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ADR Practitioner Update – October 2016

Date: October 25, 2016 Posted by No Comments

Release provisions and their interpretation: known unknowns and unknown unknowns – limits on the ‘cautionary principle’?

At some point during a mediation, parties will turn their attention to the scope of the release one or more of the parties will enjoy in return for reciprocal obligations (usually an agreed payment) they have assumed as part of the overall deal.

The release can be wide, narrow or something in between. The more complex the relationship giving rise to the dispute, the more challenging these discussions can be. The less ‘clean’ the clean break, the trickier the drafting. Sometimes discussion about the scope of the release can be as difficult as negotiation of the basic deal itself. But, as two recent cases have demonstrated, the drafting of release provisions requires a great deal of care.

Before looking at these two decisions, it is perhaps sensible to review the background and in particular, the House of Lords decision in Bank of Credit and Commerce International SA v Ali [2001] 1 All ER 961. 



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A case of unknown unknowns

In BCCI v Ali [2001] 1 All ER 961 a former employee of BCCI wanted to bring a claim for stigma damages but had earlier agreed a settlement ‘… in full and final settlement of all or any claims whether under statute, Common Law or in Equity of whatsoever nature that exist or may exist …’. The stigma claim was, as Lord Clyde noted in his judgment, one which ‘…. neither party could have contemplated even as a possibility as the law stood at the time when the [earlier] agreement was made’. Lord Bingham, after noting that ‘The general principles [of construction of contractual provisions] summarised by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912-913 apply in a case such as this’, went on to say, at paragraph 10 of his judgment, that ‘… a long and in my view salutary line of authority shows that, in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware’. Later, (at paragraph 17) he said that ‘…. I think these authorities justify the proposition advanced in paragraph 10 above and provide not a rule of law but a cautionary principle which should inform the approach of the court to the construction of an instrument such as this’.

Lord Bingham concluded by saying that ‘On a fair construction of this document I cannot conclude that the parties intended to provide for the release of rights and the surrender of claims which they could never have had in contemplation at all. If the parties had sought to achieve so extravagant a result they should in my opinion have used language which left no room for doubt and which might at least have alerted Mr Naeem to the true effect of what (on that hypothesis) he was agreeing’. Three of the four other Law Lords agreed with Lord Bingham that on its true construction, the release clause of the earlier settlement agreement did not constitute a compromise of the new claim. But it was a case of an unknown unknown – a future claim that could not have been contemplated at the time the release provision was agreed. What is the position however where future claims, however unlikely, can be contemplated? It seems the court’s approach is quite a bit more expansive!



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A case of a known unknown – unsuspected but not impossible!

Khanty-Mansiysk Recoveries Ltd v Forsters Llp [2016] EWHC 522 (Comm) (22 March 2016)

This case concerned a professional negligence action brought by a claimant against former advisors a few years after a settlement had been reached in relation to unpaid fees.

In early July 2012, Forsters, a law firm, issued proceedings on a guarantee (given by RGP) in respect of outstanding fees (owed by Irtysh). The action was compromised in December 2012.

Clause 2.1 of the settlement agreement provided that 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 defined as ‘… any claim, potential claim, counterclaim, potential counterclaim, 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’.

As noted in the judgment of Sir Bernard Eder:
‘The definition of “Claims” in Clause 1 is also, on its face, extremely wide. In particular:
a) “any claim” is expanded to include any “potential claim, counterclaim, potential counterclaim” i.e., reinforcing the notion that even a “potential” claim (or counterclaim) is nonetheless a “Claim”;
b) the words “whether known or unknown, suspected or unsuspected” make plain that knowledge or even suspicion is not a requirement for something to be a “Claim”;
c) the words “however and whenever arising” further make plain that it is not a prerequisite that the “claim” must have arisen by the date of the settlement;
d) the words “whether or not such claims are within the contemplation of the Parties [i.e. RGP, Irtysh or Forsters] at the time of this Agreement” repeat the words in the operative Clause 2.1 and make plain (again) that even (potential) claims and counterclaims outwith the contemplation of the parties at the date of the Settlement Agreement fall within its scope’.

Whilst widely drafted, the words ‘… arising out of or in connection with the Action or the invoice dated 1 July 2010 ……’ at the end of the definition clearly limited the scope of ‘Claims’. Moreover, the judge accepted that the present professional negligence action did not ‘arise out of’ the earlier compromised matters (being the guarantee/invoice). However, the respondent (Forsters) relied on the words ‘…or in connection with the Action or the invoice…’ (emphasis added) and on this, Sir Bernard Eder said ‘Here, it is sufficient to say that, as a matter of language, the words “in connection with” are plainly of wider scope than the words “arising out of”’. He concluded that ‘…. the claim now sought to be advanced is for breach of contract and/or negligence in relation to the very same legal services which were the subject of the Invoice and the Guarantee Action. In my view, it inevitably follows that, as a matter of language, the claim now sought to be advanced …..in these present proceedings is properly described as being “connected with” both the Guarantee Action and the Invoice and therefore “caught” by the Settlement Agreement’.

