Difficult economic times inevitably result in two (connected) things: (1) disputes arising between businesses and (2) businesses being disinclined to resolve disputes to avoid throwing good money after bad.
The popular (and often accurate) perception about court litigation is that it is time consuming, stressful, costly and risky.
But litigation is not the only option to resolve a dispute. In fact, only around 10% of disputes end up at trial. So when faced with a dispute, think commercially and practical. You don’t want to be throwing good money after bad. Especially in hard times.
Lets imagine the following situation. The principal, P, has contracted with an individual to act as its agent, A. P opts to terminate the Agency Agreement with A without notice because it considers A has breached the Agency Agreement for failure to follow P’s reasonable instructions.
A threatens to bring a claim against P for unpaid commission and compensation under the Agency Agreement.
P receives the letter of complaint from A. What is its (or what should be its) first thoughts?
- Ignore the letter completely
- Respond to the letter: fight back by denying the allegations.
- Make an offer of settlement
The route chosen depends on the ultimatum. Route one is the most attractive option: however, doing nothing rarely makes the problem go away. In fact, as with everything in life, the longer you ignore it the worse it may get.
The upside is: your testing how serious A really is about pursuing his claim. He may not have the strength (or ultimately) the cash, to afford a fight.
The downside is that if A is serious about his complaint and has no intention to drop it, a defensive response could lead to A commencing court proceedings. Costs for both parties will inevitably escalate.
P could just pay up. Or it could propose an offer of settlement. From experience, silly offers do not make people go away. If P chooses to make an offer to settle, this is known as a pre-action settlement. The same methods of settlement discussed below can be used here.
The downside: P does not yet know how serious A is about pursuing the claim. Also, P may have suffered its own losses as a result of A’s failings to follow reasonable instructions. Therefore, P may have its own claims its wishes to bring against A – settling at this early stage may have the effect of compromising P’s own claims.
THE DISPUTE DOESN’T SETTLE – A FILES A CLAIM AT COURT
Both P and A need to think about the following:
- How much is this going to cost you?
- How strong is your claim?
- How strong is the other party’s claim?
- Is the financial loss of the commercial relationship going to outweigh any potential gain from the outcome of proceedings (on the assumption you win)?
Either party is likely to stumble at one or more of these hurdles. But these are the essential elements every party needs to weigh up when embarking on litigation. The question is for both P and A, how far are you prepared to go before the cost and time spent on litigation starts to outweigh the ultimate goal? Parties should always be giving thought to alternative ways to resolve this dispute.
WHY SHOULD WE SETTLE?
There are various advantages of settlement for both P and A:
- Settlement creates certainty as to the conclusion of the dispute. As opposed to litigation where appeals can be made, should one of the parties contest the outcome of the trial once a matter is seemingly settled.
- Think about resources. If either A or P (or both) have limited resources, then it suits them to settle early. If P has the resources and A hasn’t, P needs to be alert to this, because if P were to succeed at court, it may be useless if A has no funds to pay P’s costs.
- If your case is weaker than the other party’s, this is often a good incentive to settle.
- Settlement saves management time being spent on the litigation rather than the business: this can apply to both P as well as A. The more time and money they are spending on the litigation, the less time is being dedicated to growing and improving the business, which in today’s climate, should be a priority.
- Litigation is public. It can therefore attract negative attention, potentially causing damage to reputation. P does not want any other agents jumping on the A’s bandwagon and A does not want to burn bridges with other principals whether current or future – principals, are likely to be hesitant in contracting with an agent that they think may sue them should the relationship go sour.
LITIGATION HAS COMMENCED: WHEN IS THE BEST TIME TO MAKE AN OFFER TO SETTLE?
There is no right or wrong time at which to attempt to settle.
Business needs aside, parties will often wait until the exchange of evidence (that is, disclosure and even witness statements) before considering whether to settle. This way, the parties are able to better assess the strengths of the opposition’s case, and in doing so can identify the weaknesses in their own cases.
