How to formalise an agreement made at mediation

A binding settlement will only arise at mediation if the parties reach mutually agreed terms. Usually, a settlement is negotiated in two parts: first, the commercial terms of a deal, and then secondly, the legal terms and conditions that formalise the commercial bargain reached into a binding settlement contract.

Documenting a settlement

In our experience, it is almost always desirable to deal with the negotiations for the legal terms and conditions that will formalise the settlement on the day of the mediation itself, whilst the parties are together and the commercial parameters are fresh in their minds. The legal negotiations will invariably call for a review and potentially a renegotiation of aspects of the commercial terms, but committing to deal with the process there and then provides the best chance of concluding an agreement on the day, and avoiding the risk of the parties changing their mind about the commercial settlement parameters.

In fact, in appropriate cases, it can help to address at an early stage, what a final settlement might look like, to ensure that all relevant issues are captured. Even if there is little substantive agreement between the parties as to how those issues might be determined at the outset, tabling them early can help in the long run.

This could even include preparing and circulating a draft settlement contract to the other parties, and to the mediator, in advance of the mediation, even if it is only a framework of key terms. This can help to ensure that all material issues are covered, nothing is omitted on the day of the mediation and will help to guide the parties in discussion during the mediation. It can also assist the parties in crystallising what they are seeking from the mediation.

This approach also gives the mediator a chance to consider the possible structure of a settlement, and help with any drafting negotiations that may be creating an obstacle to concluding a deal on the day of the mediation.

Settlement by exchange of letters or emails

Sometimes the parties are not able to come to a settlement during the mediation, but may subsequently reach an agreement through further discussion. Care needs to be taken, however, as contracts can be formed by letter, or during telephone and video calls and so it is advisable for subsequent negotiations to take place on a “subject to contract” basis, so that no settlement is inadvertently concluded until a contract is agreed and signed, to make sure that all of the required terms and conditions are incorporated.

Contents of the settlement contract

The terms and conditions required will need to reflect what has been agreed from a commercial perspective, and effectively compromise the dispute or litigation to which it relates. However, there are other important factors to consider to ensure, so far as is possible, nothing is open to interpretation and the risk of satellite disputes arising in the future is eliminated. This might encompass:

1. Precisely what have the parties agreed to settle. Is this only the current claims in dispute, part of them, or does the settlement extend to any future or unknown claims which may arise out of the subject matter or facts of the current dispute? The scope needs to be carefully spelt out.
2. Ensuring that the settlement contract binds all of the relevant parties (this may be highly relevant where subsidiaries or groups are concerned). In a multi-party mediation it may be the parties are all bound by different terms reflecting various agreements reached during the mediation.
3. What are the payment arrangements. Make sure the amounts, timings and mechanics for payment are specified. If you are the party making the payments ensure that these are suitable for your circumstances and can be adhered to.
4. Do you want the settlement contract to be conditional or unconditional. This usually depends on what the parties’ end goals are. You (or the other party) may wish to preserve the right to revive the underling and settled dispute if the settlement terms are not complied with. Alternatively it may be preferable to limit a party’s right to enforce the settlement terms, rather than revive the underlying dispute.
5. What are the other consequences of non-compliance with the settlement terms. for example, will default interest apply, accelerated payment obligations, security, guarantees or indemnities be provided, or expedited enforcement options?
6. The parties will likely have incurred legal costs up to this point, including the costs of the mediation itself. The settlement agreement should document who is to cover these costs. Parties can agree to structure this however they would like.
7. The other boilerplate clauses that may be relevant to the agreement, such as:

a) Warranties of authority, where each party signing provides a warranty that they are authorised to do on behalf of the respective party to the contract;

b) Cooperation clauses where the parties agree to cooperate in good faith to effectuate the settlement and the contract; and

c) provisions dealing with confidentiality, including whether parties can disclose the existence of a settlement contract and / or any terms of the contract and if so, to whom.

Disposing of proceedings

It is also important to ensure that any existing legal proceedings are properly disposed of if a settlement has been reached. There are different ways to do this, each of which will be appropriate in different circumstances.

One way is for the parties to agree to apply to the court for an order by consent dismissing the proceedings, which brings them to a final conclusion. Therefore, if it became necessary to enforce the settlement agreement completely new proceedings would need to be commenced.

Another common option is for there to be a permanent stay (i.e. a suspension) of proceedings on the terms of the settlement contract. This normally achieved by the parties applying to the court for type of court order known as a “Tomlin Order”. It allows the parties to revive and restart the proceedings for the purpose of enforcing the settlement contract if the terms are breached, therefore eliminating the cost and delay of bringing completely new proceedings.

However, there may be other options to consider. For example, if the settlement is simply payment of a sum of money, a consent order recording the important terms in the body of the order may be appropriate. If the terms of settlement are complex and go beyond the boundaries of the claim or what the court has jurisdiction to order, or are confidential or sensitive, a Tomlin order may be the only viable option. It is worth noting that the settlement terms / contract will not be set out in the order itself, which is a public document, but instead will be in a document annexed to the order and so can remain confidential to the parties.

Our Dispute Resolution team has a wealth of experience in advising clients on formalising a settlement. Please get in touch if you have any questions about the points raised in this article.