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The application of contractual principles to settlement offers
What can temper the gratification of finally settling a case? Perhaps only the realisation that the settlement terms are not what you thought they were. Two examples of mistakes being made in the settlement process have recently come to my attention and so this seems to be an opportune moment to review the role that mistake and other contractual principles play when considering agreements to compromise a claim.
The first example was an accident at work claim. In the course of the litigation the defendant made an early Part 36 offer of £25,000 in full and final settlement, which the claimant rejected. Medical evidence was obtained and two years later the claimant sent a letter making a Calderbank offer to settle for £25,000. The defendant accepted with alacrity and sent a cheque the very next day. On receipt of the cheque the claimant’s solicitor felt that sinking feeling: he checked his offer letter and realised that he had not in fact offered £250,000 as had been intended. He returned the cheque enclosed with a letter explaining the mistake (a missing zero). The defendant’s solicitor resent the cheque and insisted that the claim had been compromised. The claimant was forced to issue an application for determination of the matter.
The second example was a road traffic accident case. The defendant made a Part 36 offer of £1,000 plus costs which the claimant rejected. The defendant then made a global offer of £5,000 including costs (an offer that, with insurance premiums to be paid, would leave the claimant with nothing by way of damages). The claimant’s solicitors unfortunately did not notice that the offer was expressed to be inclusive of costs and wrote to accept the offer, stating: ‘We accept your offer. We will obtain details of our costs and send a breakdown to you in due course’. When the defendant responded to highlight that the offer was costs inclusive, the claimant’s solicitor immediately confirmed by return that a mistake had been made and said the offer was not therefore accepted. The defendant insisted that the offer had been accepted and that the matter was therefore subject to a binding compromise agreement.
Applicable contractual doctrines
Common law provides that where there is a mutual mistake or mutual misunderstanding as to the terms of a contract, the contract will be regarded as void ab initio. That principle was of no assistance to the claimant’s solicitors in the above cases however, as in each case the defendant expressed the view that there had been no misunderstanding on their part.
Although it will usually be clear when agreement as to settlement has been reached, in some instances it is difficult to ascertain whether the parties’ negotiations have in fact crystallised into a contractually binding agreement. The general principle is (per Lord Clarke in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG) that one must be able to identify a definite offer by one party and a definite acceptance of that offer by the other party:
“It depends not upon their 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 for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement.”
Where it is objectively apparent that a material term has not been agreed, the court is not likely to find that a concluded agreement has been achieved. In the second case study it would have been arguable that there was no binding agreement because there was no clear agreement as to whether the offer was inclusive or exclusive of the claimant’s costs. Alternatively, the claimant could have relied on the doctrine of unilateral mistake.
Foskett on Compromise states: “Where one party to a compromise is labouring under some misapprehension about its terms that is known to, or has in some way been encouraged by, the other party [my emphasis], it is arguable that there is no genuine agreement between them even though, viewed objectively, it would appear that an agreement has been concluded”. In Wilding v Sanderson the Court of Appeal held that where one party mistakenly thought, in part because of letters written by the other party, that the settlement terms did not involve the payment of interest, the mistake meant there was no real agreement between the parties. It is essential that the other party knew (or ought to have known) of the mistake. In OT Africa Line Ltd v Vicker Plc (where an offer was expressed as £150k rather than US$155k) Mance J refused to set aside the agreement as the offeree was not aware of the mistake and had not shut their eyes to it.
In the first case study above, relevant factors (because they go to whether the defendant was aware, or ought to have been aware of the mistake) were: (a) the claimant had rejected the defendant’s earlier offer of £25,000 and the medical evidence had not led to any decrease in the valuation of the claim; (b) the Schedule of Loss claimed damages of nearly £200,000 and (c) liability was admitted, so the claimant could expect to receive at trial 100% of the valuation of the claim. In the second case study the claimant’s solicitor’s reference to sending a breakdown of costs was clearly incompatible with the offer that was expressed to be inclusive of all costs. In both of the case studies given above the parties ultimately reached agreement (that there was no concluded settlement) before any court hearing was listed and in light of the case law on this point it seems highly likely that the court would have reached the same conclusion.
The two case studies above concerned Calderbank offers. Would the position have been any different had the offers been made under CPR Part 36, or under the Pre Action Protocol for Low Value Personal Injury Claims in RTAs (“the RTA PAP”)?
Application to Part 36 offers
CPR Part 36 is intended to set out a procedure that is complete in itself. CPR Part 36.1(1) provides:
“This Part contains a self-contained procedural code about offers to settle made pursuant to the procedure set out in this Part”
and in the well-known case of Gibbon v Manchester City Council the Court of Appeal held that the Part 36 rules (specifically rule 36.11(2), which provides that a Part 36 offer may be accepted at any time, whether or not the offeree has subsequently made a different offer, unless it has been withdrawn) ousted the common law principle that a counter-offer or rejection of an offer renders the original offer no longer open for acceptance. (The claimant’s rejection of the defendant’s offer of £2,500 did not act as an implied withdrawalof her own £2,500 offer; the language of Part 36 is clear and as by 36.3(7) withdrawal must be by written notice, there is no room for the concept of implied withdrawal).
