Settlement and ADR: recent developments

Three recent decisions provide cautionary reminders on conducting settlement negotiations, and highlight the need for any party to potential litigation to have a settlement strategy in place.

Labelling your settlement negotiations

Avonwick Holdings Ltd -v- Webinvest Ltd and another¹ and Bieber -v- Teathers Ltd (in liquidation)² demonstrate the need to correctly use the "without prejudice" and "subject to contract" labels.

Avonwick concerned demands for payment made by Avonwick against Webinvest and Shlosberg under a loan agreement and guarantee, followed by a statutory demand. At the same time, the parties discussed a proposed restructuring of Webinvest's debt. This correspondence included draft heads of terms proposed by Avonwick and was marked "Without Prejudice and Subject to Contract".

The admissibility of this correspondence became an issue in proceedings to restrain presentation of a winding-up petition and have the statutory demand set aside. Both the High Court and Court of Appeal considered the correspondence to be admissible. There was, at that time, no genuine dispute between the parties as to liability for the payments; the negotiations were directed at attempting to agree a restructuring of an admitted liability. In addition, labelling the correspondence "subject to contract" was incompatible with the assertion that the parties had agreed on the privileged nature of the communications; using this label means that no legal consequences are to flow from communications.

In Bieber the High Court had to consider whether an exchange of "without prejudice" emails between the parties' solicitors constituted a binding settlement agreement despite lack of agreement on the precise terms of settlement. The negotiations followed a failed mediation, and included telephone and email conversations and a Part 36 offer. In an email exchange the claimants' solicitors accepted an offer to settle for £2 million. The reply stated that a draft consent order would be sent in the morning, to which the defendant's solicitors replied "Noted, with thanks". A few days later, the defendant produced a draft settlement agreement, which included additional terms, including an indemnity against third party claims. The issue for the Court was whether the matter was settled by the email exchange or whether the agreement was subject to contract.

Whether an agreement is subject to contract is a matter of fact, and express labelling is not conclusive. However, on these facts the Court concluded that a binding agreement had been reached: the terms of the agreement were clear and the acceptance was made without reservation or reference to it being "subject to contract". The fact that the emails contemplated that a consent order would be required, and that the parties subsequently engaged in discussions on the terms of a detailed agreement were not relevant because the agreement had already been formed.

This case is a reminder of the importance of making it clear that any agreement is subject to contract where ancillary terms have yet to be agreed. Unless careful, a quick email exchange can amount to a binding settlement. It also highlights the importance of documenting negotiations. In this case, the defendant argued that reservations had been made on the phone, but the attendance notes were too imprecise to support that claim.

Settlement strategy: can you refuse to mediate?

Laporte & Anor -v- the Commissioner of Police of the Metropolis³ follows the trend of recent decisions which penalise a successful party for its refusal to settle or engage in ADR. See our October update for details of the earlier decisions.

The decision followed a failed action against the police by two protestors. Several offers to settle or mediate the dispute had been made by the claimants. Early offers to engage in discussions had been ignored, then postponed by the defendant's lawyers. Discussions to arrange a mediation were initiated, but the defendant ultimately changed its mind and told the claimant that it thought ADR "an inappropriate use of resources for either party".

The defendant successfully defeated the claim on all substantive grounds, and sought indemnity costs. It argued that the nature of the dispute made ADR unsuitable for mediation. In rejecting that argument, the judge provided useful guidance on a number of points.

• A refusal to engage in ADR may be perfectly reasonable and may not have any costs consequences. The refusal is just one aspect of the parties' conduct. An impact on costs should only be considered in "the most serious and flagrant failures to engage with ADR", for instance, when the court encourages the parties to engage in mediation.
• The fact that a mediation had no reasonable prospect of success is not sufficient to show that the refusal to mediate was reasonable. The defendant argued that the ADR offers were tactical, and that the claimants just wanted a financial outcome. However, the Court considered that this approach focused on the nature of the dispute, and did not take into account the parties' willingness to compromise and the reasonableness of their attitudes. The question whether there was a reasonable prospect of success was only one of a number of potentially relevant factors.
• The burden should not be on the refusing party to satisfy the court that it acted reasonably. It would not be right to stigmatise as unreasonable a refusal by the successful party to agree to a mediation unless the unsuccessful party shows that there was a reasonable prospect that mediation would have been successful.

On the facts, the Court found that the defendant's assumptions on success were not supported by the evidence. The defendant had failed, without adequate justification, to engage in ADR. The defendant's costs entitlement was therefore reduced by a third.

The case is further illustration of the courts' encouragement to use ADR and of the importance of being able to justify any refusal to engage in ADR.

_Notes
^1. _{[2014] EWHC 3322 (Ch). The decision is available on Bailii.}
^2. _{[2014] EWHC 4205 (Ch).}
^3. _{[2015] EWHC 371 (QB). The decision is also available on Bailii.}