When Is A Settlement Not A Settlement?

• Published date: 20 November 2023
• Subject Matter: Litigation, Mediation & Arbitration, Trials & Appeals & Compensation, Personal Injury
• Law Firm: Deka Chambers
• Author: Ms Linda Nelson

The application of contractual principles to settlement offers

What can temper the gratification of finally settling a case? Perhaps only the realisation that the settlement terms are not what you thought they were. Two examples of mistakes being made in the settlement process have recently come to my attention and so this seems to be an opportune moment to review the role that mistake and other contractual principles play when considering agreements to compromise a claim.

The first example was an accident at work claim. In the course of the litigation the defendant made an early Part 36 offer of '25,000 in full and final settlement, which the claimant rejected. Medical evidence was obtained and two years later the claimant sent a letter making a Calderbank offer to settle for '25,000. The defendant accepted with alacrity and sent a cheque the very next day. On receipt of the cheque the claimant's solicitor felt that sinking feeling: he checked his offer letter and realised that he had not in fact offered '250,000 as had been intended. He returned the cheque enclosed with a letter explaining the mistake (a missing zero). The defendant's solicitor resent the cheque and insisted that the claim had been compromised. The claimant was forced to issue an application for determination of the matter.

The second example was a road traffic accident case. The defendant made a Part 36 offer of '1,000 plus costs which the claimant rejected. The defendant then made a global offer of '5,000 including costs (an offer that, with insurance premiums to be paid, would leave the claimant with nothing by way of damages). The claimant's solicitors unfortunately did not notice that the offer was expressed to be inclusive of costs and wrote to accept the offer, stating: 'We accept your offer. We will obtain details of our costs and send a breakdown to you in due course'. When the defendant responded to highlight that the offer was costs inclusive, the claimant's solicitor immediately confirmed by return that a mistake had been made and said the offer was not therefore accepted. The defendant insisted that the offer had been accepted and that the matter was therefore subject to a binding compromise agreement.

Applicable contractual doctrines

Common law provides that where there is a mutual mistake or mutual misunderstanding as to the terms of a contract, the contract will be regarded as void ab initio. That principle was of no assistance to the claimant's solicitors in the above cases however, as in each case the defendant expressed the view that there had been no misunderstanding on their part.

Although it will usually be clear when agreement as to settlement has been reached, in some instances it is difficult to ascertain whether the parties' negotiations have in fact crystallised into a contractually binding agreement. The general principle is (per Lord Clarke in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG¹) that one must be able to identify a definite offer by one party and a definite acceptance of that offer by the other party:

"It depends not upon their subjective state of mind, but upon a...