ADR: navigating the path to settlement

Settlement, or alternative dispute resolution (ADR), is at the heart of both the Civil Procedure Rules (CPR) and the court guides. In the foreword to the Jackson ADR Handbook, published in April 2013, then Master of the Rolls Lord Dyson summed up its importance. He said that consensual settlement, whether it is achieved by informal negotiation, structured mediation, early neutral evaluation or otherwise, is "an essential aspect of any civil society”. He concluded that the "effective promotion of ADR is unquestionably in the public interest".

How practitioners approach ADR is as important as their strategy for any other part of the litigation process. A knowledge and understanding of the different methods of ADR, and of judicial guidance on these methods, is vital.

This article examines the following key areas:

• The CPR requirements in relation to ADR.
• The court’s approach to settlement.
• The interaction between settlement and limitation.
• The considerations at play when deciding on the form of the offer, whether under Part 36 of the CPR (Part 36) or otherwise.
• Key issues relating to Part 36 offers in light of the latest developments in the courts.
• The application of without prejudice (WP) privilege to settlement discussions.
• Drafting settlement agreements and consent orders to conclude proceedings.

CPR REQUIREMENTS

While, in general, there is no compulsion on parties to engage in ADR, the CPR contain a number of requirements in relation to it. The pre-action protocols set the tone. The Pre-Action Conduct Practice Direction (pre-action PD) states that litigation should be a last resort and that the parties should consider whether negotiation or some other form of ADR might enable them to settle their dispute without starting proceedings. It states that Part 36 offers may be made before proceedings are issued and that parties should continue to consider the possibility of reaching a settlement at all times, including after proceedings have been started (see "Form of the offer" below).

Strengthening this exhortation, the pre-action PD says that the court may:

• Require parties to provide evidence that ADR has been considered.
• Consider that a refusal to participate in ADR or a party’s silence in response to an invitation to participate is unreasonable, and may invite an adverse costs order.

The Pre-Action Protocol for Construction and Engineering Disputes goes further, requiring the parties to meet at least once before proceedings are issued.

The emphasis on ADR continues once proceedings have started. Both the directions questionnaire and the case management information sheet place a spotlight on steps taken by the parties to consider ADR. CPR 1.4 provides for active case management by the court, which includes encouraging the parties to use ADR, if the court considers that appropriate, and facilitating the use of ADR. In addition, the court may of its own initiative consider that it would be appropriate to order a stay for ADR (CPR 26.4).

These powers are also reflected in various provisions of the different court guides, such as the Commercial Court Guide, which contains a mechanism for the court to make an ADR order in appropriate cases. Indeed, in Guinle v Kirreh; Kinstreet Ltd v Balmargo Corporation and others and Shirayama Shokusan v Danovo Ltd, the High Court showed that it was prepared to make orders for ADR despite one of the parties being unwilling to mediate ([2000] CP Rep 62; [2003] EWHC 3306 (Ch)).

THE COURT'S APPROACH

Questions over the extent to which the court may encourage or even compel parties to consider ADR, and how the court should deal with a party that refuses to engage in ADR, have been the subject of much case law and commentary over the years. Case law also emphasises that the court is ready and willing to enforce ADR clauses contained in contracts (see box "Enforcing ADR clauses").

Compelling ADR

Most recently, the Court of Appeal tackled the issue of compelling a party to engage in ADR in Lomax v Lomax ([2019] EWCA Civ 1467). Mrs Pauline Lomax had issued a claim under the Inheritance (Provision for Family and Dependants) Act 1975. Before the directions hearing, Mrs Lomax invited her stepson Mr Stuart Lomax, the defendant, to consent to early neutral evaluation (ENE) but Mr Lomax refused. He relied on Halsey v Milton Keynes General NHS Trust, which is regularly cited in support of the proposition that the courts do not have jurisdiction to compel parties to engage in ADR ([2004] EWCA Civ 576). In Halsey, the Court of Appeal concluded that the compulsion of ADR would be an unacceptable constraint on the right of access to the court. The hallmark of ADR procedures is that they are processes voluntarily entered into by the parties.

In Lomax, the court was quick to distinguish Halsey. It noted that Halsey dealt with a very different situation, that is, whether the court could oblige parties to submit their disputes to mediation. It did not touch on the question of ENE, which is part of the court process, and so Halsey could not represent a constraint on ENE. In the absence of an express restriction on the courts’ general case management power in CPR 3.1(2)(m) to order ENE, the court held that there was no reason to imply a limitation on this to the effect that the consent of the parties was required.

