When settling a dispute it is usual for the defendant to seek the widest possible waiver of all claims that might be brought against them in the future.

If the dispute is a genuine 'one-off', that might be thought acceptable, but if an unforeseen claim later arises you could be shut out from that claim due to the width of the waiver you signed when settling the earlier claim. Can it ever be sensible to settle beyond the identified dispute? The case below makes the point.

Background facts

In 2010 solicitors were instructed to incorporate a company and draft a share purchase agreement for that company, all of which was to enable the exploitation of an oil exploration opportunity. The client for whom all of the work was done disputed the fees charged for the work and moved to another firm of solicitors.

The director and shareholder of the company gave a personal guarantee for the legal costs in order that the file could move to new solicitors. This guarantee was later called in and legal proceedings were issued for the guarantor's failure to pay £74,837 plus VAT in legal costs.

Settlement terms

These legal proceedings were settled in December 2012. The operative clause was:

"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)."

Clause 1.1 defined "Claims" as:

"... any claim, potential claim, counterclaim, potential counterclaim, right of set-off, or potential right of set off, right of contribution, potential right of contribution, right to indemnity, potential right to indemnity, cause of action, potential cause of action or right or interest of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, however and whenever arising in whatever capacity or jurisdiction, whether or not such claims are within the contemplation of the Parties at the time of this Agreement arising out of or in connection with the Action or the invoice dated 1 July 2010 addressed to [Irtysh] by [Forsters] and referred to in the Action".

The Action was defined as the court proceedings number 2YK73888 between the solicitors who were owed money and the guarantor.

Later negligence claim

In 2013 it transpired that the shares were not transferred by the share purchase agreement and a professional negligence claim was brought for £70m against the solicitors. The settlement agreement from 2012 was used to defend that claim by arguing that it waived the claim for negligence. This was argued even though the alleged negligence was not known about by the parties when the settlement was agreed.

The leading case of BCCI v Ali decided in 2002 that even widely drafted settlement agreements could not waive claims that, at the time of the settlement, did not even exist in law. But a professional negligence claim was certainly possible in law in 2012 so that was not enough in the present case to assist the claimant.

The claimant relied on the line "arising out of or in connection with the Action or the invoice dated 1 July 2010 addressed to [Irtysh] by [Forsters] and referred to in the Action" as limiting the waiver to the debt claim. The defendant argued that the phrase "in connection with" meant that the professional negligence claim was waived because it was made relating to advice to which the invoice related.

The court sided with the defendant and the appeal court agreed. The claim for professional negligence was waived because it was a claim based on the services that had been invoiced; the claim was therefore connected with the Action or the invoice. The professional negligence claim could have given the guarantor a defence to the debt and there was therefore a close overlap in the types of claim, even if the client had not known of the negligence when he settled the guarantee claim.

Had the claim against the solicitors related to different advice on an unrelated matter, or been a claim for personal injury whilst at the solicitors offices, then it would not have been waived by the settlement, but it was not. The claim was therefore shut out.

Careful drafting

This case emphasises the importance of careful attention when drafting waivers in settlement agreements. A defendant will always want to extract maximum value for its settlement, but to extend the waiver so widely beyond the known claim is not necessarily sensible for the claimant.

In the case above the baby was most certainly thrown out with the bath water and it is very doubtful that was the intention of the guarantor. If a client is fully aware of the breadth of the future claims they are waiving when they settle then that is one thing: but in this case the drafting probably extended beyond what the client expected. Had they known they were waiving future rights to claim for negligent work, they may not have agreed to it.

Whilst all cases turn on their facts - and the scope of any settlement agreement is decided when it is being drafted - if an agreement goes beyond what the client expected there are likely to be questions asked of the solicitor drafting the settlement agreement. If a client unwittingly signs a waiver wider than intended, there could then follow a claim for professional negligence in the advice and drafting of the settlement agreement.

For further detail please see - Khanty-Mansiysk Recoveries Limited v Forsters LLP [2018] EWCA Civ 89

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.