Australia: Sealing the settlement: don't forget to invite the third parties

Last Updated: 22 December 2012
Article by Peter Sise

Key Points:

When settling a dispute, it is important to consider whether the release from liability should extend to third parties associated with the release, and there are several options open to do so.

We often talk of sealing the deal, but sealing the settlement of a dispute is also an important occasion. Closing a deal may open up new business opportunities, but finalising the settlement of a dispute can resign a distracting and draining feud to history so that a business can focus on what matters most, its business.

Often, the final step in sealing a settlement is entering into a settlement agreement. There are many issues which may arise when preparing a deed of settlement; for example, the insurance implications of releasing a person from liability, the tax treatment of the settlement sum, whether any indemnities are necessary, and much more. Not all of these issues will arise in every case, but one issue which almost certainly will is the scope of the release from liability.

For the party being released from liability (releasee), it is important to consider whether the release should extend to its related entities, employees, officers, contractors and agents (together, the third parties and separately, a third party).

Consider the following example. Person A claims that Company B misled them through misleading statements made by employees of Company B. If Company B settles with Person A, it should consider a release from liability that extends to the employees of Company B who allegedly made the misleading statements. Otherwise, a risk will remain that a claim will be brought against an employee who may in turn make a claim for indemnity or contribution against their employer (Company B).

Key points in settling a claim

There are two questions that a releasee should consider:

  • which third parties should be released from liability; and
  • what mechanism should be used for releasing the third parties?

Third parties may be protected through the use of a deed poll, creation of a trust, legislation (if available) or simply a contractual release. Which option is used largely depends on whether the releasee wishes for the third parties to have a right independent of the releasee to enforce the release and the circumstances of the particular case.

Which third parties should be released from liability?

Which third parties will be released from liability will largely be determined by two factors:

  • whether the releasee believes there is a need to protect third parties; and
  • the outcome which the releasee is able to negotiate with the releaser.

The releasee may wish to seek a broad release, such as a release for its related entities, directors, officers, employees, contractors and agents, both present and past.

What mechanism should be used for releasing the third parties from liability?

When determining what mechanism to use to release the third parties from liability, the releasee must consider whether it wishes the third parties to have a right to enforce the release from liability independently of the releasee. If the answer is yes, the releasee has several options.

First, it could make the third parties signatories to a deed of settlement. If the third parties are signatories to the deed of settlement, they are parties to the deed and may enforce it. If a deed is used to record the terms of settlement, the requirement that consideration move from the third parties is dispensed with.

However, making the third parties signatories to the deed of settlement may be impractical depending on the number of third parties and their whereabouts. Further, the releasee and the releaser may not wish to disclose the contents of the settlement deed to the third parties, which would be difficult to avoid if they were signatories.

Secondly, the releasee could arrange for the releaser to execute a deed poll which releases the third parties from liability. A person for whose benefit a covenant in a deed poll is expressed may sue upon that covenant, if that person is sufficiently named in the deed poll. This option overcomes the shortcomings of having the third parties execute the deed of settlement.

Finally, the releasee and third parties may avail themselves of legislation that exists in certain jurisdictions which modifies the law of privity to allow third party beneficiaries to enforce an obligation: see section 11 of the Property Law Act 1969 (WA), section 55 of the Property Law Act 1974 (Qld) and section 56 of the Law of Property Act 2000 (NT).

Whether this legislation applies will to an extent depend on the choice of law clause used in the deed of settlement. For the legislation in Queensland and the Northern Territory, a third party beneficiary is required to communicate their "acceptance" to the promisor of the promisor's obligation. This must be done within the time specified by the promise or, if no time is specified, within a reasonable time of the third party beneficiary becoming aware of the promise. It is worth noting that the legislation in Queensland, Western Australia and the Northern Territory can restrict the ability of a promisor and promisee to vary their agreement without the consent of any third party beneficiaries.

Two further options to protect the interests of third parties

If the options referred to above are unavailable or unacceptable to the parties, the releasee has two further options to protect the interests of third parties. These two further options do not allow the third parties to enforce the release from liability independently of the releasee.

First, the releasee could include in the deed of settlement a provision stating that the third parties are released from liability. The releasee could further add that the releaser will enter into a deed of settlement with a particular third party when requested to by the releasee. If this option is taken, the third parties have no right to enforce the release and are dependent upon the releasee to protect their interests.

Secondly, a provision could be included in the deed of settlement that the releasee has sought and obtained the release as agent of the third parties and holds the release on trust for their benefit. This option is probably the most common of those mentioned in this article. For this option, the releasee is a trustee of a chose in action and the third parties are beneficiaries. The third parties must initially rely on the releasee to enforce the release on their behalf, but if the releasee is unwilling to do so, the third parties may bring proceedings to enforce it themselves where the releasee is joined as a co-defendant along with the releasor. In this way, the third parties are able to protect their own interests if the releasee is unwilling to do so.

It is worth noting that if the releasee holds the release from liability on trust, it is assuming obligations as trustee of the release. The releasee may be called upon to enforce the release several years after the deed of settlement is entered into, depending on how long the limitation period is for the releaser's cause of action. There may also be restrictions upon the ability of the releasee to vary the terms of the release, if the third parties have changed their position to their detriment on the assumption that the release will continue.

Conclusion and summary

When settling a dispute, it is important to consider whether the release from liability should extend to third parties associated with the releasee. There are several options open to a releasee to protect the interests of third parties. The appropriate option will ultimately depend on the wishes of the releasee, the outcome of the negotiated settlement, and the particular situation.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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