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Beware the settlement - it may be easier to stand up and fight

legal matters

'It is easier to fight a case than settle it.' I was told this as a pupil when training to be a barrister, and thought at the time that it was a classic oxymoron, the definition of which I remembered from schooldays as being 'truth standing on its head to attract attention'. Compared with the amount of work a trial requires, the daily grind of early morning preparation, long days in court and conferences held late into the night, the quick business of accepting the other side's offer and drawing up the settlement order seems something of a doddle.

But two appeals that have recently been heard by the House of Lords illustrate the difficulties involved in compromising actions, and demonstrate that, in some cases, it may indeed be easier to see the matter through to judgment rather than put together a settlement agreement that actually achieves what the parties intended.

Heaton v AXA (2000) involved a claim by three former directors of Intercity, a company that sold investment products to members of the public.

Their company had two agency agreements, one with Target Life Assurance (Target) and another with Equity & Law (E&L). Target summarily terminated its agreement on the grounds that the company had been 'churning' business - that is, improperly causing investors with existing policies to pay up their contracts and take out new investments.

On the back of these allegations, E&L also terminated its agreement. Without Target and E&L's business, Intercity collapsed. The directors became unemployable in the financial services industry and destitute. They brought an action against Target, claiming losses on behalf of themselves and their company totalling £18 million.

At the trial, Target failed utterly to substantiate the allegations of 'churning' and improper conduct and was obliged to settle the claim. The Intercity directors accepted Target's offer of £10 million and then issued proceedings against E&L claiming the balance of £8 million. E&L claimed a contribution from Target towards the claim. Both E&L and Target defended the second action on the basis that the directors only had one claim and they had already settled it for £10 million. They contended that the settlement prohibited a second action for the balance.

Similarly, in Cape & Dalgleish v Fitzgerald (2000), property company IMP discovered that its chairman, Fitzgerald, had been defrauding the company and quickly dismissed him, obtained a freezing order over his assets and then settled its claim against him in exchange for his shares in the company. IMP then sued its auditor, Cape & Dalgleish, for failing to spot Fitzgerald's fraudulent behaviour over a number of years.

At trial the auditor was found to be negligent but sought to recover a contribution towards its liability to IMP from Fitzgerald, the man responsible for the losses in the first place. 'Not so fast, ' cautioned Fitzgerald in his defence. 'I have already paid up in respect of these losses. I have reached a settlement agreement with IMP and am released from all further liability in respect of these matters. You, Cape & Dalgleish, are not entitled to anything from me.'

Those of you who have had the misfortune to be one of many defendants in a multi-party action will be well aware of the disadvantage of reaching an early settlement with the claimants. Providing you are potentially liable with the other defendants for the same damage, there is nothing to stop one of the other defendants from claiming a contribution from you. The Civil Liability Contribution Act 1978 expressly says that they can do just that. So, no sooner do you congratulate yourself for buying your freedom from an expensive action with a costly settlement that you find, to your dismay, that you are joined back in by another defendant. The way round this problem is to obtain an indemnity from the claimants in respect of any subsequent contribution proceedings.

But the Heaton and Cape & Dalgleish cases highlight the problem of claimants who want to bring further proceedings arising out of the same claim. Whether they are to be precluded from doing so will be the subject of the House of Lords judgment in due course. However, for the time being, it seems that it may indeed be better to fight some cases than settle.

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