This article appeared in Entertainment Law Review, Ent. L.R. 2015, 26(3), 95-97, reproduced here with the kind permission of the editor
Solicitors who deal with contentious matters routinely exchange emails and formal letters with their opponents to make settlement offers and to discuss more detailed settlement terms. This correspondence is likely to be protected by without prejudice privilege but that will not prevent a binding settlement being reached if an offer is made and accepted. This judgment provides an important reminder that the parties to a dispute should not simply focus on agreeing a settlement figure to the exclusion of other settlement terms. A failure to be clear that other terms have yet to be agreed or that a settlement will only be reached on the execution of a formal settlement agreement may result in the parties being bound by a settlement which at least one of them did not intend.
The claimants were a group of around 220 high net worth individuals who had invested in a series of film and television production partnerships which were known as the "Take" partnerships. The aim of the Take partnerships was to allow investors to benefit from attractive tax reliefs which were introduced by a series of Finance Acts between 2000 and 2007. Ultimately the schemes failed because most of the productions which were financed by the partnerships failed commercially and none generated the tax relief which had been intended. The claimants claimed that this was because Teathers Limited had failed to invest in productions which fulfilled the criteria set out in the investment memoranda which were used to promote the scheme to potential investors. The total value of the claims was approximately £20 million.
The claimants issued proceedings in September 2009 and the claim was set down for a 15 day trial starting on 21 July 2014. The parties had attended a mediation on 21 May 2014 which was unsuccessful but, with the deadlines for lodging trial bundles and skeleton arguments looming, there were further settlement discussions between the parties' respective solicitors in the days leading up to 29 June 2014. On that day, it was agreed in email correspondence that the defendant would pay the claimants a total of £2 million in settlement of their claims.
In the period which followed the parties tried to agree the terms of a formal settlement agreement but failed. One of the terms which the defendants wanted to include in a formal agreement was an indemnity from the claimants against any third party claims which might be brought arising out of the Take partnerships. In particular, the majority of the Take products were offered to investors through Independent Financial Advisors ("IFAs"). Some of the claimants had threatened to pursue claims against the IFAs who had recommended the Take schemes and the defendants wanted an indemnity to cover any contribution claims which those IFAs might bring against the defendant.
Following the failure to agree the terms of a settlement agreement the claimants applied for a declaration from the court that a binding settlement had been agreed in the email correspondence between solicitors on 29 June. The defendants argued that there was no binding settlement because all that had been agreed was the sum which the defendants would pay in principle subject to the agreement of the terms of a detailed settlement agreement.
In his judgment His Honour Judge Pelling Q.C. set out a helpful summary of the legal principles which apply when determining whether or not a binding settlement has been agreed:
1. The question of whether a settlement has been reached must be determined objectively based on the whole course of the parties' negotiations. The court must decide on the basis of the parties' conduct and words whether they intended to be bound as soon as an agreement was reached or only when a formal agreement was executed.
2. Generally the subjective state of mind of a party and any reservations they have which have not been communicated to the other party are irrelevant.
3. If, on an objective assessment, the parties intended to reach a legally binding agreement in relation to all the essential terms of a settlement, the fact that some significant terms had not been agreed (such as terms about confidentiality or indemnities against future claims) does not prevent the court from concluding that there was an enforceable agreement.
4. If the parties want to ensure that there is no binding agreement until a formal written agreement is executed they should state expressly that their negotiations are "subject to contract".
5. In the absence of an express stipulation that negotiations are subject to contract the court can conclude that the negotiations were conducted on that basis if it was the "mutual understanding of the parties". The question of whether or not there was such a mutual understanding is a question of fact to be determined in each case.
Had the parties agreed to a binding settlement?
In carrying out the necessary objective evaluation the judge carefully analysed the correspondence which had passed between the parties' solicitors and the telephone conversations between them. He also heard detailed evidence from the partner who had conduct of the claim on behalf each side.
