How wide is your settlement agreement?

08 March 2018

In the recent decision in Khanty-Mansiysk Recoveries Limited v Forsters LLP [2018] EWCA Civ 89, the Court of Appeal considered whether a settlement agreement in respect of unpaid fees was also effective to settle a negligence claim, even though that negligence claim came to light only after settlement. Here, our commercial litigation experts explain what we can learn from this case.



Background

Mr Galliers-Pratt instructed solicitors to advise on the incorporation of a company whose purpose would be to acquire an oil exploration opportunity in Russia. The company was incorporated and entered into a share purchase agreement to acquire the rights in question. Shortly thereafter, the company decided to change its legal adviser. As the solicitors had a substantial outstanding invoice for their fees on the project, they obtained a personal guarantee in relation to the fees from Mr Galliers-Pratt as a director of the company.

Neither the company nor the director paid the amount due under the solicitors' invoice or the personal guarantee. The solicitors accordingly commenced legal proceedings against the company for recovery of their fees. The solicitors, company and director subsequently entered into a settlement agreement, bringing an end to those proceedings.

The company later discovered that the share transfer envisaged by the share purchase agreement had never actually been completed, and so it had not in fact formally acquired the rights it thought it had. The company[1] brought new legal proceedings against the solicitors for negligence.

The question for the court was whether the negligence claim had already been settled by the settlement agreement.

The courts' decisions

In the High Court, Sir Bernard Eder found that the company's negligence claim was covered by and had already been compromised by the settlement agreement, and so the negligence claim was barred. The company appealed this decision, but the Court of Appeal upheld the judge's findings and dismissed the appeal.

Analysis of the settlement agreement

The settlement agreement began with background recitals, including the following:

"[the solicitors] commenced proceedings in claim number 2YK73888 ("the Action")… (For the avoidance of doubt, the Action relates in part to [the solicitors' outstanding invoice]"

The operative part of the settlement agreement provided:

  • "This Agreement and the terms set out herein shall be in full and final settlement of all or any Claims which the Parties have, or could have had, against each other (whether in existence now or coming into existence at some time in the future, and whether or not in the contemplation of the Parties on the date hereof)."
  • "Claims" was in turn defined to include any actual or potential claim of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, however and whenever arising, whether or not within the contemplation of the parties at the time of the settlement agreement, and arising out of or in connection with the Action (as defined in the recitals) or the outstanding invoice referred to in the Action.

Could and did the settlement agreement cover claims the company didn't know it had at the time of settlement?

Giving the leading judgment in the Court of Appeal, and citing the House of Lords' decision in BCCI v Ali, Lewison LJ said that although it is possible for a party to agree to settle claims they are not (and could not be) aware of, the court should be slow to infer that is the intention unless the language of the settlement is very clear.

The solicitors' claim for outstanding fees was clearly known to the parties and was intended to be settled by the agreement. Yet the agreement also referred to the settlement of unknown claims and claims not in the parties' contemplation. The parties must have intended these terms to cover something more than the fee dispute, and they were broad enough to encompass the company's negligence claim. The Court of Appeal agreed with and restated the judge's finding that the wording "all or any Claims" "whether in existence now or… in the future, and whether or not in contemplation" was very wide wording, made even wider by the fact that the defined term "Claims" included potential claims and unsuspected claims.

It was perfectly conceivable in the supply of professional services that the services supplied could be defective, even if the parties did not contemplate it. He found therefore that the settlement agreement was effective to bar a claim which was unknown at the time of settlement: "[t]he mere fact that the parties did not in fact know that there was a claim against [the solicitors] in negligence is not enough to side-step the settlement agreement."

Did the company's negligence claim arise "out of or in connection with the Action or the invoice"?

The company also argued that, even if the settlement agreement could cover a claim which was not actually known to it at the time of settlement, its negligence claim did not fall within the definition of "Claims" which had been settled by the agreement, because it did not arise "out of or in connection with the Action or the invoice".

The parties agreed that this wording couldn't cover all possible claims by the company or director against the solicitors. If, for example, the director had been injured on a visit to the solicitors' offices, a claim relating to that was clearly not covered by the settlement agreement as it did not arise "out of or in connection with the Action or the invoice".

The Court of Appeal found though that the negligence claim overlapped with and was dependent upon the allegedly defective performance of the very services for which the solicitors were claiming payment in the invoice and related Action. Accordingly it found that the company's negligence claim was connected with both the Action and the invoice, and was thus barred by the settlement agreement.

Points to consider on settlement

The Court of Appeal made clear that although a settlement agreement, like any contract, "must be interpreted in the light of the admissible background facts… the most important aspect of contractual interpretation is loyalty to the text". This case therefore illustrates how important it is for parties not only carefully to consider the extent of settlement, but also to ensure that their agreement reflects their intentions. Considerations include:

  • What is the subject matter you are settling? On a scale from narrow to wide, this could be e.g.
    • the claims set out in court proceedings;
    • claims arising out of the underlying facts of the dispute;
    • all matters arising out of a particular contract; or
    • everything arising from the entire relationship between the parties.

In this case the Court of Appeal accepted that it was relevant background that, by the time of settlement, the company had already changed legal advisers, and so "[i]t was to be expected that the settlement agreement would draw a line under the former solicitor and client relationship" - but if that is the intention, it may be advisable to make that express in the settlement agreement.

  • Known and unknown? Is settlement intended to be limited to claims already known to the parties, or does it extend to claims which they may have but not currently be aware of?
  • Present or future? Is settlement limited to claims (whether known or unknown) which already exist? Or does it extend to claims which have not yet arisen?

Of course the parties to a settlement are likely to have conflicting interests in how wide or narrow the settlement should be, and their relative bargaining positions will ultimately dictate the extent of settlement. Whilst it may not therefore always be possible to achieve your desired scope of settlement, parties should nonetheless give consideration to these issues so as not inadvertently to settle potentially valuable claims.

Footnote

[1] NB: the original company was in fact liquidated, and its negligence claim was acquired from the liquidator by another party who then brought the claim against the solicitors. For ease of reference we refer to the company throughout in this article.


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