Settlement agreements in the DIFC

Out-Law Guide | 19 Aug 2021 | 1:38 pm | 8 min. read

Settlement agreements are treated by the courts of the Dubai International Financial Centre (DIFC) free zone in a similar way as by the courts of England and Wales, given the similarities between the two common law jurisdictions.

The DIFC court rules (RDC) do not expressly require parties to attempt to settle their dispute before commencing legal proceedings. However, as in the English legal system, the idea that parties should seek to amicably settle before they resort to formal court proceedings is engrained in the DIFC courts’ overriding objective.

Other features of the DIFC regime which distinguish it from the rules operating in the ‘onshore’ Dubai courts include the recognition of the “without prejudice” principle, and automatic confidentiality bestowed on settlement agreements.

Alternative dispute resolution

While the RDC contain no express requirements for the parties to attempt to settle their dispute ahead of legal proceedings, they require the courts to “further the overriding objective by actively managing cases including … encouraging the parties to use an alternative dispute resolution procedure if the courts consider that appropriate”.

There are also a number of rules requiring parties and their legal advisers to consider ADR in certain circumstances. For example, under RDC Part 27.3, judges will invite the parties to consider whether their dispute, or particular issues in it, could be resolved through ADR in appropriate cases. RDC Part 27.4 requires the parties’ legal representatives to consider ADR with their clients, and to ensure that clients are fully informed as to the most cost effective means of resolving their dispute.

As in the English legal system, the idea that parties should seek to amicably settle before they resort to formal court proceedings is engrained in the DIFC courts’ overriding objective

Parties must indicate whether a stay for the purpose of the parties engaging in ADR is sought as part of the DIFC case management information sheet, which they are required to file and serve no less than seven days before the case management conference. If the parties indicate that ADR could be effective at this stage, an order will be made staying the proceedings pending the outcome of ADR.

The court also has a fairly wide discretion to require the parties to attempt settlement by way of ADR even if the parties themselves have opted not to. The RDC allow judges to make an ADR order, or to adjourn the case for a specified period of time in order to encourage and enable the parties to use ADR.

The DIFC courts have wide powers to award costs to a successful party. Judges can penalise a successful party for delaying or failing to engage in ADR by reducing the award of costs or even disallowing them altogether, in line with the approach of the courts of England and Wales.

Formalities of settlement agreements

The DIFC courts do not prescribe a particular form for a settlement agreement, although RDC Part 32 sets out a settlement mechanism similar to that contained in Part 36 of the Civil Procedure Rules of the courts of England and Wales. Particular formalities and cost consequences apply to RDC Part 32 offers, which are set out below.

It is best practice to record any settlement agreement in writing and to ensure that it complies with the requirements of a valid contract under DIFC law.

The DIFC Contract Law provides that a contract is concluded by the acceptance of an offer, and that the contract does not need to be concluded or evidenced in writing. However, the law also states that if “in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a specific form … no contract is concluded before agreement is reached on those matters or in that form”.

Under DIFC law, deeds do not hold any more significance than a standard agreement. As such, settlement agreements should be executed before a notary public who will confirm the identities of the signatories and witness the signatures. This will make it more difficult for any party to later challenge the validity of the agreement.

Where proceedings are to be stayed on agreed terms, the RDC specifies the wording which should be included in the proposed order submitted by the parties. The agreed settlement terms should be set out in a schedule to the draft order.

Note that, in certain circumstances, the approval of the court is required to settle a claim – for example, where a party is acting as a representative in a claim under RDC Part 20.41.

Confidentiality

The DIFC courts recognise the concept of “without prejudice”, meaning that settlement negotiations and any subsequent agreements entered into cannot be referred to in DIFC court proceedings. Best practice is therefore to clearly label all settlement correspondence and related documents as “without prejudice” or “without prejudice save as to costs” if appropriate.

The “without prejudice” principle is not recognised by many civil law systems, including that of onshore Dubai. Parties should therefore include comprehensive confidentiality provisions in any settlement agreement to prevent parties from seeking to refer to the settlement agreement in related proceedings in other courts or making any other disclosure of the terms of the settlement.

Parties’ powers to compromise

Under DIFC law, an individual must have legal capacity in order to lawfully settle their dispute – i.e. they must be over 18 years old and of sound mental health.

It is best practice for the signatory to a settlement agreement on behalf of a company to hold express authority from that company. However, the DIFC courts recognised, and have codified as part of the DIFC Contract Law, apparent authority. Therefore an individual who holds themselves out as having the requisite authority to sign a settlement agreement on behalf of a company may be deemed to have the requisite authority to bind the company.

