Given the care and attention lavished by lawyers and clients on preparation for trial, it is surprising how often settlements end up cobbled together in haste, leaving the spectre of satellite litigation over the meaning of the settlement agreement. Whether the cause of this imprecision is late-night drafting at the conclusion of a mediation or a fear of losing the opportunity to settle by creating difficulties in the drafting process, the result is generally the same: a sense of deja vu as dissection of the settlement agreement supplants analysis of the original claim. You would have thought that litigators would know better, but the number of cases involving problem settlements that reach the law reports (not to mention the newspapers) shows that there are still lessons to be learned.

Sometimes the failure of a settlement agreement to cover all possible eventualities is entirely understandable. The decision in the iPod/iTunes litigation, Apple Corps v Apple Computers [2006], which has recently been settled once and for all, is a good example. In that case the judge had to decide what the parties might have intended with regard to technology which could not have been anticipated in 1991 when Apple Computers agreed to pay Apple Corps $26.5m (£13.7m) to settle a dispute over its development of software for creating, editing and recording music.

The 1991 settlement had itself arisen out of an earlier agreement between the same parties in relation to the use of the apple logo. Mr Justice Mann held that as a matter of contractual interpretation the 1991 settlement had secured for Apple Computers the right to use the apple logo in connection with the subsequent development of the iTunes Music Store, because the reasonable user of that service would understand that the use of the logo referred to the service itself rather than to the individual tracks for which Corps held the benefit of the same logo.

Compared to the Apple case, the facts in Scammell v Dicker [2005] were as commonplace as the outcome was predictable. The parties had become embroiled in a boundary dispute that was settled by an agreement which incorporated a plan showing the line of the boundary agreed by the parties. Unfortunately, the boundary shown on the plan did not correspond with the position on the ground, which created even more uncertainty than before. By the time the Court of Appeal came to the decision that the settlement was not too uncertain to be enforceable (because there was a practical means of identifying the parties' intentions) the costs incurred arguing the terms of the settlement must have dwarfed the costs of the original proceedings and quite probably the value of the land in question.

A different sort of problem arose in Independiente v Music Trading Online [2007]. The parties had entered a settlement agreement that included undertakings given to the court by the defendant to cease certain copyright infringing activities. The question was whether, assuming the defendant was in breach of these undertakings, the claimants could sue for damages or were restricted to proceedings for contempt of court. The defendants relied on the absence of an express provision in the settlement allowing the claimants to enforce the undertakings under privity of contract.

The Court of Appeal came down in the claimants' favour, holding that a breach of the undertakings would give rise to a claim in damages. However, although the claimants achieved the desired result in the end, an express term in the settlement agreement would have avoided the need to persuade the court to imply one.

The point to be emphasised is that any settlement, whatever the format (a simple consent order, a Tomlin order or a settlement agreement outside court proceedings) should be drafted with the same precision as any other form of contract, to ensure that it stands the best chance of achieving the desired result of allowing the parties to exchange disputed positions for clear and undisputed legal rights.

It is essential for clients and their legal advisers to resist the temptation to rush to the finishing post once the basis for a compromise has been agreed. An exhaustive list of potential pitfalls would be impossible, but a good proportion of problems fall into one of the following areas.

l A failure to consider the position of other parties who might fall within the scope of the settlement – for example, subsidiary or associated companies; directors; shareholders; and joint tortfeasors or anyone else who might be the subject of a contribution claim.

l Insufficient thought to the scope of the settlement. Precise drafting is generally more effective than 'catch-all' wording.

l Failing to ensure that the signatories to the settlement agreement have the necessary authority.

l The impact of tax on the settlement – whether it is VAT, income tax or capital gains tax. A defendant who overpays or a claimant who is left with an unexpected tax demand because of a failure by his lawyers to consider the tax angles is unlikely to be satisfied with the end result.

l Costs – it is not unusual for parties to forget to make provision for the costs of the dispute or, where proceedings have been commenced, pre-existing costs orders in favour of one party or the other.

l Enforcement – the Independiente case involved one specific example of the need to think ahead to what may happen in the event of default. However, enforcement can be made easier in a number of ways, such as insisting upon payment as a condition precedent of the settlement or at the very least using a Tomlin order to permit enforcement of the agreed terms within the same action.

The common thread that runs through all of these points is the need to remain alive to the client's best interests throughout the period of negotiations and right up until the moment the settlement becomes binding. The other party must look after itself, as was demonstrated by the unusual case of Thames Trains v Michael Adams [2007].

Adams had suffered serious injuries in the Ladbroke Grove train crash in October 1999. During last-minute negotiations on the brink of trial the solicitors for the train company telephoned Adams' solicitor to offer their client £5.08m by way of settlement. This conversation took place only minutes after Adams' solicitor had sent a fax offering to accept £4.8m. That fax had not yet reached her opponent due to a system failure in his office. Was Adams' legal team under a duty to speak up about the fax they had just sent agreeing to a lower offer? "No," said the court – the solicitor's duty was to represent her client's best interests and on the facts of this case there was nothing improper in the way they had acted, particularly given that the train companies had previously given the misleading impression that £4.8m would be their highest offer.

All of these recent cases reinforce the importance of taking nothing for granted in the context of settlement negotiations.

A knowledge of the present state of the law and an eye for future legal developments are always important, but so too are a clear understanding of a client's business environment and commercial objectives; and, last but by no means least, some good old-fashioned common sense.

Neil Jamieson is a partner in the commercial litigation team at Barlow Lyde & Gilbert.