The court in Lomaxdid not have to engage with the question of what Halsey determined and the extent to which it remains good law. However, there has been no shortage of cases since Halsey where the courts have grappled with the issue of how far they can go in encouraging parties to engage in ADR. For example, in Wright v Michael Wright Supplies Ltd and another, the Court of Appeal expressed concern at the difficulty of persuading intransigent parties to mediate and suggested that it was perhaps therefore time to revisit the rule in Halsey([2013] EWCA Civ 234) (see "Dealing with an intransigent opponent" below). The court went no further on the point, expressing hope that at some point a “bold judge” would accede to an invitation to rule on the issues raised by Halsey so that it may be reappraised.

As it stands, the prevailing sentiment is that the courts will encourage, indeed may strongly encourage, ADR but cannot compel its use. The Civil Justice Council established a working group in 2016 to review the ways in which ADR is encouraged and positioned within the civil justice system. The group published its final report in December 2018 (www.judiciary.uk/wp-content/uploads/2018/12/CJC-ADRWG-Report-FINAL-Dec-2018.pdf). This report set out a number of recommendations directed at introducing more forceful methods to encourage parties to use ADR, such as more focus on ADR at the case management conference and potential costs sanctions at this stage for failing to engage in ADR. However, it specifically concluded that it did not advocate the introduction of compulsory mediation.

Reasonably refusing ADR

As is evident from the provisions of the pre-action PD, a test of reasonableness underpins the court’s approach to the question of a party’s conduct when it comes to engaging (or not) with ADR. Naturally, this will turn on the facts. In Burchell v Bullard and others, the Court of Appeal held that the nature of the case, a small building dispute, lent itself to mediation and that the defendants had been unreasonable in believing that their case was so watertight that they need not engage in attempts to settle ([2005] EWCA Civ 358). The cost of mediation was small when compared to the cost of litigation in a case of this kind. The defendants could not rely on their own intransigence to show that the mediation had no reasonable prospect of success. The court penalised them with an adverse costs order for 60% of the claimant’s costs.

Even possessing a reasonable belief in the strength of one’s case may not be enough. In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd (No 2), having considered the factors identified in Halsey, the High Court held that the reasonable belief of the successful defendant, BAE Systems, that its case was strong provided some limited justification for not mediating ([2014] EWHC 3148 (TCC)). However, in the court’s view, although the case involved a dispute over construction of a clause, a skilled mediator could have helped the parties to resolve the dispute and the costs of mediating would not have been disproportionately high. Therefore, overall, BAE Systems' refusal to mediate was unreasonable.

However, BAE Systems was not penalised in costs. The court took into account an earlier Calderbank offer (a settlement offer written "without prejudice save as to costs") made by BAE Systems, which the claimant, Northrop Grumman, had rejected but then did not better the offer at trial. The court applied the usual costs rule so that Northrop Grumman was required to pay BAE Systems' costs on the standard basis.

PJSC Aeroflot - Russian Airlines v Leeds and another (Trustees of the estate of Berezovsky) and others offers a contrasting position ([2018] EWHC 1735 (Ch)). The claimant, Aeroflot, alleged that large sums of money had been misappropriated from it. However, Aeroflot discontinued the proceedings on the day before the trial. The defendants sought indemnity costs. Aeroflot’s main argument against the court ordering indemnity costs was that the defendants refused to mediate the claim. In ordering Aeroflot to pay indemnity costs, the court held that, where allegations of fraud and serious wrongdoing are made, the proceedings are “intrinsically unsuitable” for mediation. Otherwise, defendants would be penalised for insisting on their right to have their reputations vindicated through the trial process. The court’s experience in case managing this dispute meant that it was satisfied that there was no possibility of the parties making progress through ADR.

ENFORCING ADR CLAUSES

Parties often include alternative dispute resolution (ADR) clauses in their contracts. These range from simple provisions requiring the parties to attempt ADR before starting proceedings to more complex, multi-tiered clauses. Escalation clauses of the latter kind build into the contract several stages of dispute resolution, from discussions between the relevant contract managers to more formal negotiation steps, followed by mediation or other form of ADR if necessary, and finally the commencement of proceedings on notice if settlement is not achieved.

