Before you leave the mediation - a reminder of the need to be clear whether a settlement agreement is subject to contract

A recent decision of the English High Court has underlined the need for parties who have agreed to settle a dispute to specify very clearly if they intend that the terms agreed will not be immediately binding on them and will be subject to the negotiation of a more formal contract : Bieber v Teathers Limited [2014] EWHC 4205 (Ch).

Although the case was in the context of bilateral settlement negotiations via solicitors' correspondence, the message applies equally (if not more so) to settlements reached through mediation or other structured forms of conciliatory ADR.   It highlights that, provided the agreed terms are sufficiently clear and certain as to the parties' obligations, the court will be loath to accept that the parties did not intend them to be immediately binding on them in the absence of clear words indicating that.

Applied to the mediation context, it also underlines the importance of the parties giving proper forethought to all the issues that will need to be addressed in a settlement agreement if the mediation is successful.

Background

At the conclusion of a successful mediation, the parties should always record and sign the terms of their agreement before leaving the mediation.   Ideally, this will be in the form of a final, detailed settlement agreement addressing all the issues that need to be dealt with, including common 'boilerplate' contractual clauses.  (Legal advisers will often prepare for this by bringing to the mediation in electronic form a template agreement, to expedite drafting at the end of the day). However, where this has not been done, or where the full settlement agreement cannot be prepared and signed on the day for some other reason, it is common for parties to draw up and sign 'heads of agreement' recording the terms that have been agreed and then transpose these in the following days into a formal long-form document.

However, it sometimes occurs that that subsequent step of drawing up the formal document runs into difficulty - occasionally because one of the parties seeks to resile from the settlement altogether (in a case of 'settler's remorse') but more commonly when a party seeks to address in the formal terms additional issues, which the parties had not negotiated and which turn out to be contentious.  Typical examples are the issue of who will bear a certain taxation liability that the settlement gives rise to and the question of whether one party will indemnify the other in respect of potential claims by third parties.  The latter was the cause of the dispute in the recent case.

In such cases, the courts may be called on to decide whether (viewed objectively) the parties considered themselves bound immediately to what had been agreed or whether they intended that a binding agreement would only come into being when the formal document was subsequently agreed.  The latter might be the case in a situation where the parties have reached basic agreement but need some additional information before they can agree some element of the settlement (or where they need to confirm a key assumption on which the proposed settlement is based).

The decision

The question of what particular parties intended will always depend on the facts of the case.  However, the court's decision in this case, in the context of settlement negotiations by correspondence, is consistent with the broad approach the courts have adopted to heads of agreement signed at the conclusion of a mediation.  That is, provided the recorded agreement is sufficiently clear and certain as to the parties' obligations, the court will generally require clear wording before it will be willing to accept that the parties did not intend to be immediately bound by the terms.   In this case, the court held that a party's acceptance of an offer by email, on the basis that a formal settlement agreement would subsequently be drawn up, had given rise to a binding contract.  The fact that parties intended to conduct further negotiations concerning the terms of a settlement agreement did not necessarily mean they had not earlier entered into a binding agreement to settle the dispute.

Settlement 'in principle'

It is notable that the court reached this conclusion notwithstanding that the emailed acceptance of the offer was expressed as being 'in principle'. The Court considered that, in the particular context in which it was used,  that did not mean that the acceptance was conditional and not binding.  This is interesting when compared with the position in Australia, where the courts' approach to this issue is broadly the same as that of the UK courts but where recent cases have suggested that the use of the words 'in principle' will usually be sufficient  to signify that the parties did not intend to be legally bound by the terms of an agreement.

Although such discrepancies in approach may be more apparent than real, the bottom line is that, in any jurisdiction, if you do not wish to be immediately bound by agreed settlement terms and wish to make them conditional upon some further agreement, this should be recorded expressly.

Of course, the risk of mediated settlements being challenged because of subsequent inability to agree 'peripheral' issues can be minimised by turning your mind before the mediation to all of the issues that will need to be wrapped up in any settlement (including any indemnities) and ensuring these are dealt with in the document signed at the conclusion of the mediation.

Read our full briefing on the recent English decision on our Litigation Notes blog, here.

For more on the Australian position, see our earlier blog post 'Australia: Enforceability of heads of agreement following mediation'.

Jan O’Neill

Professional Support Lawyer,
Dispute Resolution, London
Email
+44 20746 62202