UK: To Waive Or Not To Waive Future Claims In Settlement Agreements?

Last Updated: 28 April 2016
Article by Michael Bronstein, Ryan Carthew, Gilla Harris, Sarah Beeby and Virginia K. Allen

The decision of the Commercial Court in Khanty-Mansiysk Recoveries Limited v. Forsters LLP [2016] EWHC 522 (Comm) may not, at first sight, be of obvious importance to HR practitioners. However, this decision highlights important considerations for the drafting of settlement agreements in the employment sphere.

The claim

Forsters LLP (Forsters) entered into a (non-employment) settlement agreement in relation to its unpaid professional fees and a right to call on a personal guarantee which was created by a director of the company to secure the payment of those fees. The purpose of the settlement agreement, on its terms, was as follows:

"...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 contemplation of the Parties...)"

The term "Claim" was defined as "any claim, potential claim...whether known or unknown, suspected or unsuspected...however and whenever arising...arising out of or in connection with the Action or the invoice...".

The company went into liquidation in 2015 and a recovery company pursued Forsters for in excess of £70 million for alleged negligence in providing its legal advice. The Commercial Court was asked to consider, as a preliminary issue, whether Forsters could rely on the existence of the settlement agreement as a defence to this claim.

The Commercial Court held that on the construction of the settlement agreement, the claim was caught by its terms and Forsters was released from any potential claims.

Waiving future claims in settlement agreements

When entering into settlement agreements with your current or former employees, employers typically identify any "live" claims and alleged claims that the employee may have against the company and include a catch-all provision to the effect that, as the employee having had legal advice from his/her legal adviser, the employee has no other claims against the company or its officers, employees or shareholders, arising out of or in connection with his/her employment or its termination or otherwise. It is standard practice that certain claims are also excluded from scope i.e. future claims for loss of pension rights, any claim to enforce the terms of the settlement agreement, personal injury claims and, with the new whistleblowing regime (discussed elsewhere in this newsletter) clauses which prevent an employee from making a protected disclosure in due course.

The Court of Appeal decision in the case of Hinton v. University of East London [2005] IRLR 552 firmly stated that the purpose of settlement agreements is to settle specific, identifiable claims. The Court of Appeal considered that an employee is entitled to know exactly what he/she is settling and settlement agreements should be tailored to the particular circumstances of the case. The particular claims or potential claims to be covered by a settlement agreement must be identified either by a clear generic description such as "unfair dismissal", "automatic unfair dismissal for asserting a statutory right", "sex discrimination" or by reference to the section of the statute giving rise to the claim (a reference to all claims under the ERA 1996 will not sufficiently identify the settled claim). The decision went on to say that best practice would be to specifically identify the claim being settled by including particulars of the nature of the allegations and of the statute under which they are made or the common law basis of the claim in the form of a brief factual and legal description (for example, unlawful deductions from wages under Part II of the ERA 1996, a statutory redundancy payment under section 135 of the ERA 1996 or unfair dismissal under sections 94 and 98A of the ERA 1996).

In Hilton UK Hotels Ltd v. McNaughton EATS/0059/04 an employee purported to settle claims which she "believed" she had against her employer in a settlement agreement. However, the EAT held that an employee is unable to settle future claims which she was unaware of when entering into the settlement agreement. Further, if an employee contracts out of a future claim, the employee must comply with the requirements of the relevant statutory provision. The difficulty is working out how much information on each potential claim should be included. In comparison with Hinton, this decision suggests that it may be safer to simply identify the legal basis for the claim (for example, unfair dismissal) without going into details of the basis of such a claim. However, you should be warned, therefore, that certainty can only be achieved in settling specific claims identified in this Agreement in accordance with the Hinton case.

As the employment cases illustrate above, while the aim of a settlement agreement is to reach full and final settlement of claims, it is not necessarily straightforward to cover off all of them in an agreement. Specific provisions may not be given much thought when entering into an agreement, particularly in reliance on the catch-all provision. However, the drafting of the waiver and release clause does need careful consideration to ensure that you are not prejudicing any future claims that your business may have against an employee or vice versa if certain employee claims are to be carved out.

We consider that this is particularly relevant in an employee competition context when you are dealing with the exit of senior employees. If a senior employee is moving to a known competitor or setting up their own business, you may not know until they are up and running in their new enterprise whether or not they may have taken your confidential information.

The clause in the Forsters case was extremely broad and Forsters was able, in the circumstances of their particular case, to rely on it to cover off this potential negligence claim. Employers should treat this decision as an important reminder that it is necessary to take the time to consider whether the release and waiver provisions in a settlement agreement are appropriately drafted.

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