Thinking about settling out of court? Key settlement strategies and terms you need to be aware of

Insight

Published

15 November 2022

Guest article written by Ryan Colgan, Claims Executive, Professional Indemnity, currently on secondment to Howden from RPC

Having a claim made against your firm is never a nice feeling, but unfortunately it can happen. Dealing with a claim, often in conjunction with your insurers, can sometimes be upsetting and confusing, particularly if you have no or limited experience with litigation.

There can be times when there are risks on liability, which mean that settlement of the claim is necessary, and your insurers (or their representatives) will ask you for your instructions on a particular settlement strategy. However, what are the different options available and what do they all mean?

Why claims are settled instead of going to court?

Whilst litigation can be required to settle a dispute, it can also be a costly and time consuming process. It is therefore important for you to consider whether to engage in Alternate Dispute Resolution (ADR). This is actively encouraged by the Civil Procedure Rules (CPR)[1] with the pre-action protocol directing that litigation should only be used as a last resort[2]. The CPR also includes various cost penalties if you fail to engage with attempts to settle claims.

5 potential advantages of attempting to settle a claim

  1. Costs - Settling claims can provide a faster resolution to a dispute and by avoiding court proceedings you can reduce legal costs and free up time that you may have needed to allocate to resolving the dispute.
  2. Communication - When you experience a deadlock, settlement discussions can open up lines of communication and narrow down the issues in dispute. Settlement discussions can also be kept privileged, which prevents exchanges from being referred to in future litigation.
  3. Preserve Business Relationships - Settling claims can reduce the risk of escalating a conflict and help you preserve your business relationships.
  4. Confidentiality - You can keep the discussions and terms relating to any settlement agreement confidential so that any commercially sensitive information remains private.
  5. Control - You can retain control over the process and it can be flexible to meet your needs.

    Three common methods of settling disputes you need to be aware of

    1. "The Part 36 Offer"

    art 36 of the CPR contains a set of rules for settlement offers designed to encourage parties to settle by setting out the cost consequences of accepting or rejecting offers. A Part 36 Offer can be made by either party in a dispute and at any time during proceedings, though it must:

    • be in writing;
    • be clear that the offer has been made pursuant to Part 36 of the CPR;
    • specify a period of not less than 21 days within which the Defendant will be liable for the Claimant’s costs if the offer is accepted (this is called “the Relevant Period”);
    • state whether it relates to the whole claim or part of the claim; and
    • state whether the offer takes into account any counterclaim.[3]

    A Part 36 Offer will remain open for acceptance by the opposing party until the start of the trial, unless the offer is expressly withdrawn in writing[4]. It is therefore important to maintain a watching brief over any Part 36 Offers and to be ready to withdraw an offer if new details are revealed that change the circumstances. If insurers have appointed representatives to deal with the claim on your behalf, they will keep an eye on this.

    Cost consequences of a Part 36 offer

    A Part 36 Offer is made ‘without prejudice save as to costs’[5]. It is therefore recommended you review the various cost consequences of Part 36 offers outlined in the CPR in the link at the end of this section, however some key points to be aware of include:

    • Accepting the Offer - The Claimant can be entitled to any costs incurred up to the end of the relevant period[6].
    • Declining Defendant’s Part 36 Offer – If the Claimant fails to obtain a more advantageous offer, the Claimant will be liable for the Defendant’s costs from the expiry of the relevant period and interest on those costs.
    • Declining the Claimant’s Part 36 Offer – If the judgment is at least as advantageous as the Claimant’s offer, the Claimant will be entitled to costs on an indemnity basis[7], interest on these costs, interest on the sum awarded and an additional amount of up to £75,000[8].

    To view the full range of potential costs consequences, along with the procedure for withdrawing and accepting offers, Part 36 of the CPR can be accessed here: https://www.justice.gov.uk/courts/procedure-rules/civil/rules/part36

    2. "The Calderbank Offer"

    Calderbank Offer is also a ‘without prejudice save as to costs’ offer to settle all or part of a claim. However it is not as restricted by the CPR, giving parties greater discretion in forming their offers, including:

    • You have the discretion to decide whether the offer will be time-limited or open-ended (if the offer is open-ended you should ensure it is kept under review).
    • Unlike Part 36 Offers, Calderbank Offers can be applied in the small claims track and arbitration.
    • You can agree costs as part of the settlement. Parties are also free to pick the form of the payment and how the payment should be made.

