25/06/2013 12:20 BST | Updated 25/08/2013 06:12 BST

Are you there Sidney?

Recent coverage of the Daily Mail's settlement payment of £125,000 to Sally Morgan A.K.A. 'Psychic Sally' paid following a libellous article they published about her brought to mind Benjamin Franklin's famous quote "Three can keep a secret if two are dead". Presumably this would not be the case if Mrs Morgan were involved!

As well as paying damages, the Daily Mail's publisher, Associated Newspapers, also had to apologise unreservedly and pick up her legal bill. I suspect that won't have been cheap!

So what happened? In September 2011 Magician Paul Zenon wrote an article which alleged that Mrs Morgan was wearing a hidden ear pierce during a performance at a Dublin theatre and repeated instructions received from her team as if they were from the spirit world. In short, it was alleged, she was acting dishonestly and deceiving her audience. Her solicitor explained "The allegation contained in the article that Mrs Morgan cheated the audience in Dublin is completely false and defamatory of her."

Mrs Morgan released a statement in response to the article referring to the allegation as "nonsense". It must have strengthened her position when the theatre independently denied there was any truth in the allegation. However despite this support, when Mrs Morgan intimated her claim Associated Newspapers defended its article. Legal proceedings were commenced.

As actions in defamation are to protect the interest in reputation there is a duty to get on with it quickly and set the record straight. Uniquely in civil claims, limitation (the time period within which to bring a claim) is one year from the date of the publication so any claim must be issued within this period.

I regularly advise clients that a defendant must, when dealing with these claims, adopt a 'fight or flight' position. By this I mean they must either accept that the claimant may have a credible claim to which a suitable resolution must be found, or, if that's not the case, be prepared to defend the claim all the way to trial. Unfortunately it really is that polarised, there is little or no middle ground.

In this case, Associated Newspapers decided to defend Mrs Morgan's claim. Given the nature of claims in defamation, there are significant risks and costs involved in doing so and adopting a defensive position can be enough to put off would be claimants. However, this demonstrably does not work in every case. It goes without saying that every case must be given very careful consideration because it is very easy for positions to become entrenched. I have heard litigation being described as an express train and it is very difficult to get off one of those before it reaches trial.

Most people seem to be really shocked by the level of settlement reached between Associated Newspapers and Mrs Morgan. I cannot dispute that £125,000 is a considerable amount but I do not think it is too dramatic to say that her livelihood was at stake and the settlement must be enough to compensate her for the damage to her reputation. Mrs Morgan's reputation is valuable - she is a TV personality, star of the stage and a successful author. The allegation that she relied on a hidden ear piece rather than any psychic ability attacked the foundation of her credibility and, if true, would effectively have been the end of her career.

To put the settlement amount into context, in 2004 Lance Armstrong is widely reported to have received £900,000 (including legal costs) from the Sunday Times for suggesting he took banned substances. This matter is now the subject of further proceedings following his confession to Oprah Winfrey but it is interesting to compare his case to Mrs Morgan's because the allegations about Mr Armstrong similarly went to the heart of his profession.

To reiterate the point that it is important to get it right from the outset its worth noting the cases involving actors Josh Bowman and John Cleese where early use of an offer of amends (basically an apology) reduced the amount of damages awarded.

Mr Bowman received £4,250 in respect of an article published in The Mirror alleging he was romantically involved with an actress. This level of damages was to reflect the fact that the offending article had been quickly removed and the early use of an offer of amends. It emerged Mr Bowman was offered £5,000 and £10,000 by way of offer of amends from The Mirror which he refused!

In Mr Cleese's case the Evening Standard published an article entitled "So, has John Cleese lost his funny bone? How the legendary comedian faces humiliation after his latest TV Flop". Mr Cleese complained and the newspaper made an unqualified offer of amends which he accepted. An apology was published 3 months after the offending article was published and was considerably less prominent. The court assessed the appropriate level of compensation to be £13,500 as they did not find the allegations to be particularly grave.

Harry Houdini was famed for debunking psychics. It doesn't look as if Paul Zenon will be emulating him any time soon! However what this case does provide, quite nicely, is a good guide as to what level of damages are likely to be awarded in this type of case.