presence of a neutral mediator can assist in focusing parties’ minds on the true prospects of their case and a face-to-face meeting can help to overcome communication issues and narrow the issues in dispute. It is particularly helpful where there are strong personalities or if either party doesn't feel they are being sufficiently "listened to." If unsuccessful however, mediation adds time and costs on to the dispute.
Documenting the deal
Many parties invest lots of time and energy in negotiating the amount and/or timing of a settlement payment then, once agreement in principle is reached, sometimes rush the final step of documenting the deal. However this is a really important stage, particularly if part of the cause of the underlying dispute is a contract that is unclear about rights and responsibilities. Documenting settlement can be achieved by:
- An exchange of correspondence. (This can be useful if the amounts involved are relatively low, no claim has been issued and/or you do not wish to be overly formal about settlement)
- Settlement agreement (this may be drafted by way of a deed if there is no consideration from one party)
- If an issued claim is being settled, settlement may need to be agreed in the form of a Court Order which would enable enforcement within the existing claim, rather than one of the parties having to initiate a new claim.
You may want to control the first draft of a settlement agreement because it can be helpful in ensuring that your business's interests are represented and can ultimately save time.
You need to consider the following issues:
- The parties. Who are the right legal entities that need to be tied into the settlement agreement? Are there any other parties that need to be bound into it?
- What is it that you are settling? Is it simply a claim that has been issued or intimated, or is it all claims? The latter may achieve finality but if there is an ongoing agreement to supply, it may not be appropriate. Is there anything that you wish specifically to exclude? It is worthwhile taking time to draft this carefully especially where the issue is complex
- You may wish to ask whether the settlement needs to be in deed format (for example, where there is no consideration on one side, or whether you insert a provision for nominal consideration of £1). Linked to that, you need to consider how each party formally executes the settlement agreement (or deed) so that it binds them effectively
- If a claim has been issued, you need to consider what formalities are needed to dispose of the claim. Is the claim being stayed on terms that are agreed so that enforcement can take place within the existing proceedings, or is it being dismissed or discontinued?
- You may want to consider whether there are any conditions precedent to settlement (for example, so that it only becomes binding upon receipt of the settlement payment)
- Most obviously, you may wish to consider the timing of the payment – whether it should be paid via a lump sum or in instalments? If instalments are large and spread over a long period, ought you to ask for security (for example, a charge on property)? If so, you will need to prepare and negotiate the relevant legal charge and ensure that it is registered. Sometimes one party needs to take time to raise the settlement funds. You may wish to make express provision for interest on a late payment and, in the event of default, an acceleration provision (ie so that all sums fall due). You can always waive the right to enforce that subsequently if it suits you at the time
- You may wish to consider where payment is to be made and ensure that the relevant bank details are provided along with any reference number. If your business receives lots of payments, do you need to notify the relevant department internally to look out for the monies coming in?
- You may wish to check whether the settlement payment attracts VAT or has any other tax implications
- You may wish to consider whether one party is going to have to pay the other party's legal costs either in dealing with the claim and/or in the event of having to enforce the terms of the settlement agreement if one party breaches it
- Confidentiality is something to consider, with an appropriate carve out clause (for example, in the event that there is a regulatory requirement to disclose)
- Any parties in England and Wales may wish to negotiate on the basis that English law governs law and jurisdiction, but that may not universally be the case, especially if the underlying contract relevant to the dispute is governed by a different law
- An obvious point is to ensure that the person signing the settlement agreement has authority to do so
- In international disputes, would it be more favourable (eg as the receiving party) to negotiate a settlement payment in a currency other than sterling?
- Finally, where one of the parties is not legally represented, you may prefer it if they seek independent legal advice (and this is a requirement in certain contexts – for example, where a wife is being asked to stand as surety for her husband's business debts). If the opponent does take legal advice, this can assist if they subsequently try to raise the argument that they did not know what they were doing when settling or that they settled under some form of duress. It can provide a greater degree of certainty.
Unpicking a settlement agreement
Should you be able to undo a settlement agreement where your opponent has been dishonest? In Zurich Insurance Co Plc v Hayward  UKSC 48, the defendant suffered a back injury at work and sued his employers. Zurich were his employer's insurers and suspected that the defendant had exaggerated his claim, but lacked clear proof. They decided to settle for just under £135,000 (being about 30% of the sum claimed) in full and final settlement. This was wrapped up in a Tomlin Order (a court order staying proceedings, recording the existence of a settlement and giving the parties the right to apply to court to enforce the terms of that settlement). Subsequently, the neighbours of the defendant provided evidence that the seriousness of the back injury had been dishonestly exaggerated. Zurich pursued the defendant claiming damages for deceit and sought to rescind the settlement agreement. The Supreme Court decided in Zurich’s favour, holding that the party seeking to set aside the compromise must simply establish the fact that the misrepresentations were a material cause for them entering into the settlement agreement. They did not have to prove that they were induced into entering into the compromise because they believed the misrepresentations were true.
This case might have been decided differently if the claimant had actually known the defendant's representations were false. (Zurich suspected it at the time of settlement, but were not sure). The Court also decided that it was difficult to envisage any circumstances in which a mere suspicion that a claim was fraudulent would prevent the unravelling of the settlement when fraud was subsequently established.
The mis-selling of interest rate swaps has been a feature of banking litigation in the UK in recent years. In Marsden v Barclays Bank plc  EWHC 1601 (QB) Mr Marsden signed a letter to Barclays Bank which stated that "The entry by the parties into the facility letter dated 27 January 2011 with a loan amount of £3,671,374.00 is in full and final settlement of all complaints, claims and causes of actions which arise directly or indirectly, or may arise, out of or are in any way associated with the Swaps." Mr Marsden admitted that he had signed that agreement but argued that it was not binding upon him. He said that it was not supported by consideration and he had entered into it as a result of economic duress applied by Barclays upon him. The Court found that the settlement agreement was supported by consideration.
In order to amount to economic duress, there must be pressure:
- The practical effect of which is that there is compulsion on, or a lack of practical choice, for the victim
- Which is illegitimate
- Which is a significant cause inducing the claimant to enter into the contract.
The Judge also stated that while the threats of lawful action may amount to duress, it may only do so in rare cases in commercial contexts, where the threat is coupled with a demand that goes substantially beyond what is normal or legitimate in commercial arrangements.
Barclays required Mr Marsden to sign the settlement agreement as part of a commercial negotiation on the terms upon which it would provide a new loan facility to him at a time when he was in default. In the circumstances, Barclays could not be criticised for threatening not to provide Mr Marsden with a facility, or to cancel the existing facility if he did not sign the settlement agreement. The result was a compromise entered into by Mr Marsden for good commercial reasons and with the benefit of legal advice. There was nothing to suggest that this was one of those rare cases where lawful action amounted to illegitimate threat.
The Judge also found that Barclays was perfectly entitled to refuse to negotiate a restructuring of Mr Marsden's indebtedness until he withdrew his complaint to the Financial Ombudsman Service.
Finally, the Court held that the settlement agreement was designed by solicitors acting for both parties to draw a line under all claims, present or future in relation to the Swaps as part of a restructuring exercise which was useful to Mr Marsden. There was no evidence of sharp practice on behalf of Barclays given that Mr Marsden was just as aware of the relevant facts as Barclays and had access to legal advice.