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Reaching a binding settlement agreement in mediation

20 August 2013 #Dispute Resolution


The Court of Appeal has given its Judgment on a recent case that considered the extent of a solicitor’s duty to his client to formulate a binding settlement agreement resulting from a mediation. The background dispute that gave rise to the current case is worth consideration first.

The Original Dispute

David Frost and his brother Ron had been in business together for around 20 years. Over that time, their business interests had become, in the words of the Judge, interwoven, complex and opaque. Their business in property development and management was conducted in part through a company of which the brothers were co-directors and shareholders, Advance Property Development Ltd (“Advance”). There were various charges over the properties and most were subject to tenancy agreements. The brothers also each had an interest in a damp-proofing company, Sentinel Specialist Service Ltd (“Sentinel”). Their father and younger brother were also proprietors of two properties in which the brothers claimed an equitable interest.

The First Mediation

The brothers’ relationship broke down and they were unable to agree on an effective division of their interests. Both brothers instructed solicitors: David Frost instructed the Defendant law firm (Wake Smith and Tofields) with Mark Serby, a partner and head of litigation handling the matter.  The parties, through their solicitors, agreed to mediate the dispute. The mediation took place in Mr Serby’s offices on 18 November 2003 with Mr Robin Bramley acting as mediator. By late afternoon, an agreement on the division of the various assets and their future management seemed to have emerged. The brothers left to eat a meal leaving Mr Serby to put the agreement in writing, which was signed by the brothers on their return (the “First Agreement”).

David Frost clearly believed that the First Agreement would be legally enforceable and Mr Serby did not disabuse him of this belief. However, when the parties’ solicitors attempted to draw up a more formal agreement, it became clear that there were many shortcomings with the First Agreement. In particular, many terms were unclear and crucial terms had not been defined. Furthermore, Advance was not a party to the First Agreement nor were other third parties who held interests in the properties. It also included the distribution of Sentinel, which it transpired was not owned by the brothers.

In addition Ron Frost raised many issues with the First Agreement and began to act in a manner that made David Frost believe that Ron was not prepared to be bound by its terms.

The Second Mediation

Mr Serby considered making an application for an order of specific performance to enforce the terms of the First Agreement. However, the parties instead agreed on a second mediation, which took place on 24 June 2004. The resulting agreement (the “Second Agreement”) was a far more detailed document that dealt with each asset in great detail. Particular care was taken by Mr Serby to ensure that the Second Agreement was binding and enforceable.  

However even this new agreement failed to deal with some of the tax consequences, which, even with a tax expert’s advice, meant that not all matters had been resolved when the Court of Appeal handed down its Judgment in 2013.

Claim by David Frost

In October 2009, David Frost commenced proceedings against Mr Serby’s firm for alleged negligence and/or in breach of retainer when drafting the First Agreement. In particular, David Frost alleged that the breaches of duty were:

  • failure to confirm ownership of the properties,
  • failure to consider what contractual provisions were required to make the First Agreement enforceable,
  • failure to draft the First Agreement so that it was consistent with the instructions given on the ownership of Sentinel,
  • drafted the First Agreement so that it was unenforceable,
  • failure to advise on tax consequences,
  • failure to have an accountant attend the first mediation to advise on tax consequences,
  • failure to act with reasonable skill and care

When the matter came to trial, the Judge considered that however it was argued, a solicitor owed no duty to his client to ensure that an agreement in principle reached in a mediation was binding and legally enforceable. The Judge found that there was no such duty or obligation since such an obligation would have been impossible to perform. Although agreement had been reached on many points, there was insufficient detail available to the solicitors to allow the parties to reach a final and enforceable agreement. As such, a binding agreement could not have been drafted because the parties had not reached a final agreement.

The Appeal

The appeal primarily concerned the fourth alleged breach of duty. The first two alleged breaches were considered unrealistic by the Court of Appeal in view of the difficulties in even getting Ron Frost to the mediation, let alone reaching any agreement. It was not realistic to have expected Mr Serby to spend a considerable amount of time (and David Frost’s money) immersing himself in the level of detail necessary to ascertain the true ownership of the properties before it became apparent that an agreement could be reached. The parties accepted this at the time and proceeded on the basis that if an agreement-in-principle could be reached, there would need to be a lot more work done to give effect to the broad intentions in that agreement-in-principle. The third alleged breach fell away since it was found that both brothers’ understanding of Sentinel’s ownership was incorrect. The parties also agreed that even if tax experts had attended both meetings, they would not have been able to advise on the tax implications in sufficient detail to prevent subsequent difficulties in finalising the agreements.   

In relation to the allegation that the First Agreement had been drafted so that it was unenforceable, the Court of Appeal agreed with the trial Judge and held that this could not be correct since an agreement had not been reached and this was therefore an impossible task. The Court accepted that there was some confusion between the solicitors as to whether they believed that a binding agreement had been reached and there were a number of things that could have been done, such as incorporating the standard conditions of sale to improve the First Agreement but the point remained that drafting an enforceable agreement was impossible.

A further point was taken that in failing to advise David Frost that the First Agreement may not be enforceable, Mr Serby had been negligent. The Appeal Court did not accept this either.

Conclusion

The case is a sad one since it is clear that a considerable amount of litigation had to take place to extricate the brothers from their business dealings, which is something that mediation is supposed to avoid. There are however a number of positive points that can be taken from the case. In particular, the case highlights the need for the parties to prepare fully for a mediation. Although the Courts held that it was unrealistic to expect Mr Serby to have gone into the detail necessary to establish ownership of the parties, further work in this area may have gone a considerable way towards resolving the problems that ended up taking many years and much more litigation to resolve. If the parties are committed to resolving their disputes through mediation, it must not be partial. Efforts must be made to ensure that all matters in dispute are finally resolved and that all parties that need to be involved in the mediation are present so that a final and binding agreement can be reached.

Clarkslegal, specialist Dispute Resolution lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Dispute Resolution matter please contact Clarkslegal's dispute resolution team by email at disputeresolution@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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