The courts have demonstrated their willingness to enforce these provisions. In the recent decision in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd, the High Court held that the relevant contract contained an enforceable obligation to engage in ADR before starting proceedings on a plain and natural reading of the clause, which survived termination of the contract ([2019] EWHC 2246 (TCC)). This operated as a condition precedent. It was therefore appropriate to stay proceedings that had been commenced in breach of that obligation until mediation had taken place.

In Ohpen, the court set out the applicable test where a party seeks to enforce an ADR provision by means of an order staying proceedings, which provides a useful checklist when drafting these clauses:

• The agreement must create an enforceable obligation requiring the parties to engage in ADR.
• The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.
• The dispute resolution process to be followed does not have to be formal, but has to be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step without requiring any further agreement by the parties.

The court also made the general point that there is a clear and strong policy in favour of enforcing ADR provisions and in encouraging parties to attempt to resolve disputes before litigation. It noted that the court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, the court will have regard to the public policy interest in upholding the parties' commercial agreement and furthering the overriding objective in Civil Procedure Rule 1 in assisting the parties to resolve their dispute.

LIMITATION

While there is much emphasis on encouraging parties to settle disputes before they reach the courts, a potential claimant may be under time pressure to issue its claim before the relevant limitation period expires.

Before proceeding are started, the mechanism for dealing with this situation is a standstill agreement between the parties, since the court does have not discretion to extend the running of time, except in personal injury and defamation claims. A standstill agreement freezes the running of time at the date of the agreement. The defendant will agree not to rely on the expiry of the limitation period from this date until notice is given to restart the claim.

If a potential claimant is dealing with an unco-operative defendant, a standstill agreement will not be possible and the claimant may have to issue its claim on a protective basis. Once proceedings have been issued, the court’s jurisdiction is engaged and the court has the discretion to order a stay in order to allow for ADR between the parties as part of its general case management powers in CPR 3.1(2)(f) and CPR 26.4 (see "Notifying the court of a stay" below).

In order to obtain a stay, a claimant can make a written request for a stay in the directions questionnaire or the case management information. However, it need not wait until this point and can make an application to the court in the usual way under CPR 23. Practitioners should be aware that the Commercial Court and Chancery Division, for example, have specific provisions and procedures when it comes to making orders in respect of ADR and their respective guides should be consulted.

The duration of a standstill agreement is a matter of negotiation between the parties. A standstill agreement may often be expressed to last for three months but it can be shorter or longer depending on the requirements of each party. A stay of proceedings may often be one month, as contemplated in the directions questionnaire, but again will vary depending on the circumstances. For example, in Phillips v Symes, which concerned a long-standing dispute, the High Court ordered a stay of proceedings for two years to allow the negotiation of a settlement and gave the parties liberty to apply to extend the period if they had credible evidence to show that they could not proceed to settle by the deadline ([2006] EWHC 1721 (Ch)).

FORM OF THE OFFER

The two most commonly used forms of settlement offer are:

• Offers made without prejudice save as to costs under Part 36.
• Offers made without prejudice save as to costs on a contractual basis outside of Part 36, commonly known as Calderbank offers.

Part 36 costs consequences

Making a Part 36 offer can be an attractive proposition because of the certainty provided by the costs consequences set out in CPR 36. These consequences are designed to encourage the making and accepting of sensible offers and to penalise unreasonable non-acceptance, particularly by defendants. A Part 36 offer can afford costs protection to the offeror and help test the resolve of the opponent, knowing the likely costs consequences if it misjudges the strength of the parties’ respective cases.

The court’s discretion to decline to follow the CPR 36 costs consequences is drawn narrowly: it may do so only where it considers it would be unjust to follow these consequences. This contrasts with the much wider discretion the court has under CPR 44 to take into account other offers to settle, such as Calderbank offers, and the weight it may attach to those.

Two recent cases highlight the significance of the Part 36 costs consequences, even where the offer is beaten by only a slim margin at trial. In JLE v Warrington & Halton Hospitals NHS Foundation Trust, the claimant beat her Part 36 offer by £7,000 ([2019] EWHC 1582 (QB)). At first instance, a Master in the Senior Court Costs Office held that it would be unjust to award some of the costs consequences in view of the small margin by which the offer was beaten. The High Court upheld the appeal, finding that it is not open to the court to take into account the amount by which a Part 36 offer is beaten.

