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Are We Done Yet?

If parties are successful in reaching an agreement at the end of a long day (or more) of mediation, one of the final challenges is preparing a written document everyone can sign to capture the terms of the settlement.

One difficulty is to make it detailed enough to cover all of the essential terms, without leaving any loose ends.

Another is to avoid getting bogged down with overly complex legal drafting that can simply open up new issues or unravel a still-fragile agreement.

The more complex the settlement, the more difficult it is to balance these two competing challenges. It’s fairly simple when the settlement involves a one-time payment to settle a claim, together with mutual releases. It’s much more difficult when there’s an ongoing relationship between the parties and the agreement involves continuing obligations on both sides.

There’s a natural temptation, when agreement “in principle” has been reached, to “fine tune” the detailed terms to each party’s advantage. Be careful it doesn’t lead to either no agreement, or one that wasn’t intended.

A recent case in the Federal Court illustrates this danger and provides a timely reminder of the importance of having a clear settlement agreement.

Though not involving mediation, the Court in Betser-Zilevitch v Nexen Inc., 2018 FC 735 was faced with an agreement “in principle” to settle a patent infringement action.

After lengthy correspondence between counsel, with multiple offers and counter-offers, Betser-Zilevitch proposed terms which included a patent license, release from all claims, no further legal action by either party and a confidentiality agreement. (The offer, as set out in the decision [22] also included one term that is fully redacted. References to this term, which appears to relate to confidentiality, are redacted throughout the judgment [see 89-93].)

Nexen said it was “prepared to agree in principle” and would prepare a settlement agreement on those terms and “other standard settlement terms.” Betser-Zilevitch then advised the Court, on consent, that a settlement had been reached subject to formalization.

In fact, the parties could not agree on all the terms of the formal agreement and Betser-Zilevitch tried to withdraw the settlement offer. Nexen brought a motion to enforce the settlement and was successful. The court found that there was a binding agreement to settle, determined several implied terms on which the parties could not agree, and discontinued the action.

The court found a clear intention to settle in the correspondence. It also found agreement on the “essential terms” despite the subsequent correspondence between counsel, disagreeing over the scope and conditions of the license, release and confidentiality agreement.

Both parties tried to change the wording of the formal documents to their own advantage, beyond what was in the original settlement offer.

  • Nexen tried to expand the scope of the license and release Betser-Zilevitch had offered.
  • Betser-Zilevitch tried to narrow the scope of the license and release.

I especially enjoyed the “officious bystander” approach cited by the Court to determine what an objective business person would have considered to be essential terms in an agreement of this kind. The Court set out its conclusions on the essential terms, including implied terms. Each side, it concluded, had also tried to add non-essential terms in the final drafting. Those were rejected by the Court.

The Court also refused to set out the settlement terms in a formal order, which would elevate contractual terms into a “Court order with attendant liability to civil contempt proceedings for non-compliance.” [97] This effectively threw it back to legal counsel to draft a definitive agreement, on the terms determined by the Court.

Avoid Unintended Consequences

How can parties to a dispute, counsel and mediators avoid the potential unintended consequences of a vague or incomplete settlement agreement? Here are a few ideas.

1. Preparation

It may go without saying, but I always make a point of recommending to counsel that they come to the mediation with prepared drafts of the terms they would expect to see in the settlement document. This includes the standard release, confidentiality and other terms that should be in any agreement.

More importantly, it should include potential terms relating to the main issues in dispute. They can prepare several alternatives for a range of settlement options that may be discussed. This will also help each party focus on precisely what they want to achieve in the mediation – best case, as well as a range of acceptable alternatives.

2. Keep it Simple

Lawyers are risk averse. They have a natural tendency to try to draft settlement agreements to cover every possible contingency. This can make them overly complicated. The document should be detailed enough to make the terms clear and certain, but not more than that.

A mediated settlement agreement should be written in clear simple language, not in typical legalese.

Complicated clauses may create uncertainty and ambiguity, rather than providing certainty. At best, they will take time to review and discuss, usually at the end of the day when everyone is tired and impatient. At worst, over-reaching in the drafting will damage hard-won trust and may scuttle the settlement.

There is often a temptation to add terms in the document that were not discussed during the mediation – usually with an “of course we need to include that…” If it’s something non-controversial, it may be fine. But if not, it may be a large setback.

The more complicated the agreement, the more likely it is that one party or the other will think there is something underhanded.

The writers should also avoid throwing in catch-all phrases, such as “other standard terms.” As the case above illustrates, this just opens the door for the lawyers to argue over what terms are standard or were implied. If specific terms are critical to the settlement, include them, at least in bullet form, to provide certainty.

3. Conditions to be Satisfied

Ideally, the final decision makers are at the mediation and can sign off on the settlement terms on the spot, but that is not always possible. In complex commercial disputes, the settlement may be subject to approval or other conditions.

It may be conditional on internal approval (e.g. by one party’s board of directors) or the approval or other action of a third party (e.g. a public authority). In public sector disputes, the settlement may need approval of elected officials or some other formal process.

These conditions should be communicated to the other parties early, so they aren’t a last minute surprise. The should also be drafted carefully. Spell out exactly what approvals are required, from whom and when.

Beware of terms that allow approval to be withheld or delayed as a way to re-open negotiations. There should be a realistic deadline to secure approval, failing which the settlement fails (or some other alternative kicks in).

The representatives at the mediation can’t promise that approval will be given. Often, the most that can be said is the party representatives will recommend approval. Avoid obligations such as “best efforts” to get the approval; this just opens the door to an argument over what that means if approval isn’t forthcoming.

If a party is required to take a specific action or pay a fee to get the consent, spell it out.

None of this is easy, especially under the pressure of a deadline to prepare something the parties can sign before they leave the mediation. The lawyers’ big fear is that they might forget to include an important term. The more this can be planned in advance, the easier it will be to get a signed agreement when the day is done.

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