The importance of binding settlement agreements in commercial disputes

When a commercial dispute arises, the parties will be encouraged by their lawyers and the Court to reach a mutually acceptable compromise of that dispute. Such a settlement is no less final and binding than if the parties had asked the Court to determine the dispute for them, unless the terms of the compromise are unrecorded, unclear or ambiguous (or the settlement is deliberately partial or conditional).

Accordingly, when a dispute is being compromised on mutually agreed terms, those terms ought to be recorded clearly in a legally binding settlement agreement.

What is a settlement agreement?

A settlement agreement is simply a contract between the parties to the dispute which sets out how the parties have agreed the dispute is to be resolved. Often the resolution of the dispute will be achieved by one party paying a sum of money to the other. There are other important considerations which need to be addressed when compromising a claim and negotiating a settlement agreement. Some of these are set out below.

Effect of a compromise

When parties reach a 'full and final settlement' of their dispute, it puts an end to that dispute (unless the parties have expressly agreed that the dispute can be resurrected in certain circumstances) and it is agreed that any legal proceedings which have been commenced in relation to the dispute will not proceed any further.

Generally, the parties will not be able to start a new legal action relating to the dispute. This principle applies regardless of whether legal proceedings were actually commenced in relation to the dispute and whether or not the settlement is embodied in an order or judgment of the Court.

Key considerations

It is important that the settlement agreement is drafted carefully to ensure that it reflects what was actually agreed. Some of the key considerations when negotiating and drafting settlement agreements are as follows:

  • Ensure that the party you are settling with is the party to the dispute. Usually the parties to a dispute are clear but if there is any uncertainty then this should be resolved before signing on the dotted line
  • The obligation for payment of any money should be clear and a time limit for payment should be expressed. There is little value in agreeing to compromise a dispute if the agreement put in place lacks clarity around the payment obligations. This is particularly the case if payment is being made in instalments or coming from a third party
  • The involvement of third party payers in the compromise of disputes is an important issue in itself. Sometimes insurance companies or other counterparties will be the paying party even if they are not a party to the dispute. In this instance, it is important to consider whether the paying party needs to be tied into the settlement agreement or whether it is sufficient to bind only your opponent in the dispute
  • The parties to the dispute should ensure that they have embodied in the agreement a settlement of all of the issues that it was intended to settle. This may require a statement that all and any claims between the parties are resolved by virtue of the agreement, or it may require wording to ensure that only some aspects of a particular dispute are resolved if that is the intention of the parties. The settlement agreement must accurately reflect what the parties actually intended in order to avoid any issues later on
  • Consideration should be given as to whether the terms of the settlement should be confidential

When is a settlement binding?

Negotiations between the parties as to the wording of the settlement agreement can become extended and heated. Usually, the settlement is only considered to be finalised, and binding, when the settlement agreement is signed. However, that is not always the position. In the recent case of Bieber and others v Teathers Limited (in liquidation) (2014) a dispute arose between the parties and settlement negotiations began in an effort to resolve the issues. Emails were exchanged proposing and agreeing settlement terms and, at that point, the defendant presented the claimant with a settlement agreement for signature.

The claimant refused to sign the agreement on the basis that a binding agreement had already been reached by way of email exchange. It argued that in those emails an offer was made and that offer accepted, thereby concluding a binding agreement. The defendant disagreed and asked the Court to determine the issue. The Court agreed that a binding agreement had been reached by virtue of the email exchange and that it was too late for the defendant to seek to put in place a settlement agreement. The formal draft agreement contained additional terms which the parties had not discussed during the negotiations and it was too late to impose these once an agreement had been reached.

This case serves as a warning to parties to ensure that the negotiations are undertaken subject to the terms of a settlement agreement to be agreed. The issue in the above case could have been avoided by marking all correspondence in respect of the negotiations 'subject to contract' (that contract being the settlement agreement that the parties would ultimately sign).


Resolving a dispute through settlement negotiations is often the swiftest and most effective way to bring that dispute to an end.  All parties to a dispute are expected to actively explore settlement options throughout the course of litigation.

However, care should be taken when engaging in negotiations to ensure that the resolution is the one which was intended. Reaching an agreement without entering into a written settlement agreement may mean that important issues relating to the resolution are overlooked or, in a worst case scenario, that you are left with an outcome that you did not intend.

For advice or guidance, please contact me on +44 (0)1752 675078 or email [email protected]