    However one potential downside of a Calderbank Offer is it can create uncertainty for both parties if the issue of costs is not included as part of the agreement. This is because the courts will have discretion on how much weight should be applied to accepting or rejecting an offer. Some relevant factors that the court may consider to determine costs include whether the offeree made a genuine attempt to compromise, the prospects of success at the time the offer was made and at what stage the offer was made during proceedings. But the courts will retain the ability to place weight on whichever factors they consider relevant based on the conduct of the parties. This can create uncertainty over costs if these are not dealt with as part of the settlement agreement.

    3. Mediation

    ediation is a flexible, voluntary and confidential form of ADR where a neutral third party will assist in working towards a negotiated settlement. This can allow you to retain control of the decision whether or not to settle and on what terms.

    You can engage in mediation at any time during the litigation process, however the timing of mediation is essential to secure the best chance of achieving a cost-effective outcome. This will differ with each case, though generally if the issues are properly defined and there has been a proper exchange of information it can be helpful to mediate before proceedings are issued to reduce costs. You should also avoid unreasonably refusing to engage with an honest offer to mediate as a failure to do so could lead to the court making an adverse costs order against you.

    The process of mediation is also flexible and can be changed according to your needs. Some helpful steps that your appointed representatives can take in preparing for mediation include:

    • Preparing a risk assessment;
    • Liaising with your mediator and opponent to plan the agenda;
    • Agreeing the extent of disclosure required;
    • Preparing a case summary and supporting documents as agreed; and
    • Developing strategies for discussions.

    During the mediation session, discussions are facilitated and guided by the mediator to open the way for one or both parties to put forward proposals for settling the dispute. The discussion and offers can continue until such time as common ground is reached and a settlement achieved.  

    However one drawback of mediation is that in the event that a mediator is unable to achieve a settlement, the process can add additional time and costs to the final resolution of your dispute. Additionally, mediation can risk exposing your strategy for proceedings which might impact your later position in litigation.

    Other methods available for settling claims

    • Cost Inclusive Offers – If you make an offer costs inclusive, the offer is intended to settle both the claim and any costs the offeree may have incurred in bringing their claim. This can be helpful as you can avoid having to deal with the issue of costs as a separate dispute.  
    • Negotiation – Involves the parties attempting to reach an agreement without the assistance of a third party. This is the most flexible and informal form of ADR and can be helpful to engage in at an early stage of the claim.
    • Arbitration - Arbitration is a private forum where an independent arbitrator makes an award to finalise the dispute. It functions similarly to litigation as the outcome is final and binding on the parties.  The arbitrator focuses on the issues, of either fact or law, as presented by the parties.
    • Adjudication - An adjudicator usually provides a decision on disputes as they arise during the course of a contract. Typically, the decision of an adjudicator has interim binding effect.
    • Blind Bidding Settlement – In a single day a neutral person, normally a mediator, receives three bids from each party on their offer to settle a dispute. The neutral party then reports whether there is a match, an overlap or a gap. This system can be considered at any time during a dispute, including being used before mediation to gauge whether the parties are close to, or can reach settlement, prior to a matter escalating to the next stage.
    • Early Neutral Evaluation – Parties will appoint an independent third party (likely a judge or Kings Counsel) to hear each party’s submission and advise on what the likely outcome of the trial will be. This is without prejudice and has no binding effect.
    • Expert Determination – An expert is appointed by the parties to determine an issue, usually of a technical nature. As an expert’s decision is an evaluation, this approach is treated as having different legal characteristics to an arbitration award. The expert’s decision is normally binding on the parties.

    Do you have questions? Howden is ready to help

    We hope this article has helped to outline the different settlement methods that are available.

    If you want to consider these options in greater detail, always remember that Howden and your insurers (and/or representative appointed by insurers) are happy to help to engage in further discussion with you. We have a great deal of experience in assisting our clients in engaging with different types of settlement options and can help you decide the best strategy for your situation.

    Please do not hesitate to contact your designated claims advocate at Howden at any time.  

     

    [1] The CPR is the procedural code which has an overriding aim to enable the courts of England and Wales to deal with cases justly.

    [2] Art.8 of the Pre-Action Protocol

    [3] Part 36.5 (1) (a) – (e) of the CPR

    [4] Part 36.9 (2) of the CPR

    [5] This means the offer or correspondence cannot be shown to or be considered by the court until they have delivered a final decision on the main issue in dispute. However, as indicated by the fact that this is ‘save as to costs’, the court can consider the offers when determining costs.

    [6] Part 36.13 (1) of the CPR

    [7] Normally costs are assessed on a standard basis, meaning the claimed costs need to be both proportionate and reasonable. When costs are assessed on an indemnity basis, the claimed costs only need to be reasonable and the onus will be on the paying party to demonstrate that the costs are unreasonable.

    [8] Part 36.17 (4) of the CPR