The High Court took a similar stance in Hochtief (UK) Construction Ltd and another v Atkins Ltd ([2019] EWHC 3028 (TCC)). The claimants succeeded on one of two claims and beat their Part 36 offer by £4,847. The court held that awarding the claimants the prescribed CPR 36.17(4) benefits was not unjust. Relevant factors for the court were that:

• The Part 36 offer was clear and made early; after the letter of claim but before issue of proceedings.
• The parties had sufficient information to make an informed assessment of the merits of the case.
• The offer was a genuine attempt at settlement.

Accordingly, the claimants were awarded enhanced interest of 6% above base rate on damages and costs from expiry of the offer, plus a £65,000 additional sum. The defendant paid a heavy price.

Calderbank offers

A Part 36 offer may not always be the most appropriate form of settlement, particularly in the case of a defendant. The greater flexibility of Calderbank offers in terms of payment and costs often forms the basis of their appeal. Terms can be included that specify a particular payment schedule or costs consequences which are not permitted by CPR 36 but which are better suited to a party’s commercial or financial position, or that of their opponent. This in turn may make a Calderbank offer a more valuable or commercially viable settlement solution.

An example of this would be when a defendant is agreeable only to covering a proportion of the claimant’s costs, or perhaps none at all if it considers that the claim is relatively weak. Under CPR 36, where the claimant accepts an offer within the relevant period, the defendant will automatically be liable for the claimant's costs up to the date of that acceptance. By contrast, the costs consequences set out in a Calderbank offer can be tailored to suit the particular defendant’s requirements and objectives.

The same goes for the payment of any settlement sum. Under CPR 36, where the defendant makes an offer to pay a sum of money, CPR 36.14(6) requires that this is paid within 14 days of acceptance, unless the parties agree otherwise in writing. The court does not have jurisdiction to extend the 14-day period under its CPR 3 case management powers (Titmus v General Motors UK Ltd [2016] EWHC 2021 (QB)). Meanwhile, CPR 36.6(1) prohibits payment by instalments. A Calderbank offer, by comparison, allows a defendant to specify a period for, or schedule of, payment that may be better suited to its ability to obtain the necessary funds and transfer those to the claimant.

Duration of the offer

Part 36 offers must remain open for acceptance for a minimum of 21 days, after which they may be withdrawn automatically or by further action from the offeror. A Calderbank offer, on the other hand, can be expressed to be open for however short a period as the offeror chooses or, where it is not expressly time-limited, may be withdrawn at any time before acceptance; there is no concept such as a “reasonable period” within which it must remain open. As Chitty on Contracts (33rd Edition) states: "The general rule is that an offer may be withdrawn at any time before it is accepted" (paragraph 2-094). In addition, and also in contrast to Part 36 offers, where the duration of the offer is not limited, it can come to an end after the lapse of a reasonable period of time, which will depend on all the circumstances.

Part 36 key considerations

When drafting a Part 36 offer, a practitioner’s starting point must be the specific requirements as to content set out in CPR 36.5. There is no shortage of cases emphasising the importance of not making the slightest deviation from those requirements (see Briefing "Part 36 offers to settle: lessons from recent decisions"). This is illustrated by three recent cases.

In King v City of London Corporation, the claimant’s purported Part 36 letter stated that the offer related to the whole of the claim for costs but excluded interest ([2019] EWCA Civ 2266). CPR 36.5(4) provides that a Part 36 offer that offers to pay or to accept a sum of money will be treated as inclusive of all interest until the relevant period expires, or 21 days after the date of the offer if the offer is made less than 21 days before the start of trial. The claimant argued that CPR 36.5(4) does not impose a mandatory requirement but merely operates as a deeming provision, so an offer that is silent regarding interest is taken to include it. The Court of Appeal rejected that argument, finding that CPR 36.5(4) is mandatory and that, here, the offer was not a valid Part 36 offer.

In Knight and another v Knight and others, before proceedings were issued, the administrators of a deceased’s estate purported to make a Part 36 offer to pay the defendants £35,000 from the proceeds of the sale of a property, with the defendants paying nothing towards their costs ([2019] EWHC 1545 (Ch)). Even though the term as to costs was favourable to the defendants, the High Court held that an offer that attempts to limit costs is not a valid Part 36 offer, noting that the Court of Appeal had previously confirmed this point in Mitchell v James ([2002] EWCA Civ 997).

