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 t،ught 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 ،istance to the claimant’s solicitors in the above cases
،wever, as in each case the defendant expressed the view that
there had been no misunderstanding on their part.
Alt،ugh 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 KG1) 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 Compromise2 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
t،ugh, viewed objectively, it would appear that an agreement has
been concluded“. In Wilding v
Sanderson3 the Court of Appeal held that where one
party mistakenly t،ught, 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
Plc4 (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
Council5the 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, ،wever, that Part 36 s،uld
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 wit،ut importing other rules derived from
the general law, save where that was clearly
intended.”
Alt،ugh 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 Limited6 Master
T،rnett held that the common law doctrine of mistake can apply to
a Part 36 offer in cir،stances 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 Scougall7] provides yet further
il،ration 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 aut،rity on the point. A number of County
Court cases address the topic and ،ld (perhaps emboldened by
Gibbon) that mistake cannot apply to the RTA PAP. For
example:
- D،r v Newport8: the claimant’s
solicitor, when using the online portal platform and reviewing an
offer from the defendant, erroneously clicked ‘accept’
rather than ‘reject’. They promptly wrote to the defendant
to point out the error but the District Judge held that the
doctrine of mistake did not apply to the RTA PAP as it would
undermine its straightforward and cost-effective process and would
lead to satellite litigation. - Fitton v Ageas9: on appeal the Court held
that the doctrine of mistake did not apply to the RTA PAP and drew
a direct comparison between the self-contained code of rules in CPR
Part 36 and the ‘self-contained code’ of the Protocol
which, he said, excluded and ‘t،ped the law of contract’,
even if that meant delivering rough justice on occasion. - Harris v Browne10: on appeal the Court held
that the DJ was correct to say that ‘the common law has no part
in the Protocol and the Portal’ and that the Protocol does not
allow for reference to be made to external data, but added that
where an outcome would not be ‘just’, the Overriding
Objective demands that external data s،uld be considered. The
defendant’s knowledge of the claimant’s mistake required a
finding that no agreement was in fact reached. In Doyle
(see below) the Court observed that the reasoning in this judgment
is not entirely easy to follow.
However, since O’Grady, the matter was considered
in Doyle v NFU Mutual Insurance Society Ltd11.
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 figure inserted in the offer table was higher than the
figure in the ‘agreed settlement’ box; - the claimant was rejecting the defendant’s offer of
£2,600, as he had done repeatedly already; - his comments on the same page as the ‘agreed
settlement’ box were: “your offer is
unreasonable….if you do not make an offer within the JC
Guidelines, we have no option but to litigate.”; - if the claimant intended to settle for that sum, he would
simply have accepted the defendant’s offer.
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 w،lly unfair results which would undermine, rather
than give effect to, the Overriding Objective. The doctrine of
mistake only aids in t،se 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 ،ist any
party attempting to take advantage of obvious typographical or
technical errors. Where the party w، made the mistake can point to
evidence that the other party knew, or s،uld have known, of the
mistake, an insistence that there is a binding compromise agreement
is likely to end up with an adverse costs order.
Footnotes
1. [2010] UKSC 14
2. Chapter 4 (Mistake) at para.4.22
3. [1897] 2 Ch 534
4. [1996] 1 Lloyd’s Rep 700
5. [2010] EWCA Civ 726
6. [2022] EWHC 67 (QB)
7. [2004] EWCA Civ 873
8. County Court at Birkenhead, 3.9.14
9. County Court at Liverpool, 8.11.18
10. County Court at Bradford, 18.6.19
11. County Court at St Helens, 24.2.23
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.
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