Counsel for the defendant argued that the underlying litigation was so complicated that the parties cannot have intended to settle it without a formal settlement agreement. The judge agreed that the proceedings were "immensely complex". However, in his view the settlement terms which were discussed between the parties before the exchange of emails on 29 June were not complicated and there was nothing to suggest that at that stage the parties believed a formal settlement agreement would be necessary.
The defendant claimed that the parties anticipated a two stage process whereby the settlement sum would be agreed first and the parties would then negotiate the other settlement terms. Those terms would, once agreed, be set out in a formal settlement agreement. In support of this argument Counsel for the defendant pointed to references in the correspondence on 29 June to the need for a consent order to be agreed. The judge was unconvinced by this. The parties had certainly discussed the need for a consent order. That was unsurprising because proceedings were underway and a consent order would clearly be necessary following a settlement. However, the implication from the correspondence was that there was nothing of substance left to agree other than the form of words necessary to put into effect the agreement which had been reached. When the claimants' solicitor confirmed on 29 June that his clients would accept the defendant's most recent offer and that he would provide a draft consent order the following morning the defendant's solicitor simply replied "Noted, with thanks." The judge was sure that if the defendant's solicitor had intended to raise further issues on which agreement was needed before a settlement could be reached he would have done so, at the latest, at that stage.
The judge also thought it was clear from the correspondence leading up to 29 June that both parties were motivated by a desire to reach a settlement before significant further costs were incurred. He noted that the deadline for the trial bundles to be lodged had passed on 26 June and that skeleton arguments were due to be exchanged and lodged by 11 July. The claimants' solicitors had explained that under his clients' funding arrangements the next tranche of money would soon fall due. On 27 June the defendant's solicitor also confirmed that the next tranche of his counsels' brief fees would be incurred on 30 June and he doubted that his client's offer would remain on the table if that happened. This obvious desire to reach a swift settlement was inconsistent with the two stage process which the defendants claimed the parties had envisaged.
Perhaps the most persuasive factor for the judge was that there had been no indication in the correspondence leading up to 29 June that either party wanted to agree any further settlement terms. There had not even been an indication of the issues to which any additional terms might relate. For example, it appears that the main sticking point which prevented a formal settlement agreement being agreed after 29 June was that the claimants were not willing to indemnify the defendant against any contribution claims brought by IFAs who might be sued by the claimants. That issue had been raised in correspondence as long ago as October 2011 when the defendant's solicitors asked whether the claimants intended to pursue any related claims against IFAs. The claimants' solicitors replied that the claimants did not intend to pursue any such claims. That appears to have satisfied the defendant because the issue was not raised again until after the exchange of emails on 29 June. The judge placed great weight on the fact that the defendant had never made any attempt to reserve its position in relation to claims by third parties. If the defendant had wished to include an indemnity in the settlement it should, at the very least, have reserved its position in the course of the negotiations. The judge stated that "a subjective and internal reservation of position is entirely immaterial to the question of whether in fact agreement has been reached".
The judge therefore concluded that the parties had settled the proceedings by an agreement contained in or evidenced by an exchange of emails on 29 June 2014. The parties had agreed all the essential terms of a settlement, namely the settlement sum, the timing of payment and the fact that the agreement would be in full and final settlement of the outstanding claims and, on an objective analysis, they intended the settlement to be binding. The negotiations had not been carried out expressly or impliedly on a subject to contract basis.
Lessons to be learned
The judge's detailed analysis of the correspondence which passed between the parties' solicitors in this case shows that decisions of this type will be heavily dependent on the facts. However, there are important lessons to be drawn from the judgment. It can sometimes be helpful for the parties to focus on the settlement sum and to leave negotiations about other settlement terms until later but it is vital that those additional terms are not simply forgotten. It may be enough for a party to reserve its position on outstanding matters or to make it clear that they expect there to be a formal settlement agreement but the safest way to ensure that a settlement is not inadvertently reached is to make sure that negotiations are carried out on an expressly "subject to contract" basis.
If you require further information on anything covered in this briefing please contact Ben Longworth (firstname.lastname@example.org; 020 3375 7195) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Disputes page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2015
 Raymond Bieber & Others -v- Teathers Limited (In Liquidation)  EWHC 4205 (Ch)
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