Settle Down! Then write it down … clearly!
Parenting provides an excellent education in mediation over disputes such as:
- whether to play cricket or football;
- who gets the biggest strawberry; and
- whether Harry Potter or Beaver Towers is played in the car.
If the resolution is implemented immediately, that’s it, done. Complications arise when one party must wait until tomorrow to receive its part of the deal. Things can change overnight! Mum may forget which story to play; the child desperate to play cricket on Saturday may wake up on Sunday deciding the rugby season has started (and that was never part of the deal); the strawberry may have been eaten by an innocent third party. How can such risks be managed? Post-its on the fridge and mobile phone reminders are handy at home and, unsurprisingly, a written document (in a more formal medium) is essential for recording commercial deals too.
You know that already. The point to emphasise is that the written record needs to capture the deal accurately. When it comes to settlements we are seeing a trend in recording (let’s call them) “heads of agreement” only and either leaving it at that or drafting a formal document later. Why? The parties thought that was enough, they had an understanding, the deal had to be done that day and they could “paper” it later if necessary.
The trouble is this can leave a lot unaddressed and open to debate. Do the heads of agreement constitute a binding contract or an unenforceable gentlemen’s agreement? Either way, is there enough detail around each head to ensure they are properly understood? The fallout of hasty, unclear “line in the sand” agreements hits our desks quite often. Classic examples are disputes arising out of references to superseded or inconsistent programmes, unclear scopes of work or changes to contract terms that have implications not properly thought through.
A recent case in the Family Court (but relevant to all settlements) highlighted the risks. In Abberley v Abberley 2019 a family fell out over a division of land and assets. The long-running saga ended in a successful mediation. A deal was done and typed up, but IT problems caused the draft to be lost. The lawyers then prepared, and signed, a handwritten note of recording heads of agreement.
" Well, recommending a full-blown settlement agreement with every “t” crossed and “i” dotted is one thing, but what can parties do in practice to capture full and clear settlement terms when they are short of time, under pressure and without all the answers? "
Seven years later the Abberleys came to blows again, over whether the signed note was binding. The Judge decided it was. Key principles arising from his judgment are these.
- RTS v Molkerei Alois Muller GmbH 2010 provides the starting point for analysis. Whether there is a contract and on what terms “depends not upon [the parties’] subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential”. The court will look at the facts objectively to ascertain whether there was an agreement on essential terms and an intention to be legally bound. That means the heads of agreement may be a contract even if they do not spell out all the little details, provided the parties did not see those details as essential to the done deal.
- If heads of agreement do expressly envisage a more formal document being drafted, then it will be a matter of construction as to whether they stand as a contract in their own right or whether the formal document is required before there is a binding agreement.
- The Abberley heads of agreement did not refer to any future or formal agreement, which the Judge took as an indication that the parties had not intended there to be one.
- Efforts to draw up a formal settlement agreement later do not necessarily mean that the original document is not binding.
- Intention is crucial. In Abberley the Judge rejected an argument that the parties did not intend the heads of agreement to be binding because they were prepared in the context of a mediation aimed at settlement, where there was a signed mediation agreement requiring any deal to be recorded in writing before it could take effect and a signed set of compromise terms.
- Certainty is another essential component of a contract. It is very difficult to convince a Judge that there is a lack of certainty. In Abberley, the Judge felt that the terms were clear enough to be understood, especially in the context of documents referred to and shared during the mediation. Following Wells v Devani citing G Samuel & Nephew Ltd v HC and JG Ouston 1941, he said that the court “will not be deterred by mere difficulties of interpretation” and, although there may be occasion when the words used “fail to evince any definite meaning on which the court can safely act”, “[s]uch a position is not often found”.
The result was that a scrappy, but signed, handwritten note of key terms formed a contract even though it did not cover everything, the party relying on it had tried to draw up something more formal and the Judge had to refer back to documents shared over 7 years earlier to make sense of it. The Abberleys (or their lawyers) could have made it clearer.
Well, recommending a full-blown settlement agreement with every “t” crossed and “i” dotted is one thing, but what can parties do in practice to capture full and clear settlement terms when they are short of time, under pressure and without all the answers? Ideally, slow down, but if that is not possible try:
- Keeping template settlement agreements in your armoury. A full-blown one containing all the clauses that the most cautious lawyer would recommend (for the most difficult matters and as a precedent bank) and a short simple letter for minor spats or when a gentle tone is needed.
- Taking a draft into a settlement discussion or mediation. The head start will be appreciated when a deal is done at midnight!
- Thinking through how each term will work in practice. Take payment for example: it is usual to agree who is to pay and how much, but also when and how payment is to be made, plus interest.
- If there is no chance of completing an agreement on the day, still record heads of agreement but decide and specify whether some or all are intended to be binding.
If you intend to replace the heads of agreement with a formal contract, get on with it ASAP.
Ultimately, the message is the usual one – record your agreement as clearly and as soon as possible. Otherwise, parties may change their minds, the agreement may be unclear and a Judge might decide that the heads of agreement have a meaning and status you had not intended. (She says, scribbling on a post-it something about playing Harry Potter in the car … tomorrow … for at least 15 minutes…. That covers it, right?)