The benefits of settling disputes out of court are clear, most of all in terms of the time and costs saved by not taking the dispute to trial.
However, it's important to ensure that the terms of any settlement are agreed by all parties before they become enforceable.
Sometimes parties disagree as to whether their agreement to settle (either orally or in writing) is enforceable and sometimes even as to whether an agreement to settle exists at all. The recent decision in Newbury v Sun Microsystems  EWHC 2180 (QB) is a stark reminder of the Court's powers to impose an agreement whose form, as far as the parties were aware, had never been agreed by either party.
The Case Law
In Newbury the defendant sent a letter to the claimant, offering a settlement sum and legal costs. In the letter, it read 'such settlement to be recorded in a suitably worded agreement.' The claimant emailed a response, accepting the offer and agreeing to forward to the claimant a draft agreement. The parties were then unable to agree the terms of the 'suitably worded agreement'. The claimant contended that, notwithstanding this, the dispute had been settled and the defendant should pay the sum offered.
The judge in Newbury concluded that a binding agreement had been reached. The reasoning can be summarised by the following three points:
- The letter constituted an offer of settlement with the terms of that offer to be accepted within a specified time frame and payment being made within 14 days of acceptance. The judge stated that it was therefore 'intended to be a binding offer capable of acceptance with certain legal consequences following from acceptance.'
- The words 'such settlement to be recorded in a suitably worded agreement' suggested that an agreement had already been reached. The language used gave the suggestion that the settlement terms had already been agreed at that point - namely the reference to 'such settlement' and the court holding that the term 'recorded' meant to record an agreement that had already been reached.
- The letter was not expressed to be 'subject to contract'.
This case followed on from the decision of the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH  UKSC 14 which determined that a binding agreement can be created before all terms of the settlement had been agreed and before any formal document is created. In determining whether an agreement has been made and is binding, the court will objectively assess whether the parties have intended to create legal relations.
In RTS the Supreme Court stated, 'Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement.'
A warning to all
The above decisions together serve as a warning to all that the courts can enforce agreements, even where a number of terms have yet to be finalised and even in circumstances where there is controversy around whether or not an agreement was intended to be entered into by the parties at all
To avoid finding yourself in a position where you are unintentionally bound, you should bear in mind the following practical steps:
- When making an offer to settle ensure that any terms that are important to you are included within that offer. Whilst parties often agree the key terms immediately, some other terms that may be vital to your business and reputation can be forgotten at these early stages. If such terms are not expressly agreed the Court could find that a binding agreement had been reached before you've had a chance to include these terms
- Start settlement discussions as early as possible to avoid a last minute rush on drafting agreements that may result in favoured terms being missed
- Ensure any offers and correspondence sent with the intention of being binding only on the happening of all event (e.g. by the finalising of a formal written agreement) is marked 'subject to contract'. This shows a clear intention that the parties do not intend for the offering correspondence to bind until the relevant event has occurred
If you are in any doubt about how to settle your dispute on terms acceptable to you, seek legal advice.