The Judge made clear that this was a decision reached having in mind the cautionary principle referred to earlier, noting ‘This is not a case like BCCI where the claim was, in effect, an “unknown unknown”. Whilst fully recognising that the present claim was not “suspected” at the time of the Settlement Agreement, the objective bystander could not and would not, in my view, have said that a claim for damages for breach of contract and/or negligence was “impossible”’.

Last year, the court came to a similar conclusion in one of the well-publicised phone hacking cases in what was another example of a known unknown.

Brazier v News Group Newspapers Ltd [2015] EWHC 125 (Ch)

In Brazier, the court struck out phone hacking claims on the basis that they had been compromised by an earlier settlement agreement, the release provisions of which had been drafted narrowly by reference to a specific claim number. A confidential schedule to a Tomlin Order had provided, ‘The Parties have agreed terms in full and final settlement of the Claimant’s claim in proceedings HC12C00607 (the “Claim”) as follows:’.

Mr Justice Mann, applying the normal principles of construction, identified the context in which the release wording was agreed, stating, ‘Since the matters compromised are identified in terms of claims made in a specified set of proceedings the principal context is the claim made in those proceedings and the proceedings themselves. I have set out details of the claim form and the pleadings above. The notice to admit and the admissions are of significance, and it is right to say that they are largely Mulcaire-centric, but the pleadings are more significant’.

He went on to say, ‘All this therefore points towards the claim brought in the proceedings as being one in respect of all phone-hacking activities directed against Mr Brazier. It is not a claim merely in respect of Mr Mulcaire’s activities. Mr Mulcaire’s activities, and therefore the News desk’s activities, were the main activities which had been revealed to Mr Brazier, but his claim was not about just those activities. It was about more than that. He expected to get relief in respect of whatever level of activity the court found by the end of the trial, as a result of disclosure, witness evidence and inference’.

Later, in distinguishing BCCI, Mr Justice Mann said:
‘Accordingly, when Mr Brazier settled his case he settled a case in which he did not know the full extent of his claim, but unlike the claimant in [BCCI] he was aware of his ignorance. In other words, he knew in general terms what it was that he did not know in detail. It was a “known unknown”. What is more, he knew that a stage was coming shortly when he might become better informed, because disclosure was to take place within the foreseeable future ….’

‘The case is therefore not one in which the releasor was completely ignorant of a further cause of action, as in [BCCI]. He was aware of further causes of action, and did not know how many, but, crucially, was aware that he did not know how many. A decision to settle in those circumstances, taking some sort of view on the probabilities and deciding whether it is worth going on in the action, is entirely rational and nothing like the situation in [BCCI] and the cases referred to there where there is an unappreciated ignorance of another cause of action. The latter situation might drive the court to the view that the parties cannot have intended to settle that of which they were ignorant, but there is no justification for forming that view in the former.

Accordingly Mr Brazier’s ignorance of the Pinetree conspiracy does not affect the construction of the words of the settlement so as to lead to the view that the Features desk conspiracy was not intended to be settled. The words are appropriate to settle it and the context does not upset what the words would seem to provide. Subject to the next point, I would find that the compromise agreement embodied in the Tomlin order prevents bringing the second action based on further evidence of phone hacking’.

Conclusion

Interpretation cases are always tricky and those that concern release clauses are no exception. No special rules apply to their interpretation and they are to be treated as any other contractual provision. The object of the court, as Lord Bingham summarised in BCCI, ‘….is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties’ intentions the court does not of course inquire into the parties’ subjective states of mind but makes an objective judgment based on the materials already identified’.

There is no reason why parties cannot settle future unknown claims. As Lord Bingham said at paragraph 9 of his judgment, ‘A party may, at any rate in a compromise agreement supported by valuable consideration, agree to release claims or rights of which he is unaware and of which he could not be aware, even claims which could not on the facts known to the parties have been imagined, if appropriate language is used to make plain that that is his intention’. The ‘cautionary principle’ that he later went on to discuss (‘that, in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware’), clearly has it limits as Khanty-Mansiysk Recoveries and Brazier demonstrate. In each of these cases, a distinction was drawn between BCCI on the one hand, which was a case of an unknown unknown (‘The stigma claim is one which neither party could have contemplated even as a possibility as the law stood at the time when the agreement was made’, Lord Clyde, paragraph 86) and the claims sought to be advanced in those cases, being known unknowns.

The three cases looked at in this Update demonstrate the need for careful drafting of release provisions. What on the face of it might look like a narrow settlement, e.g. release of claims made in Claim No XXXX, can in fact, depending on the drafting of that claim document, turn out to be a very broad settlement as Brazier demonstrated. On the other hand, what on its face looks like a widely drafted clause, can turn out to be narrow in scope, as would have been the case in Khanty-Mansiysk Recoveries Ltd had the words ‘or in connection with’ not been included in the release clause.
 
Jon Lang
October 2016