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Mediation Settlement Agreements

Who should draw up a settlement agreement and what terms should it contain? Parties advising litigants need to take care, particularly if the settlement involves property and/or shares, because of the formalities required for transfer and the potential tax implications.  The mediator also needs to be aware if they help the parties to draw up the agreement, because they may assume responsibility for it.

This issue was highlighted in David Frost v Wake Smith & Tofields Solicitors.  At the end of the mediation the parties signed an agreement which laid out the basis of a resolution. The dispute concerned various properties.  One of the problems was ownership of the properties and the failure of the agreement to comply with the  requirements of the Law of Property (Miscellaneous Provisions) Act 1989.

One party was advised the agreement was unenforceable because of its vagueness and the fact that it purported to deal with the interests of third parties who were not signatories.  A further mediation followed at which a second detailed and binding settlement agreement was drawn up, but there were still uncertainties regarding tax implications. The Court found  the mediation had resulted in an agreement in principle which was not, without more, sufficiently certain and complete in its terms to be legally enforceable.  Essentially, the parties had not in fact settled the case.

In the Court of Appeal, Tomlinson LJ said

“this unhappy story ultimately bears testimony to the ability of a skilled mediator to resolve even the most apparently intractable dispute attended by the inevitable animosity of a fractured family relationship.”

He found that the failure to achieve finality at the first mediation was inevitable. Such an obligation would have been “impossible” to perform. It was impossible from the outset, because the solicitor could not know how the mediation would develop. It was impossible at the conclusion, because matters had not developed to a point at which the parties had achieved a final agreement. It was not in the solicitor’s power to fill in the gaps.

The Court also considered the suggestion that the judge should have found the Solicitor negligent in failing to warn  his client that the outcome of the first mediation was not a final and binding agreement.  This was an issue which had not been dealt with at the original trial and the claimant had not come to trial prepared to demonstrate what he would have done had appropriate advice been either necessary or given.

The Court found that there was no absolute duty to ensure that the settlement was legally enforceable, but if the case had been put differently the Claimant might have succeeded if there had been a failure to warn the client about the unenforceability issue.

It was a surprising decision, because in any other transaction, a Solicitor is often held responsible if a drafting error leads to foreseeable problems further down the line, albeit the difference in this case is that the Court found that no binding agreement had in fact been reached.

This case highlights the importance of taking care when drafting the settlement agreement and advising the client about its enforceability.  There is a risk of a claim if the settlement agreement is negligently drafted (where finality was a possibility), and as a result the settlement agreement is unenforceable.   Mediators and representatives need to make sure that they do not give any guarantees about the settlement agreement and that it does not contain errors, particularly if they are legally qualified and assist in drafting it.  The client also has to be advised at the conclusion of the mediation whether a binding agreement has been reached, or there are loose ends which need tying up.  What the Court will not do is to interfere in the mediation process and make it an obligation to reach a binding agreement.