Settlements produced during mediation, at the courtroom door or in mid-trial are usually drafted under pressure and in a short time, without correspondence about the terms of the compromise. The speed at which such agreements are concluded - as well as the fact that there are usually no independent records of the discussions which lead to settlement - leaves scope for dispute between the contracting parties over the meaning of terms. When asked to construe disputed settlement terms, the court must look at them objectively and ask how a reasonable person, given the full factual matrix of the case, would construe the contractual terms.
The recent case of Alliance v Tishbi ([EWHC] (Ch) 1015) has provided additional guidance on the factors that courts should consider when interpreting agreements made in mid-trial.
Mr Alliance and Mr Tishbi held equal 50% shares in Barnes Estates Limited, a special purpose joint venture company for the acquisition, development and sale of a hospital. The terms of the joint venture were agreed orally. Alliance provided the funding for the project, while Tishbi provided his daily management and development expertise. On the sale of the hospital, a dispute arose about the charges that could be made against profits before distribution.
Alliance argued that it had been agreed that interest could be charged on the funding that he provided, but that Tishbi would not be entitled to charge for management services. Tishbi argued that there had been no agreement on interest or management charges; rather, it had simply been agreed that the gross profit on the sale would be divided equally.
On the fourth day of trial, the case settled. The agreed terms were set out in a Tomlin order. A further dispute arose as to the meaning and effect of the settlement.
The face of the order referred to the schedule, which contained various provisions concerning the appointment of accountants to prepare settlement accounts for the joint venture company. Paragraph 5 concerned interest on the project's funding. It stated:
"for the purposes of auditing the accounts of Barnes Estates Limited the sums paid out by Barnes Estates Limited to Mr Alliance… represent the discharge of Barnes Estates' liability to pay interest to Mr Alliance."
The schedule also included the following 'bookend' provisions at Paragraphs 1 and 9:
"The Claim and the Counterclaim herein are withdrawn...
This agreement shall be in full and final settlement of all claims between the parties as part of the settlement hereto howsoever arising."
Alliance asserted that his claim for interest had been conceded as part of the settlement discussions, meaning that he was entitled to keep the distribution that he had received in full and that Tishbi had to pay back part of what he had received. He argued that Paragraph 5 was not intended to preclude his right to receive interest, and that it had been included only to stipulate how payments should be treated for accounting purposes.
Tishbi disagreed and sought a declaration that on the proper construction of the order, Alliance was not entitled to receive further moneys from the proceeds of the sale of the hospital beyond those that he had already received by way of profit.
The judge explained that the correct approach to ascertaining the parties' intended meaning of the words was to ask:
"What would a reasonable person (having all of the background knowledge available to the parties in the situation in which they were at the time of the compromise) have understood them to be using the language of the document to mean?"
The judge commented that the words of the settlement agreement had to be read in their practical context - which, in this case, was the ongoing trial. He identified four factors which should be considered when a settlement is reached in mid-trial:
- State of the action when compromise was reached - in this case the settlement was reached after the closing of Alliance's witness evidence. It was apparent to the judge from the transcript that Alliance had not come across well in the witness box. As such, the judge considered it more likely that he was in a losing position at the time of settlement and that this would be reflected in the compromise.
- Arguments as presented at trial by reference to the parties' skeleton arguments - the judge referred to Alliance's skeleton argument, in which it was noted that part of his claim would depend on the court's assessment of the oral evidence, which, as set out above, was not positive as far as Alliance was concerned.
- Correspondence immediately preceding trial - the judge considered that the court should look at the pre-trial correspondence to see whether there was anything to suggest that either party had been willing to give ground. In this case, the judge referred to correspondence in which Alliance had acknowledged that specialist expertise from local agents would be required in order to quantify his claim for interest. The judge considered that if Alliance's claim for interest had been agreed, the parties would have made provision in the schedule for the involvement of local agents in the production of the settlement accounts, rather than leaving this task to the accountants.
- Material available to be deployed at trial - the judge commented that this could reveal what factors may have been considered when the compromise was discussed.
After considering the words used in the order and the facts relating to the points outlined above, the judge concluded that, on its true construction, the compromise had the effect in law that Alliance and Tishbi could retain the sums which they had actually received, subject to certain contributions towards corporation tax and auditors' fees, as envisaged by the schedule.
The judge was strongly influenced by the wording of Paragraphs 1 and 9, which he considered would be understood by the reasonable person to mean that there had been a 'drop-hands' settlement and that any significant issues going to the heart of the dispute had been resolved as part of the settlement.
The judge's decision was also influenced by the poor quality of Alliance's witness evidence. He commented that:
"A reasonable person who was as informed as Mr Alliance and Mr Tishbi and who had watched what was going on would be surprised if it was suggested that the bargain struck towards the conclusion of Mr Alliance's bad performance in the witness box represented a surrender by Mr Tishbi, and he would think that if that was its legal effect then something must have gone wrong with the language."
This case provides a timely reminder that although settlement agreements may be drafted in pressurised circumstances, parties should apply the same care that they would take in documenting any other agreement to ensure that the terms are clear enough to be construed unequivocally. It also underlines the importance of keeping notes of settlement discussions and, where possible, documenting the reasons for the terms of settlement. Doing so will minimise the risk of satellite litigation over settlement terms.
For further information on this topic please contact Sarah Trimmings at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).