Tactically, A and P may prefer to wait until disclosure (the exchange of documentary evidence), to see whether the other party has the evidence to back up its case. If it looks like P’s case is stronger than A first thought, he may decide to cut his losses and propose an offer to settle the dispute – to avoid the (now increased) risk of losing at trial. The same point applies vice versa.
Just because settlement discussions get underway, does not necessarily mean they will be successful and you may still find yourself in court.
HOW TO SETTLE
There are a number of different ways that A or P could use to try and settle the dispute, but at the same time protect their position, should negotiations fail.
Without Prejudice negotiations
Without prejudice negotiations are held to be privileged subject to certain exceptions, which means that they will not be admissible as evidence against the other party. It enables the parties to be able to speak freely without the fear of thinking that statements they make may later be held against them.
Make sure you head the correspondence with the words “without prejudice” to ensure that no mistake is made as to the meaning behind the correspondence. But bear in mind that these words alone will not necessarily amount to a without prejudice correspondence – it must be the intention of the parties to enter into without prejudice communications.
Part 36 offers
‘Part 36 offers’ provide cost protection to the party making the offer, should the offeree unreasonably refuse to accept the offer, and then fail to beat the offer at trial.
Part 36 offer made by the claimant, A
A part 36 offer made by A must specify a period of 21 days within which P will be liable for A’s costs if the offer is accepted. Unless A decides to withdraw the offer, it will remain open for P to accept at any time.
If P accepts the offer, it is liable for A’s costs up to the date of acceptance. However, should P reject or simply not respond to the offer, and A then goes on to obtain a judgment that is equal to or more advantageous to the offer, then P will have to pay whatever the court awards A as well as interest on the award from the date of expiry of the relevant period, as well as A’s legal costs incurred after the expiry of the relevant period plus interest.
Should A win at trial but the judgment is less favourable than A’s part 36 offer, P will be ordered to pay A’s legal costs in the normal way (being loser pays winner’s costs, without the interest).
Part 36 offer made by the defendant, P
As the defendant, P can also make an offer to pay A a sum to settle the dispute. A part 36 offer from P also must give a period of 21 days within which P will be liable for A’s costs if the offer is accepted.
If A accepts the offer outside the 21 day period, A will have to pay P’s legal costs from the expiry of the 21 day period up to the date of acceptance.
If the offer is not accepted and A fails to beat the offer at trial, A will be ordered to pay P’s legal costs from the date of expiry of the relevant period to trial, including interest. If A obtains judgment better than the offer, costs will be decided in the usual way.
Both parties control the mediation process and as such, have more control over the outcome. A mediator, who will be a neutral third party appointed by the parties, will assist both parties to negotiate their own settlement, by focusing on their underlying concerns and needs not purely the strengths and weaknesses of the case.
Key points to note about mediation:
- The mediation process is generally non-binding and conducted “without prejudice”.
- The parties must all agree to it in the first place, they cannot be forced to accept any settlement offer and are free to pull out at any time.
- If a settlement is reached, the terms of the settlement must be recorded.
- With the continuing legal uncertainty as to how any compensation payable under the Commercial Agents Regulations should be valued following the House of Lords judgment in Lonsdale, mediation is useful tool for both sides of an agency dispute to reach a settlement to avoid the uncertainty.
A and P have reached a settlement. What should they do now?
The terms of a settlement can be put into a letter.
Or a settlement agreement or a court order, known as a Tomlin Order. The former is common where proceedings have not been commenced, the latter is common when proceedings have been commenced.
The benefit of a Tomlin Order is that, should one party breach the terms of the settlement which the Tomlin Order encompasses, the innocent party can enforce the terms of the Order without having to start a new action.
Effect of settlement
Once P and A have settled, it effectively ends the dispute fully, and therefore generally the parties will then not be able to reopen the dispute.
Breach of settlement agreement?
If the settlement was pre-action and was recorded in a settlement agreement, then the usual course would be an action for breach of contract. This time, there is an sum that the offending party has contractually agreed to pay, in which case the dispute becomes one of debt recovery.
If you are faced with a dispute, think about your options: don’t dive straight into litigation, all guns’ blazing. But at the same time, don’t bury your head, in fear of how much the dispute may cost you.
There are alternative options available.