Settlements: drafting watertight agreements

29.04.10

 

This article was written by Andrew Manning Cox, partner, in Wragge & Co's Commercial Litigation team and published on the PLC online magazine.

Anyone sensible that is involved in a dispute will want to try and settle a claim. This has been one of the principles behind the development of methods of alternative dispute resolution (and, in particular, mediation) in the UK over the last 20 years (see Briefing "Alternative dispute resolution: trends in practice". It is also the bedrock of the Woolf Reforms and the Civil Procedure Rules which implemented them (see Opinion "The Woolf reforms: One year on".

There is, however, a danger that a settlement agreement is seen as the end of the problem. If insufficient thought is given to making it watertight, it can be the start of another problem (see below "Checklist for successful settlements").

Advantages of settling

An agreed settlement of a claim (whether or not in the context of actual or threatened litigation or arbitration) saves legal costs and management time, and can help to preserve commercial relationships for the mutual benefit of parties who are in dispute. To put it another way, there is nothing more calculated to destroy the prospect of two parties doing business together in the future than a piece of heavily-contested litigation lasting several years.

So there are lots of good and positive pressures on parties in dispute to reach agreement to make the dispute go away. Large numbers of such agreements are negotiated at a commercial level as issues arise, such as late delivery, change of specification or price or change of business need. Many of those agreements never get anywhere near a lawyer.

Reaching a binding settlement

Sometimes the settlement is reflected in an exchange of commercial correspondence, even in the context of a very sophisticated underlying suite of contract documents which are then varied by the correspondence. Sometimes it is set out in a letter of agreement, sometimes in a formal deed of variation.

They all have a common thread; they will settle existing known disputes and lay the ground for future contractual performance. Or will they?

The universal feature of such settlements is that all parties will sign them with a sense of some relief, assuming that the dispute to which the documents refer is now at an end. The parties can then concentrate on abiding by an amended contract, or simply getting on with business elsewhere if the settlement has brought a trading relationship to a conclusion.

There can, of course, be litigation arising out of a settlement agreement if one party breaches its terms or if the form of any variation to an underlying contract is claimed not to follow the contractual machinery and therefore not to have effect under the contract.

Vulnerability of settlements

If a settlement agreement has been entered into on the basis of, for example, negligent misrepresentation by one party to the other, the efficacy of that agreement can also be attacked at a later stage.

This issue was brought into relief recently in BSkyB Limited and another v HP Enterprise Services UK Limited (formerly Electronic Data Systems Limited) and another which came before the Technology and Construction Court ([2010] EWHC 86 (TCC)). The case has attracted a lot of attention, particularly in the IT world (see Opinion "BSkyB v EDS judgment: read and learn".

The judgment hit the headlines for a number of reasons: a six-year legal battle, a ten-month trial, 109 days in court over a full judicial year, more than 70 witnesses, approximately 500,000 documents, and damages likely to exceed £200 million. A lower profile part of the case shows how a settlement agreement can be successfully attacked in certain circumstances.

The facts can be summarised briefly. In 2000, Sky retained EDS to design and build a Customer Relationship Management system, following a competitive tender process. Work started under a letter of intent in August 2000 and a contract was signed in November 2000. The project was not a success and EDS was ultimately removed from it. Sky sued for damages. To get over a limitation of liability clause in the contract, Sky had to prove fraudulent misrepresentation, which they succeeded in doing.

Misrepresentation in settlements

The High Court found that EDS acted deceitfully in making dishonest representations by its head of practice, Joe Galloway, falsely claiming during the tender process that EDS had carried out a proper analysis as to the amount of time needed to complete the project (nine months), which had induced Sky to contract with EDS in preference to other bidders.

The court also found that EDS made further negligent misrepresentations during the run of the project which induced Sky, in the course of the project, to enter into an agreement to amend the contract (the letter of agreement). The letter of agreement reflected a settlement of certain existing claims, agreed extensions to the original project timetable and provided that Sky would not recover certain costs. Sky said that representations made by EDS in relation to progress to date, resources, planning and cost, leading to the agreement reflected in the letter of agreement were crucial in its decision as to whether to terminate or continue with the agreement and enter into the letter of agreement.

In essence, the judge found that:

• EDS had made a negligent misrepresentation (namely, that it had developed an achievable plan after proper analysis and re-planning) before entering into the letter of agreement.
• It was a material misrepresentation.
• EDS intended Sky to rely on it.
• Sky did rely on it in entering into the letter of agreement.

Sky's other allegations of negligent misrepresentation failed on the basis of findings of fact that they did not amount to representations on which Sky relied.

EDS was therefore liable in damages for negligent misrepresentation in relation to the letter of agreement and so what the parties thought had been settled by agreement was not settled.

Checklist for successful settlements

• It may seem obvious, but the first point to make is that a settlement agreement or an agreement to vary existing contractual relationships is just as much a contract as the underlying contract under which it seeks to settle claims or which it seeks to vary. Therefore, the same potential remedies apply. This is so even where the settlement agreement is, for example, recorded in a Tomlin order or a consent award in existing litigation or arbitration or in an agreement coming out of a successful mediation (see below "Tomlin orders").
• Treat the drafting of a settlement or variation agreement as carefully as the original contract. There is a danger it becomes a Cinderella in the energy stream of negotiating a deal and moving on.
• Have an entire agreement clause. No doubt the factual scenarios fuelling a successful attack on a settlement agreement as a result of misrepresentation will not be common. But EDS shows just what can happen when sales or operational exuberance run unchecked; and shows how much money (and reputational damage) can be at stake.

  It is a regular occurrence, and not just in IT procurement contracts, that claims and counterclaims arising during a long and complex project are negotiated and settled in return for benefits or concessions elsewhere, such as changes in specification or extensions of time, or in order to avert a termination.

  Such agreements are regularly reflected in an exchange of commercial correspondence arising out of a series of negotiations; the parties do not necessarily reach for their lawyers to do the drafting, and an entire agreement clause can seem out of place in a commercial letter.

  It is clear that entire agreement clauses in such agreements are effective if properly and fully drafted; they need to use very clear words if they are to be successful in excluding liability for pre-contractual representations. EDS demonstrates how strictly these clauses will be interpreted and any ambiguity will be construed under the contra proferentem rule (in other words, where there is doubt about the meaning of a contract, the words will be construed against the person who put them forward).

  There is, of course, a practical negotiating point here; normally, the more the draftsman seeks to exclude liability the more concerned the other party may become that there is an attempt to disguise or mislead. The draftsman should make it clear whether the settlement relates to both contractual and non-contractual claims (depending on the facts of the case and the possible causes of action which are to be settled).

• On the basis of prevention being better than a cure, avoid making optimistic statements in negotiations which can be capable of being representations. Easier said than done, of course, when a party is trying to negotiate out of a difficult contractual situation to the blue waters of new or refreshed contractual obligations to keep the project live.

Tomlin orders

A Tomlin order is a type of consent order. It states that the parties have agreed terms of settlement, and orders that all further proceedings are stayed but the parties are entitled to apply to court to enforce the agreed terms, should that become necessary, without having to commence new proceedings. A Tomlin order does not entitle the parties to seek an order that the action should proceed to trial. So, if the parties wish to have this option, they will need to include the right to restore proceedings, or to sign judgment if specified conditions are not met, within the agreed terms.

For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Redding on +44 (0)121 685 2708 or Rebecca Lum on +44 (0)121 260 9973

This published article may contain information of general interest about current legal issues, but does not give legal advice.