In Gibbon the Court held:
“Basic concepts of offer and acceptance clearly underpin Part 36…It does not follow, however, that Part 36 should be understood as incorporating all the rules of law governing the formation of contracts…Part 36….is to be read and understood according to its terms without importing other rules derived from the general law, save where that was clearly intended.”
Although Part 36 provides mechanisms for clarifying offers (r36.8) and withdrawing or changing the terms of the offer (r36.9, 36.10), it is silent as to mistake.
In O’Grady v B15 Group Limited Master Thornett held that the common law doctrine of mistake can apply to a Part 36 offer in circumstances where a clear and obvious mistake has been made and this is appreciated by the offeree at the point of acceptance. He observed that the point made in Gibbon is that:
“Part 36 does not incorporate ‘all the rules governing the formation of contracts’ but is nonetheless compatible with them in the absence either of express exclusion, express inclusion or direct contradiction”.
He added further that:
“the Court of Appeal’s acknowledgment of the application of the Overriding Objective to the construction of Part 36 in [Flynn v Scougall] provides yet further illustration that Part 36 is not quite as hermetically sealed a process as the Defendant submits”
and Part 36 is intended to have clear and binding effect “but not at the expense of obvious injustice.”
Application to RTA PAP
The principle objective of Stage 1 of the RTA PAP is to facilitate prompt liability admissions and Stage 2 is described (in the notes to the White Book) as a ‘highly prescriptive’ process focussed on settlement of liability-admitted claims. Is there room in this ‘highly prescriptive’ process for the contractual doctrine of mistake to apply?
There is no binding authority on the point. A number of County Court cases address the topic and hold (perhaps emboldened by Gibbon) that mistake cannot apply to the RTA PAP. For example:
However, since O’Grady, the matter was considered in Doyle v NFU Mutual Insurance Society Ltd. The matter proceeded through stage 1 (where liability was admitted) and to stage 2 of the RTA PAP. In the course of the Stage 2 process the claimant provided the defendant with the requisite Settlement Pack including an offer of £3,900 set out in the table for offers contained in the Pack. The Defendant responded with an offer of £2,600: the offer was set out in the offer table and on the final page of the Pack the defendant inserted the figure of £2,600 in the ‘agreed settlement’ box. (No agreement had been reached at that stage, but the claimant could indicate his response by way of ticking the ‘yes’ or ‘no’ boxes). The parties each made a number of further offers, the defendant each time repeating its offer of £2,600. When the Claimant made his fourth offer, his solicitors inserted the new offer figure in the offer table but failed to amend the figure in the ‘agreed settlement’ box: that box therefore continued to contain the figures from the defendant’s last offer (£2,600). The defendant then purported to accept the claimants ‘offer’ of £2,600 and argued that the doctrine of mistake had no application to the Protocol process.
The Court held that it was quite apparent that the claimant had no intention of making an offer of £2,600 given:
The Court further held that the doctrine of unilateral mistake does apply to the RTA PAP. There is nothing in the PAP that expressly ousts or is inconsistent with the doctrine and:
“To conclude otherwise would give rise to the risk of perverse and wholly unfair results which would undermine, rather than give effect to, the Overriding Objective. The doctrine of mistake only aids in those cases where the other side is, in effect, seeking improperly to take advantage of the error”
The DJ noted that the doctrine of unilateral mistake addressed any concerns about undermining the straightforward and cost-effective PAP process and of satellite litigation: if, at the time the apparent settlement was formed, the other party could not be criticised for not having been aware of the mistake, then the settlement is binding.
This is essentially a reiteration of the ‘blush test’: can the offeror say with a straight face that it did not realise that the offer was made in error? It is clear from the cases addressing the issue of mistake that the courts will not assist any party attempting to take advantage of obvious typographical or technical errors. Where the party who made the mistake can point to evidence that the other party knew, or should have known, of the mistake, an insistence that there is a binding compromise agreement is likely to end up with an adverse costs order.
About the Author
Linda Nelson was called in 2000 and is ranked in the Legal 500 and Chambers and Partners for her personal injury and travel law work. Linda regularly advises in international personal injury cases with cross-border issues, Admiralty Court claims and the more substantial and complex clinical negligence and personal injury cases, including insurance and MIB issues and fatal and amputation cases. She is a contributing author to Kemp and Kemp’s Personal Injury Law, Practice and Procedure; Munkman on Employers’ Liability and APIL’s Guide to RTA Liability, and she co-authored ‘Work Accidents at Sea’ (third edition soon to be published).
  UKSC 14
 Chapter 4 (Mistake) at para.4.22
  2 Ch 534
  1 Lloyd’s Rep 700
  EWCA Civ 726
  EWHC 67 (QB)
  EWCA Civ 873
 County Court at Birkenhead, 3.9.14
 County Court at Liverpool, 8.11.18
 County Court at Bradford, 18.6.19
 County Court at St Helens, 24.2.23