UK: Settlements: The Risks Of Unintentionally Compromising Claims And Releasing Parties

Last Updated: 14 December 2016
Article by Helen Rowlands and Nicola Vinovrski

Most Read Contributor in UK, November 2017

Three recent decisions highlight the risk of inadvertently settling more claims or releasing more parties than intended. Parties seeking to bring proceedings to an end, whether by way of settlement agreement or consent order, should take as much care in identifying the scope of the settlement as would be taken identifying the causes of action and the defendants when commencing proceedings.  A failure to do so may result in a party finding that it has given up rights it did not intend to concede.

Disputes over the scope of a settlement

In Botleigh Grange Ltd v Revenue and Customs Commissioners [2016] the Court considered the scope of a consent order agreed between HMRC and a company in respect of a dispute over a winding-up petition. The effect of the consent order had been to discharge the petition debt, and the question was whether, in light of the terms of the consent order, the company's right to dispute certain debts had been preserved such that it could assert such rights by way of cross-claim in respect of a second winding-up petition.

The Court observed that the test was what a reasonable person (with the parties' background knowledge) would have understood the order to mean (Arnold v Britton [2015]).  If the language of the consent order was considered in isolation, it supported HMRC's position that there was no qualifying wording preserving the company's rights. The Court found that there was nothing in the correspondence between the parties that would lead to a different interpretation and held that a reasonable person with the relevant background knowledge would consider that the company had not successfully preserved its rights and had thus lost its ability to bring a valid cross-claim.

In Marsden v Barclays Bank plc [2016], Mr Marsden claimed he had been mis-sold interest rate swaps. Mr Marsden had complained to the Financial Ombusdman and, subsequently, the bank had offered Mr Marsden a new loan, a condition of which was that the swaps were terminated.  Mr Marsden accepted the offer. Both parties also signed a settlement agreement stating that the entry into the loan was "in full and final settlement of all complaints, claims and causes of action which arise directly or indirectly, or may arise, out of or are in any way connected with the Swaps".

Subsequently, as required by its regulator, the bank reviewed its past sale of swaps to certain customers.  As a consequence of the review, the bank made an offer to Mr Marsden, inviting him to submit any further loss claims by a specific deadline, which he failed to do.  Mr Marsden then brought a claim against the bank for alleged mis-selling, restitution, deceit and breach of contract in conducting its review. The bank sought summary judgment dismissing Mr Marsden's claim on the basis that all causes of action in relation to the swaps had been fully and finally compromised by the prior settlement.  Mr Marsden accepted that he had signed the settlement agreement but argued that there was no consideration for it, his signature was procured by economic duress and/or the agreement did not compromise all claims.

The Court granted summary judgment dismissing Mr Marsden's claims, finding that the settlement agreement was entered into for good commercial reasons and with the benefit of legal advice.  The Court considered that, though formulated in different ways, Mr Marsden's claims were in effect that he had been mis-sold the swaps. On its true construction, the settlement agreement was "plainly intended to encompass mis-selling the swaps to Mr Marsden, no matter how that mis-selling came about".  The Court observed, however, that "even very wide wording will not usually be sufficient to show that the parties intended to settle fraud claims, unless express words are used", but found that alleged deceit claims were within the scope of the release.

Disputes over which parties have been released

Aside from being certain about which claims are being settled, it is also important to consider which parties are to be released. The general rule is that the release of one joint tortfeasor (meaning those who have committed the same wrongful act for which they are jointly and severally liable for the whole of the damage, thus giving rise to a single cause of action) will operate to release all other joint tortfeasors (Bryanston Finance Limited v de Vries [1975]). There are two main exceptions: first, where there is an agreement not to sue rather than a release, leaving the cause of action intact (Gardiner v Moore [1969]); and second, where the settlement reserves rights to sue or there is an implied right to sue other joint tortfeasors (Watts v Aldington [1999]). There was a shift away from this approach in Ansari v Knowles and Others [2012] which decided that a settlement agreement did not release a joint tortfeasor as a reasonably bystander would not conclude that there was such release.  However, in Gladman Commercial Properties v Fisher Hargreaves Proctor [2013], the Court of Appeal declined to imply a reservation of a right to sue other joint tortfeasors as both parties were advised and represented in the settlement. Therefore, where there is a single cause of action, the starting point is that a release of one joint tortfeasor will release all.

However, where a claimant has separate causes of action for the same loss against multiple defendants and enters into a settlement with one of the defendants, the question to be considered is whether the effect of the settlement is to extinguish the claimant's loss.

This issue arose in Anthony McGill v Sports & Entertainment Media Group & 8 Ors [2016] where the Court of Appeal concluded that a claimant's previous settlement with a contract breaker did not discharge his claims against the present defendants for inducing a breach of the same contract. The claimant had brought a claim against a former professional football player for alleged breach of an oral contract appointing him as exclusive agent for the negotiation of a new contract. The claim was settled with the player agreeing to pay a sum in full and final settlement of all claims arising out of the matters set out in the statements of case. Subsequently, the claimant brought claims against the present defendants alleging that they had induced the player's breach of contract. The Court of Appeal found that it would be unfair to the claimant to hold that the settlement with the player precluded him from pursuing the present action. The claimant had two separate causes of action: a claim for breach of contract against the player; and claims for inducing a breach of contract and conspiracy against the present defendants. The Court of Appeal considered that, unless it was beyond doubt that the settlement of the action against the player had left the claimant with no remaining loss to recover, the second claim would not be barred.

Therefore, where there are separate causes of action leading to or contributing to the same loss against different defendants (i.e. liability is not joint), a settlement with one defendant may not discharge the other defendants unless it is clear that the effect of the first settlement was to extinguish the claimant's loss in full.

Conclusions

These recent cases serve as a useful reminder that:

  • As with any other contract, in interpreting a settlement agreement, the courts will try to determine what a reasonable person, with the parties' background knowledge, would have understood the relevant settlement to mean.
  • If more than one interpretation is available, the courts will strive to give the settlement agreement a meaning consistent with business common sense.
  • However, even very wide release wording will not usually be sufficient to show that the parties intended to settle fraud claims, unless express words are used.
  • Careful consideration should be given to whether there is a single cause of action or separate causes of action against the defendants and care should be taken in drafting any settlement to ensure that claims are not unintentionally released.
  • Unless clear words are used to reserve the right to pursue other joint tortfeasors, settlement with one joint tortfeasor will generally be presumed to release all joint tortfeasors.
  • To minimise the risk of non-intentional release, it is preferable to include an express reservation of the right to pursue the other joint tortfeasors or to settle on the basis of an agreement not to sue as opposed to a release of liability.
  • Where the causes of action against the different defendants are separate, the court is unlikely to conclude that a settlement with one will release the others from liability unless it is clear that the effect of the settlement is to extinguish the loss.

Settlements: The Risks Of Unintentionally Compromising Claims And Releasing Parties

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