In a previous article we highlighted some of the issues that can arise when parties agree a settlement. A key concept which often sits alongside the settlement of a dispute is the release of any future claims. As a recent High Court case [1] demonstrates, it is crucial to take care when drafting a release, as making a mistake can be particularly costly. Gwendoline Davies explains.

Khanty-Mansiysk Recoveries v Forsters LLP

The defendant solicitors had acted for a petroleum company (the client) on the share purchase of a Russian entity, with a view to the exploitation of an oil exploration opportunity. The solicitors invoiced their client for their services, but the client disputed the amount. One of the directors of the client company provided a personal guarantee in respect of a large proportion of the invoice. A couple of years later, however, the invoice remained outstanding and the solicitors issued proceedings against the director for payment. The director and the client then entered into an agreement with the solicitors to settle the payment dispute.

As part of the settlement, the release clause stated that the agreement was “…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…”. “Claim” was defined as “any claim, potential claim… of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, however and whenever arising… 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 [for payment] or the invoice…”.

Claim and release defence

Another year down the line it transpired that the share purchase agreement had not been properly completed. The client went into liquidation and the claimant recoveries company sued the solicitors for £70 million, for breach of contract and negligence in respect of the failed share purchase. The solicitors defended the claim in full on the basis that it was caught and compromised by the settlement agreement.

Decision

The High Court agreed with the solicitors and dismissed the claim. The court looked closely at the wording of the release and the definition of “Claim” and concluded that both were very wide. Whilst the breach of contract/negligence claim did not “arise out of” the payment dispute, it did relate to the very same legal services as did the invoice. The release included the word “or”, such that claims “in connection with” the payment dispute could be caught as an alternative. In addition, it was clear on the express wording that the settlement and release went far beyond merely the payment dispute that existed at the time. In fact, the wording was so clear that the cautionary principle espoused in Bank of Credit and Commerce International SA v Ali [2] (that in the absence of clear language the court will be slow to infer that a party intended to surrender claims of which it was not, and could not be, aware) did not apply to assist the claimant. Neither did the court agree with the claimant that the wording of the release should be limited by the background context and the underlying purpose of the settlement agreement.

WM Comment

This case is, fundamentally, a question of contractual interpretation. The correct approach to interpreting contracts has hit the legal headlines a lot in recent months [3]. In each case, the message is clear: the wording of the contract is the starting point and the more clear the wording, the less likely the court will be to depart from it, whatever the outcome.

This case also highlights the danger of making a mistake with a release – in particular, the costly error of inadvertently releasing potential claims which the injured party might never intend to compromise. Even though the negotiation and completion of a settlement agreement often follows a long and hard-fought dispute, it is important that parties and their advisors do not take their eye off the ball.