You might be surprised to learn that more often than not, business disputes end in settlement or a compromise being reached rather than being resolved by a court. Given that litigation costs are steadily increasing and the delay in cases being heard by the court is simply getting longer, exploring settlement can be considered an attractive option (and is encouraged by the court) and can come about as a result of negotiation between the parties, mediation or another form of alternative dispute resolution (ADR).
In this article, we will cover multiple aspects of the settlement process so that you can be fully informed of what’s involved if you wish to consider settling your business dispute out of court.
- What is a settlement?
- Should you consider a settlement offer?
- When to use a settlement offer in a dispute?
- What is a Part 36 offer?
- How do you make a Part 36 offer?
- How long does the offer last?
- What are the costs consequences of accepting a Part 36 offer?
- Late acceptance of a Part 36 offer
- Can you withdraw or modify a Part 36 offer?
- Other types of settlement offers
- The consequences of withdrawing a claim
- How to document a settlement
- Breach of settlement agreement
What is a settlement?
A settlement is a mutually acceptable compromise of a dispute that can arise at any time before legal proceedings are commenced and also at any point afterwards
Effect of a settlement
When a settlement is reached between the parties to a dispute, it effectively brings an end to it – this is the case whether or not legal proceedings have begun. It usually means that the parties won’t be able to start a new action in relation to that dispute, unless it’s been expressly agreed that it can be resurrected in specific circumstances.
Should you consider a settlement offer?
If you’re uncertain as to whether settling your dispute via the means of making or accepting an offer to settle is the right thing to do, it’s worth considering some of the clear benefits of doing so – as set out in the list below:
- Reduces expenditure: Going to court is always risky in that you’re not guaranteed to recoup all of your legal and court fees even if you’re successful – and you may end up being liable for the other side’s costs in the event that you’re unsuccessful. Settling the dispute inevitably reduces your outlay in respect of these fees.
- Time considerations: Spending time embroiled in preparing for litigation means time spent away from tending to the needs of your business, and that includes any personnel who may also be engaged in assisting you with this. Reaching a settlement prevents or reduces this time being spent.
- Peace of mind and closure: A settlement brings about closure and certainty, so you don’t have to worry about facing a decision made by the court which may not be as amenable to your situation as an agreed settlement would be. Litigation can also take a personal toll on those involved particularly in the lead up to trial, particularly for witnesses who are faced with the prospect of having to take the stand. An early resolution helps to reduce the stress and pressures associated with the litigation process.
- Reputational considerations: If a confidentiality clause is added to the settlement (which it commonly is), then details of the dispute won’t end up being leaked and potentially attract unwelcome publicity and reputational damage to your business. Often settlement agreements also contain no admission clauses, so you can settle a dispute without admitting liability.
- Range of remedies: It’s worth highlighting that a wider range of remedies is available when a settlement agreement is reached than the remedies that are available in the litigation process.
In addition to the above, it’s very important to be aware of the fact that the courts place a heavy emphasis on encouraging settlement between the parties, as reflected by multiple provisions in the Civil Procedure Rules (CPR) and a dim view is generally taken in the form of costs penalties being imposed on parties who do not seriously engage with attempts made by another party to settle a dispute in order to avoid going to trial.
When to use a settlement offer in a dispute?
One of the further benefits of reaching a settlement agreement is the fact that it can potentially be achieved at any point in the lifetime of a dispute, including before proceedings are commenced – the earlier the better from a costs perspective. It’s also the case that historically, there are specific stages where settlement is usually considered once the litigation process has been engaged with, for example, before a time-consuming and costly exercise termed disclosure takes place.
What is a Part 36 offer?
The term ‘a Part 36 offer’ refers to a specific provision in the CPR that deals entirely with a particular, formal type of offer to settle, with equally specific costs consequences that are also set out in the Part. It’s often treated as a vital tactical step that a party (especially a claimant) can take during legal proceedings and is therefore not to be treated lightly. Whilst a highly technical examination of Part 36 offers is outside of the scope of this article, this section provides an overview for information purposes.
In order for an offer to settlement to be compliant with Part 36, it must be a genuine offer to settle, be made without prejudice save as to costs (this means the offer cannot be shown to the court until after the main issue is resolved, at which point the judge will take it into account when considering the issue as to liability of costs) and it must comply with the strict requirements of Part 36.
How do you make a Part 36 offer?
