Settlements produced during a mediation, at the courtroom door or mid-trial are usually drafted under pressure and within a short space of time, without correspondence about the terms of the compromise. Given the speed at which such agreements are concluded and the common absence of independent records of the discussions leading up to settlement, there is ample scope for dispute between the contracting parties over the meaning of the terms. When asked to construe disputed settlement terms, the court must look at these objectively and ask itself how the reasonable person, given the full factual matrix of the case, would construe the contractual terms.

The recent case of Alliance and another v Tishbi and others [EWHC] (Ch) 1015 has provided additional guidance on the factors that the court should consider when interpreting agreements which are made mid-trial.

Background facts

Mr Alliance and Mr Tishbi held equal 50% shares in a special purpose joint venture company called Barnes Estates Limited for the acquisition, development and sale of a hospital. The terms of the joint venture were only ever agreed orally. Mr Alliance provided the funding for the project whilst Mr Tishbi provided the daily management and development expertise.

On the sale of the hospital, a dispute arose as to the charges that could be made against profits before distribution.

Mr Alliance argued that it had been agreed that interest could be charged on the funding he provided but that Mr Tishbi would not be entitled to charge for management services. Mr Tishbi argued that there had never been any agreement about interest or management charges, simply that the gross profit on the sale would be divided between them equally.

On the fourth day of trial, the case settled. The agreed terms were set out in a Tomlin order (the Order). A further dispute then arose as to the meaning and effect of the settlement.

The settlement

The face of the Order referred to the Schedule. The Schedule contained various provisions concerning the appointment of accountants to prepare settlement accounts for the joint venture company.

As regards interest on the project’s funding, it stated at paragraph 5:

“…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 “book-end” 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”.

Mr 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 Mr Tishbi had to pay back part of what he had received. He argued that paragraph 5 of the Schedule was never intended to preclude his right to receive interest and that it was only included to stipulate how payments should be treated for accounting purposes.

Mr Tishbi disagreed and sought a declaration that, on the proper construction of the Order, Mr Alliance was not entitled to receive any further monies from the proceeds of sale of the hospital beyond those he had already received by way of profit.

The court’s decision

Norris J explained that the correct approach to ascertain 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?”

Norris J further 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 features which should be considered when a settlement is reached mid-trial:

  1. The state of the action at the time when the compromise was reached. In this case the settlement was reached after the closing of Mr Alliance’s witness evidence. It was apparent to the judge from the transcript that Mr 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.  
  2. The arguments as they were presented at trial by reference to the parties’ skeleton arguments. The judge referred to Mr 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 at point 1 above, was not positive as far as Mr Alliance was concerned.  
  3. The correspondence that immediately preceded the trial. Norris J considered that the court should look at the pre-trial correspondence to see if there was anything to suggest that either party had been willing to give up some ground. In this case, the judge referred to correspondence in which Mr 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 Mr 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 alone.  
  4. The material that was 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 four features outlined above, Norris J concluded that, on its true construction, the compromise had the effect in law that Mr Alliance and Mr 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 as meaning 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 Mr 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.”

Comment

This case provides a timely reminder that even though settlement agreements can be drafted in pressurised circumstances, parties need to take the same care that they would in documenting any other agreement to ensure that the terms are sufficiently clear that they can be construed unequivocally. It also underlines the importance of keeping notes of settlement discussions and possibly documenting the reasons behind the terms of settlement reached. Taking such care will minimise the risk of satellite litigation over settlement terms.