Terms of settlement and future claims

Under DIFC law, parties can settle both existing and any future claims in a settlement agreement. Parties should therefore ensure that the wording of any settlement agreement clearly sets out which claims are included in the settlement and which are carved out.

Severability

As is the case with any legal document, it is best practice to include a severability clause in settlement agreements concluded under DIFC law.

Third party rights

Under the DIFC Contract Law, a party “may in his own right enforce a term of the contract if … the term purports to confer a benefit on him”. However, if the parties intend for a third party to be able to enforce a clause in a settlement agreement, that clause must be drafted carefully. If, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party, it may be void for this purpose.

Disposal of legal proceedings

After settlement, disposal of the legal proceedings in the DIFC depends on the form of the settlement:

  • if a RDC Part 32 offer has been accepted, the court will stay the proceedings
  • for non-Part 32 offers, a claimant can discontinue all or part of a claim by serving a notice of discontinuance. Once that notice is served, the proceedings are brought to an end except in relation to costs.
Breach of settlement terms

Again, the DIFC courts deal with breaches of settlement agreements differently, depending on the form of the agreement:

  • if the settlement is as a result of a RDC Part 32 offer, a party may apply to the DIFC courts to enforce the terms of the agreement without the need for a new claim
  • for non-Part 32 offers, a breach of the terms of a settlement agreement would amount to a new claim for breach of contract and a fresh claim must be filed with the DIFC courts.
Setting aside a settlement

Settlement agreements are treated in the same manner as any other civil or commercial agreement. As such, they can only be varied or set aside by the parties by mutual agreement; or by a DIFC court order if the court determines that the contents of the agreement are unlawful or contrary to public policy.

Legal costs

For non-Part 32 offers, although the DIFC courts have wide discretionary powers to award large sums, parties commonly agree to bear their own costs. It is best practice to deal with this issue in writing in the settlement agreement.

The costs consequences of RDC Part 32 offers are set out below.

RDC Part 32 offers

RDC Part 32 sets out a formal settlement mechanism, similar to the ‘Part 36 offer to settle’ procedure in England and Wales. Offers made in accordance with these provisions carry potentially significant costs consequences, so it is advisable for parties considering settlement to make such an offer to give themselves a degree of costs protection in the event a costs award is eventually made against them.

If a RDC Part 32 offer is accepted within 21 days of the offer being made (the ‘relevant period’), the general rule under the RDC is that the claimant is entitled to its costs of the proceedings up to the date on which notice of acceptance was served on the offeror.

Where the offer is not accepted, the costs consequences of the offer flow from the judgment in the case. In the event that the claimant fails to obtain a judgment more advantageous than the defendant’s RDC Part 32 offer, the defendant will be entitled to its costs from the date on which the relevant period expired plus interest on those costs. If the judgment against the defendant is at least as advantageous to the claimant as the proposals in the offer, the claimant is entitled to:

  • interest on the whole or part of any sum of money awarded, excluding interest, at a rate not exceeding 10% above Base Rate for some or all of the period starting with the date on which the relevant period expired;
  • its costs on the indemnity basis from the date on which the relevant period expired; and
  • interest on those costs at a rate not exceeding 10% above Base Rate.

The court will not apply the RDC Part 32 cost consequences if it considers it unjust to do so. Factors the court will take into account when considering whether it is just include the stage in the proceedings at which any RDC Part 32 offer was made, including in particular the length of time between the offer being made and the beginning of trial; the information available to the parties at the time when the Part 32 offer was made; and the conduct of the parties with regard to the giving of or refusing to give information for the purposes of enabling the offer to be made or evaluated.

The RDC sets out the formalities of a valid RDC Part 32 offer including a requirement for the offer to be made in writing, stating on its face that it is intended to have the consequences of a RDC Part 32 offer. An offer by a defendant must additionally include an offer to pay a sum in settlement within 14 days of acceptance of the offer. Parties should take care to follow these formalities closely in order to ensure the cost consequences apply. It is advisable to ask the offeree to confirm within a certain time period if they consider the offer to be invalid for any reason. Silence on the part of the offeree will make it more difficult to challenge the validity of an offer at a later date.

As with all settlement offers, without prejudice privilege attaches to a RDC Part 32 offer. The RDC expressly state that the fact that an offer has been made must not be communicated to the trial judge or to the judge allocated in advance to conduct the trial, if any, until the case has been decided.

Co-written by Amelia Cave of Pinsent Masons. This guide is based on a practice note by the same authors, first published by LexisNexis Middle East.