The answer to this question requires examination of a fundamental aspect of contract law – what did the parties intend? In Point West London Limited -v- Mivan Limited  EWCH 1223 (TCC) the court considered whether the phrase “full and final settlement in respect of any and all outstanding matters” was intended to release the contractor from its liabilities for defects which both parties knew about at the time the settlement agreement was concluded, but which remained unresolved.
Mivan, a building contractor, was engaged by developer Point West on 22 August 2000 to build 400 apartments at the old West London air terminal site in Cromwell Road for a sum of £10m, plus an additional sum for the fit-out of a penthouse, known as Flat 1601, which occupied the top three floors. Global practical completion of the apartments was achieved in June 2001, but problems arose with Flat 1601, including a leaking curtain walling system and a heating and cooling system that could not deliver adequate heat.
A year after global practical completion, a final account of £12.5m was agreed. Around this time, Flat 1601 was purchased by Rothschild Trust (Bermuda) Limited and a sum of £50,000 was held back by the purchasers as a retention against the defects.
Six years later, the remedial works remained unresolved but both Mivan and Point West wished to draw a line under the project. In October 2007 a deal was struck through an exchange of three letters, which together formed the following settlement agreement:
- Mivan proposed £50,000 in “full and final settlement in respect of the above works, together with any and all outstanding matters”;
- The proposal was accepted subject to Mivan providing documents to assist Point West in their claim against the occupants of Flat 1601 for arrears of service charge and payment of retention; and
- Mivan agreed to assist Point West in their claim for recovery of sums owed by the occupants of Flat 1601.
Meanwhile, Point West pursued the tenant of Flat 1601. The tenant successfully counterclaimed in respect of building defects and was awarded damages. The defects to the curtain walling and heating and cooling systems were far greater than either Point West or Mivan had envisaged at the time the settlement agreement was concluded, and it appears the entire curtain walling needed to be replaced.
Point West then brought proceedings against Mivan seeking a declaration that the settlement agreement did not include settlement of Mivan’s liability to pay damages for defects that were the subject of proceedings between Point West and the tenant of Flat 1601, and/or any other defect the consequences of which were unknown at the time of the settlement agreement.
The court was required to consider whether the settlement agreement could be interpreted so that Mivan was responsible to Point West for losses in respect of the defects. The court, in interpreting the settlement agreement, applied the general rules of interpretation of contracts. The court sought to ascertain the intention of the parties by considering the express words used in the agreement in the context of the specific background knowledge which would reasonably have been available to the parties.
Mr Justice Ramsey confirmed that the wording of the letters envisaged a full and final settlement in respect of works and all “outstanding matters”. At the time the settlement agreement was concluded, the “outstanding matters” were financial payments owing to Mivan and the defects. It was held that the settlement agreement could only be interpreted as meaning that Mivan was being released from all responsibilities and obligations that were patent at the time the settlement agreement was concluded, and this included liability for the defects to the curtain walling and heating and cooling system. There was nothing in the settlement agreement that expressly reserved Point West’s rights to claim from Mivan the cost of carrying out further remedial works and the court was not prepared to remedy this gap.
Whilst the judge acknowledged that the decision might not be commercially desirable for Point West, the courts would not “rewrite or improve the agreement or make an agreement which the parties themselves did not make”.
Comment and Practical Tips
The case demonstrates the need for careful drafting in settlement agreements, and the need to consider the parties’ background knowledge at the time the settlement agreement is being drafted, as these facts may be used to assist the interpretation of the express words used. The following are useful tips to consider when preparing settlement agreements:
- Record settlement agreements accurately. A single document executed by the parties setting out their intentions is far better than an exchange of letters.
- Consider the impact of all potential disputes and/or claims with third parties.
- The settlement agreement should clearly identify the scope of any release from future liability, especially future liability in relation to potential disputes or claims of which the parties have knowledge.
- If you intend to reserve your rights, then say so expressly.