In James v James and others, the defendants purported to make a Part 36 offer, which would have meant that the claimant would pay the defendants' costs up to the end of the relevant period ([2018] EWHC 242 (Ch)). This conflicted with the position under CPR 36.13, where the claimant pays the defendants' costs only up to the date of acceptance within the relevant period. As a result, the offer was not a valid Part 36 offer.

One way to guard against the risk of departing from the terms of CPR 36 is to use court form N242A to make the offer. However, this is not foolproof: care must still be taken when setting out the terms of the offer in the relevant box to ensure that those terms do not conflict with CPR 36.

While the form of the offer must adhere to the requirements in CPR 36, the offeror still has latitude as to the nature of the offer. As CPR 36.2(2) notes, nothing in CPR 36 prevents a party making an offer to settle in whatever way that party chooses, as long as it is made in accordance with CPR 36.5. This means that an offer can be made on non-monetary terms or for nil damages, provided that it is a genuine offer to settle the dispute.

This is illustrated by MR v Commissioner of Police for the Metropolis ([2019] EWHC 1970 (QB)). The case involved proceedings against the police for false imprisonment and assault. The claimant made a Part 36 offer that the matter be settled for nil pounds with an admission of liability. The defendant never responded. The High Court held that the costs consequences set out in CPR 36.17 should apply to the offer, which was beaten at trial: giving up any and all claim to a financial remedy was a significant concession and therefore a genuine Part 36 offer.

It is also now well established that an offer can be a genuine offer to settle in accordance with CPR 36 where it is for nearly all of the damages claimed, provided that there is some element of concession by the offeror. In Jockey Club Racecourse Ltd v Willmott Dixon Construction Ltd, the High Court held that an offer for 95% of the claim value was a genuine attempt to settle and it did not need to reflect a possible outcome at trial ([2016] EWHC 167 (TCC)). Therefore, offers of this kind should not be dismissed out of hand as offers that the court will regard as tactical rather than genuine attempts to settle proceedings.

Offerees have the ability to seek clarification of offers under CPR 36.8. However, the High Court in JMX (a child by his mother and litigation friend, FMX) v Norfolk and Norwich Hospitals NHS Foundation Trust, upholding an offer of 90% of the damages to be agreed or assessed, said that an offeror need not explain to the other party the rationale behind making its offer ([2018] EWHC 185 (QB)).

Where a party is moved to reject a Part 36 offer, or to make a counter-offer, it is important to remember that the offer will remain open for acceptance unless it is expressly withdrawn (CPR 36.11(2)). The Court of Appeal confirmed in Gibbon v Manchester City Council that a Part 36 offer may be accepted at any time unless the offeror has withdrawn it by serving a notice of withdrawal on the offeree ([2010] EWCA Civ 726). This is so even if the offeree has subsequently made a different offer or rejected the offer.

In light of this, the situation can arise where multiple offers are open for acceptance. In this scenario, practitioners will wish to keep all Part 36 offers under review and consider varying or withdrawing an offer if the merits of the case warrant it. Varying an offer may be preferable to withdrawing it on the basis that this may preserve the costs protection afforded by the original offer. CPR 36.17(7) provides that the costs consequences do not apply where an offer has been withdrawn. The costs consequences also do not apply where an offer is varied to be less advantageous to the offeree, who goes on to beat that offer. However, where a less advantageous offer either is accepted or is not beaten at trial, it is likely that the costs consequences will run from the original offer.

Even where an offer is held to be non-compliant with Part 36, it does not lose its status as an offer to settle. The court has discretion to take into account any settlement offers when considering an appropriate costs order (CPR 44.2(4)(c)). Therefore, for a party to disregard entirely an offer because it considers it non-compliant with CPR 36 can be a risky strategy.

WITHOUT PREJUDICE PRIVILEGE

The court’s policy of encouraging parties to settle disputes out of court gives rise to a particular branch of privilege; that is, when parties are engaged in negotiations to settle a dispute, any statements, whether oral or in writing, will usually be covered by WP privilege. This means that those statements will not generally be admissible in court. The rationale for this is that parties are more likely to settle when they can speak freely and without fear that what they have said will be used against them.