If you are a claimant, i.e. the party bringing the claim, the following provisions apply in relation to making a Part 36 offer in that it must:
- Be made in writing
- State that it is intended to have the consequences of Part 36 clearly on the face of the written offer
- Specify a period for acceptance of not less than 21 days (referred to as ‘the relevant period’), within which the defendant will be liable for the claimant’s costs if the offer is accepted
- State whether it relates to the whole of the claim, to part of it or to an issue that arises in it (and if it’s the latter, it must stipulate which part or issue)
- State whether it has regard to any counterclaim
- Contain sufficient information to allow the offeree to consider the offer, which will be necessary where the offer relates to a non-money claim
If you are a defendant, i.e. the party defending a claim instigated against you, and you wish to make a Part 36 offer to settle, the offer must also:
- State that the offer is to pay a single sum of money (in cases where there is an offer to pay a sum of money)
- State that the sum will be paid at a date not later than 14 days following the date of acceptance
An offer to settle a money claim will be treated as inclusive of all interest, subject to one of the specific Rules in Part 36 itself.
Due to the serious nature of commercial disputes it is advisable that you seek legal support from experienced business dispute solicitor who can negotiate a settlement or draft a settlement offer on your behalf. A experienced business dispute solicitor will help you get the best result possible, whilst avoiding any reputational damage to your business.
How long does the offer last?
As touched upon above, the relevant period a Part 36 settlement offer must be specified as being capable of acceptance for is a period of not less than 21 days. Once the relevant period has expired, an offer can be withdrawn or revised without the court’s permission being required (discussed in more detail later on in this article). However, if the offer is not formally withdrawn, an offer to settle can be accepted at any time, unless obtaining permission is necessary.
Should you accept a Part 36 offer?
It’s definitely worth giving serious thought to accepting a Part 36 offer to settle your dispute if the offer appears to be reasonable, and seeking legal advice is strongly recommended in relation to this, because there are consequences which may apply if you reject the offer and fail to secure an outcome as favourable as the terms of the offer at a trial. Legal representation is not as expensive as you think and the costs of getting it wrong will damage your position in the negotiating process.
If you do decide to accept a Part 36 offer, it should be accepted in writing with written notice served upon the party making the offer, or their legal representative if they have one. If court proceedings have begun, then a copy should also be filed with the court.
Can you negotiate a Part 36 offer?
You can effectively negotiate a Part 36 offer by making a counter-offer to it, but you should be aware that making a counter-offer does not affect the validity of the original offer.
What are the costs consequences of accepting a Part 36 offer?
Accepting a Part 36 offer leads to some automatic costs consequences. If you are a claimant, the defendant is only liable for costs incurred up to the end of the relevant period (the not less than 21-day timeframe referred to above) and if the offer is accepted after that date, the presumption is that the offeree pays the costs from the expiry of the offer to acceptance, which is essentially a penalty for late acceptance.
What happens if a claimant does not accept a Part 36 offer?
If a claimant fails to obtain a judgment that is 'more advantageous' than the offer made in the event that they don’t accept it (this means asking the question of whether the claimant recovered a sum that is less than or equal to the offer), then the defendant will recover from the claimant its reasonable and proportionate legal costs from the date on which the relevant period expired, along with interest on those costs.
What happens if a defendant does not accept a Part 36 offer?
The costs consequences where a defendant fails to accept a Part 36 offer in circumstances where the claimant obtains a judgment which is equal to or more advantageous than the offer are as follows:
- They will have to pay the claimant's costs on the indemnity basis (a higher contribution than is standard) for the period starting from the date on which the relevant period expired, with interest on those costs at up to 10% above base rate
- The defendant will also have to pay interest on the whole or part of the sum awarded to the claimant at a rate not exceeding 10% above base rate for some or all of the period starting from the date on which the relevant period expired
- Also payable will be the claimant's reasonable and proportionate costs from the start of the matter to the date on which the indemnity costs and enhanced interest start running, with interest being added on to those costs; and
- There will also an additional amount payable by the defendant, capped at £75,000 and calculated by applying the stipulated percentage on the amount of damages/costs as awarded by the court
Late acceptance of a Part 36 offer
In summary, if a Part 36 offer is accepted after the expiry of the relevant period, the costs must be determined by the court, unless the parties agree otherwise. In instances where the court determines the costs consequences, it will consider all of the circumstances of the case – which is clearly risky for the party who accepts at a later stage.
Can you withdraw or modify a Part 36 offer?
Before the expiry of the relevant period, a Part 36 offer to settle can be withdrawn or its terms can be modified to be less advantageous to the offeree if the offer is not accepted within the relevant period, or if the offer is accepted within the relevant period but the court gives permission for the withdrawal or variation.
You do not need the court’s permission to withdraw or modify a Part 36 offer after the relevant period has expired, provided that notice of acceptance has not previously been served.
