Drafting a settlement agreement—legal pitfalls to watch out for

Ben Giaretta, partner in the dispute resolution department at Mishcon de Reya LLP, specialising in international arbitration, looks at a case which provides a practical illustration of how to get the drafting of a settlement agreement right—including the issues of ‘labels’ (eg subject to contract), authority and the general principles on forming binding contracts. In Goodwood Investments Holdings Inc v Thyssenkrupp Industrial Solutions AG [2018] EWHC 1056 (Comm), the judgment arose out of a relatively rare reference by an arbitral tribunal to the court to determine a point of law pursuant to section 45 of the Arbitration Act 1996 (AA 1996).

What are the practical implications of this case?

The case concerns a question of whether a settlement was achieved through an (apparent) exchange of offer and acceptance between the parties’ solicitors, at the start of an arbitration hearing.

The practical implications of this case arise from the fact that the offer was made, on the one hand, subject to approval from the offeror’s board of directors being obtained and a binding settlement agreement being signed, and, on the other hand, on the basis that if the offeree did not accept the offer, the offeror would bring this to the attention of the tribunal in the consideration of costs and ask the tribunal to award indemnity costs.

How can a party make an offer that (as the judge concluded) was not capable of being accepted, but at the same time say that indemnity costs would be sought if the other party did not accept?

Practitioners need to be careful about the wording of settlement offers in arbitration because they may not achieve the costs protection that is being sought. Equally, a party receiving an offer can push back on wording referring to indemnity costs, if the offer is not actually capable of acceptance at the time it is made.

What was the background?

The purchaser of a superyacht brought an arbitration claim for breach of warranty against the builder of the yacht. On the first day of the arbitration hearing, the builder made an offer to settle the claim. That offer was expressly subject to ‘conclusion of a formal settlement agreement to include, prior to signature, formal approval of the settlement by the competent corporate body of the builder’. At the same time, the offer was stated to be open for acceptance for only two days, and if the purchaser did not accept the offer, the builder stated that it would seek an award of costs on an indemnity basis from the expiry date of the offer onwards, if the purchaser did not obtain an award from the tribunal that was better than the offer.

The purchaser replied that it was agreeable to the offer, and the arbitration hearing was adjourned. A period of negotiation followed. The purchaser sent the builder a draft settlement agreement, and the builder replied a fortnight later with its own (extensively revised) draft settlement agreement. The purchaser complained that the settlement had already been agreed and the builder could not rewrite it.

As a result, the negotiations broke down and the builder went back to the arbitrators. But the purchaser said the arbitration had come to an end as a result of the acceptance of the settlement offer, so the arbitrators’ mandate had finished.

The arbitrators and the parties agreed to refer to the English courts, under AA 1996, s 45, the legal question of whether a binding settlement had been agreed. If it had, the arbitration was over—if it had not, the arbitration would continue.

What did the court decide?

The judge thought the purchaser’s argument ‘had some force’—that the reference in the offer to a claim for indemnity costs must have meant the offer was capable of immediate acceptance. Nonetheless, he said the fact that the offer was expressly ’subject to contract’, and required the approval of the builder’s board of directors, showed that no binding settlement had been agreed (since a settlement agreement had not been signed, and the approval of the builder’s board of directors had not been obtained).

Consequently, he said that the arbitration must continue.

Why was an AA 1996, s 45 application made in this case, and are there any practical points for practitioners to note in this respect?

AA 1996, s 45 applications are rare. It was used in this situation because of the unusual situation, in which, in order for the particular question to be answered, it was necessary to review ‘without prejudice’ correspondence between the parties. The arbitral tribunal did not want to do so, if they subsequently had to continue with the arbitration.

The arbitrators and the parties sensibly agreed that it would be safer to refer the question to a judge who would not afterwards have to consider any substantive issues in the case.

The practical points to note are:

• parties making settlement offers should be careful about the wording of the offers, if they subsequently want to receive costs protection (see the section on practical implications above)
• parties receiving offers can push back on ‘indemnity costs’ wording if the offer is not capable of immediate acceptance (see the section on practical implications above)

AA 1996, s 45 can be a useful mechanism to resolve discrete questions of law, by a separate decision-maker outside the arbitration.

Interviewed by Diana Bentley. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.