WP privilege is not absolute. In Unilever plc v Procter & Gamble Co, the Court of Appeal set out the principal exceptions to WP privilege ([1999] EWCA Civ 3027). It said that WP privilege prevents the admission into evidence of what one or both of the parties said or wrote where:

• The issue is whether the WP communications have resulted in a concluded settlement agreement.
• It is evidence of misrepresentation, fraud or undue influence.
• A statement may have given rise to an estoppel.
• It is evidence of perjury, blackmail or other unambiguous impropriety.
• It explains delay.
• It is evidence of the reasonableness of a settlement in other related proceedings, where the reasonableness of the settlement has been put in issue (also known as the Muller exception (Muller v Linsley & Mortimer [1994] 11 WLUK 417)).
• There is a question of costs and the parties have written offers "without prejudice save as to costs".
• Communications are received in confidence with a view to matrimonial conciliation.

While WP documents may be resorted to for a variety of reasons when the justice of the case requires it, according to the House of Lords in Rush & Tompkins Ltd v Greater London Council and others, only incremental developments of the existing exceptions or a comparable exception will likely be permitted ([1988] UKHL 7). As the High Court put it in the recent case of Briggs v Clay, WP privilege is designed to have a broad scope and the exceptions are narrow ([2019] EWHC 102 (Ch)).

The High Court reiterated the limited nature of the exceptions to WP privilege in Willers v Joyce and others, where it refused to apply the Muller exception on the facts ([2019] EWHC 937 (Ch)). There was an unsuccessful mediation, following which the claimant’s solicitors invited the defendant to indicate on a WP basis whether there was any change in its position. The defendant responded on a “without prejudice saves as to costs” basis. The claimant’s solicitors replied to say that the defendant had misrepresented the position and had sought to include information from a WP mediation that would remain privileged, but then said that they were writing to set the record straight on the same "without prejudice saves as to costs" basis. The court held that this had the effect of waiving the whole of the WP communications for the purpose of costs. The decision serves as a warning to practitioners to exercise care as to the basis on which they are corresponding.

The High Court examined the extent to which the court is willing to infer WP status in Sternberg Reed Solicitors v Harrison ([2019] EWHC 2065 (Ch)). The court held that an arbitrator had erred in law by taking into account communications expressly made “without prejudice”. It is well established that the court has no general discretion to disapply WP privilege. However, the court took a more novel point by distinguishing between WP communications and communications that are treated as impliedly WP; that is, communications aimed at resolving a live dispute. The initial offer, which was not expressed to be WP, was therefore admissible on questions of costs.

The practical message is to ensure that practitioners make their intentions clear as to the purposes for which communications may subsequently be used. If correspondence is received which is aimed at settlement but is not stated to be “without prejudice”, it may be taken into account in relation to costs, even if it is inadmissible in relation to the substantive dispute.

DRAFTING SETTLEMENT AGREEMENTS

The terms of a settlement agreement will naturally vary depending on the particular circumstances of the dispute, but there are some key points to bear in mind when it comes to drafting and negotiating those terms (see Briefing "Settlement agreements: the importance of early planning") (see "Settling court proceedings" below).

The terms of any payment will likely form the heart of the agreement. While much focus will be on the obligations of the paying party, the receiving party should give careful consideration to the tax implications of the settlement, which may be complex. When it comes to the paying party’s obligations, it will be important to set out how late payment will be treated. One option may be the use of an acceleration clause, although practitioners should be careful to ensure that the clause is not penal in nature.

ZCCM Investments Holdings plc v Konkola Copper Mines plc provides some useful guidance ([2017] EWHC 3288 (Comm)). An acceleration clause provided that if the defendant breached the settlement agreement, all unpaid sums due under it would be accelerated and required to be paid within five business days of the breach. Interest would then accrue at the rate of LIBOR (the London Interbank Offered Rate) plus 10% per annum. Applying the test on penalty clauses set out by the Supreme Court in Cavendish Square Holdings BV v El Makdessi and ParkingEye Ltd v Beavis, the High Court held that the acceleration clause did not impose a detriment on the defendant that was out of all proportion to any legitimate interest of the claimant ([2015] UKSC 67, see News brief "The rule on penalties: a new more flexible test"). The court emphasised that there is nothing extravagant, exorbitant or unconscionable in requiring a commercial party under the terms of a settlement agreement to pay the full amount immediately in the event of any non-compliance with its terms.