Any withdrawal or modification to the offer’s terms must be made in writing and served on the offeree or their legal representative. At this point, a Part 36 offer won’t technically be subject to the Part’s costs and interest consequences.
Other types of settlement offers
There are other types of settlement offers that can be used to settle commercial disputes. These are as follows:
A Calderbank offer is also typically known as an offer made ‘without prejudice save as to costs’ and is usually set out in writing in the form of a letter. It can be less restrictive in that you can dictate the terms of the offer. It differs from a Part 36 offer in that a Calderbank offer is typically inclusive of costs as opposed to in a Part 36 offer, which typically determines the cost amount to be paid after the Part 36 offer has been accepted. You can also determine the time in which the offer is open for acceptance and the payment terms.
If a Calderbank offer is not accepted and the matter proceeds to trial, whilst the court will consider the existence of such an offer when determining the costs at the end of a dispute, the amount of weight given to it is entirely subject to the court’s discretion.
Without prejudice offer
An offer of this nature cannot be referred to during the course of the legal proceedings relating to the claim itself, nor can it be referred to the court on the question of costs without the express consent of both parties or unless the offer is expressly marked as 'without prejudice save as to costs'.
In a nutshell, an open offer is not the norm. This is an offer which does not fall under the privilege attached to the without prejudice rule. It would only really be used when the offeror is of the opinion that the offeree is being overly optimistic about the outcome of the case and there is virtually no possibility of the offer being bettered in the ultimate decision made by the court. There are also occasions, such as in an unfair prejudice petition, when tactically it might be appropriate to make an early open offer to purchase the petitioner’s shares at a fair value.
The consequences of withdrawing a claim
The general rule on withdrawing (‘discontinuing’) a claim is that the discontinuing claimant is liable for the defendant’s costs. Unless the court orders otherwise, a claimant who discontinues is liable for the costs which a defendant incurred on or before the date on which the notice of discontinuance (the formal document which must be used) was served upon them. With this comes the risk that the court may decide to award costs on the indemnity basis, which is punitive. In light of this, it’s definitely more sensible to try and reach a negotiated settlement of your dispute with the other party from a costs perspective.
How to document a settlement
There are a few different ways in which a settlement can be documented, and the form which the settlement takes will affect the method of enforcement, should the terms of the settlement be breached.
Letter or email
This may suffice in straightforward cases where you or your lawyer simply liaises with the other side and agrees the settlement in writing. This might be appropriate, for example, before litigation proceedings have commenced.
Settlement agreement or deed
This is a common method of documenting a settlement, particularly in more complex commercial cases.
Consent order or judgment
In cases where the settlement relates to court proceedings, a consent order (including a kind called a Tomlin Order) or judgment will be necessary. This has the effect that enforcement of the agreement in the event of a breach can be done within the parameters of the existing proceedings without the need to begin fresh proceedings for the purposes of the enforcement.
Terms of settlement – checklist of issues to consider
Carefully drafted terms of settlement are crucial and all aspects of the agreement must be covered. Whilst the terms will be bespoke to the particular nature of your dispute, some of the key matters to include are as follows:
- Who the parties to the agreement should be, so that every relevant individual or entity is covered
- The scope of the claims to be settled
- How any court proceedings will be disposed of, i.e. is the action being dismissed, discontinued or stayed on agreed terms?
- Payment arrangements and interest on late payments
- The tax implications of the settlement
- Legal costs
- Confidentiality issues
Breach of settlement agreement
The remedy where a breach of the settlement agreement occurs will hinge upon what the parties’ intentions were when agreeing to settle, and whether it can be construed that this included an intention for the agreement to govern their legal relationship from the point when it was entered into and the dispute at its heart being treated as finished, or whether there was the intention for the claim to be resurrected in the event of a breach.
If there is no court order or judgment recording the terms of the settlement, you will be required to begin a fresh action for breach of contract.
In the event that you did record the terms of the settlement in a court order or judgment, you would need to look to the form of that document to determine the correct method of enforcement, i.e. whether it’s an order or judgment for a sum of money, a Tomlin Order or an injunction by consent and undertakings to court. (It’s advisable to seek legal advice if you are unsure as to the most appropriate method of enforcing a breached settlement.)
It’s abundantly clear that there are a whole host of benefits to settling your commercial dispute outside of court and as mentioned in this article, the courts place a heavy emphasis on actively encouraging parties to do so – applying sanctions in the form of costs penalties when settlement is not at least reasonably contemplated. As demonstrated, certain kinds of settlement methods – particularly Part 36 – can be a technical minefield and as such, it’s crucial to have the right legal support in place to help you navigate the rules carefully so that you can attain the best possible settlement outcome for your business and protect your position.