The scope of the claims to be settled will be another key area of drafting. Practitioners should give careful regard in particular to the terms of any release drafted into the agreement. In Khanty-Mansiysk Recoveries Ltd v Forsters LLP, the general release in the settlement agreement stated that the agreement was in full and final settlement of all or any claims that the parties had, or could have had, against each other, whether in existence at that time or coming into existence at some time in the future, and whether or not in the parties' contemplation ([2018] EWCA Civ 89). Two years later, Khanty-Mansiysk Recoveries Ltd, the assignee of one of the parties to the settlement agreement, issued a claim against Forsters LLP for negligent advice in respect of the acquisition. The Court of Appeal upheld the High Court’s decision that the claim had been comprised by the settlement agreement, given the wide drafting of the release clause. Although the claim was unsuspected at the time of the agreement, the objective bystander could not have said that it was impossible.

Forsters will no doubt encourage parties seeking to compromise any potential future action to draft clauses as widely as possible. The challenge for opposing counsel will be to ensure that clauses are drafted so that claims are not inadvertently compromised. This is particularly important in light of Ackerman v Thornill and others, where the High Court held that a settlement agreement should not be undermined except on the clearest grounds, such as evidence of fraud or collusion: it is in the public interest for there to be finality in litigation, and that is reinforced where the parties have entered into a settlement agreement ([2017] EWHC 99 (Ch)).

At the risk of stating the obvious, it is important to ensure that a binding agreement is reached. In Goodwood Investments Holdings Inc v ThyssenKrupp Industrial Solutions AG, the High Court held that the various WP correspondence exchanged between the parties constituted various offers and counter-offers, with the introduction of additional and new terms, and “subject to” language requiring a formal settlement agreement and board approval ([2018] EWHC 1056 (Comm)). With regard to the latter point, the court rejected the argument that the necessary board approval was mere "rubber stamping", given a director’s duty to act in the best interests of the company.

BGC Brokers LP and others v Traditions (UK) Ltd and others offers a cautionary tale on seeking to incorporate WP communications into a settlement agreement ([2019] EWCA Civ 1937). It is well established that once settlement has been reached, the terms of the settlement will not usually be privileged. The Court of Appeal observed that including information from earlier WP communications in a settlement agreement so that a party may sue on any commitments made in the agreement relating to those communications raises a real risk that they will lose their WP status, as happened in BCG Brokers.

Notifying the court of a stay

It is important to notify the court where the parties enter into a stay after proceedings have been issued. In Commercial Court cases, this should be treated as a mandatory requirement. In Griffin Underwriting Ltd v Varouxakis (Free Goddess), the parties entered into a litigation moratorium for an indefinite period, which was terminable on 48 hours’ notice ([2018] EWHC 3259 (Comm)). Griffin Underwriting gave Varouxakis notice under the moratorium and, seven months later, sought judgment in default. Varouxakis contested the court's jurisdiction. The issue for the court was whether or not the stay was effective, and therefore whether the jurisdictional challenge was in time. The High Court noted that Civil Procedure Rule 58 and Practice Direction 58 contain a specific obligation to notify the court in writing of any variation to a time limit, reserving the right of the court to override the parties’ agreement. The failure to observe these requirements meant that the moratorium was ineffective to extend time for Varouxakis to challenge jurisdiction. As the court said, “it takes three to make an agreement.”

Settling court proceedings

Where court proceedings have been issued it is important to ensure that a settlement agreement is embodied in an order or judgment of the court. This is commonly done by way of a consent order. The terms of the order should allow the parties to enforce the terms of the agreement without starting a new action. Where the settlement terms are particularly confidential or sensitive, a Tomlin order can be used under which the settlement terms will be kept separate from the order in a schedule, which may or may not be held on the court file, depending on the particular court’s requirements.

The High Court considered the interaction between a Tomlin order and a settlement agreement in Adibe v National Westminster Bank plc, where the parties had settled earlier proceedings brought by National Westminster Bank (NatWest) against Mr Adibe ([2017] EWHC 1655 (Ch)). As part of the settlement, NatWest was to mark Mr Adibe's credit records as settled. The Tomlin order did not mention this and NatWest took no steps to amend the credit records. While the High Court concluded that the parties could not have intended that the Tomlin order exclude the agreement to amend the credit record, clearly it is prudent to ensure that all material terms on which a party may wish to enforce are set out in the Tomlin order.

In some circumstances, the parties may be unable to agree the terms of the order. In this instance, as emphasised by the High Court in Walsh and another v Hall and another, the court will apply standard methods of contractual interpretation to consider what a reasonable person with the background knowledge of the parties would have taken them to mean by the language used in the settlement agreement and applying commercial common sense ([2016] EWHC 1759 (Ch)).