The Court of Appeal case Khanty-Mansiysk Recoveries Limited v Forsters LLP [2018] EWCA Civ 89 considers the ambit of settlement agreement wording and the extent to which this can cover future claims.

Background facts

Forsters LLP (“Forsters”) were solicitors who had been instructed by Rupert Galliers-Pratt (“RGP”) to assist with preparatory work required to incorporate Irtysh Petroleum plc (“Irtysh”).

Once Irtysh were incorporated, Forsters were also instructed on their behalf to acquire an oil exploration opportunity in Russia. In this respect, Irtysh agreed to buy shares in a company called YBI, which owned 49% of three companies each holding an oil field exploration licence.

Forsters issued an invoice to Irtysh for the sum of £129,853.22 inclusive of VAT. There was a dispute between the parties as to how much of the invoice was in respect of work carried out by Forsters for Irtysh and how much was in respect of work carried out by Fosters for RGP.

Forsters brought a claim against RGP for payment of the invoice pursuant to a guarantee that RGP had given.

The parties subsequently agreed to a settlement by which Irtysh and/or RGP would pay Forsters the sum of £90,000 in return for the action being discontinued, and a settlement agreement was drawn up between Irtysh, Forsters and RGP to this effect.

Clause 2.1 of that Settlement Agreement provided “This Agreement and 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)”.

The term “Claims” was defined in Clause 1.1 as being “any claim, potential claim, counterclaim, potential counterclaim, right of set-off, or potential 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”.

After the Settlement Agreement had been entered into, Irtysh discovered that it did not own YBI due to the fact that there had not been an actual transfer of shares to Irtysh.

Irtysh subsequently went into liquidation and its claims against Forsters were allegedly acquired by a company called KMR from the liquidators. KMR brought a claim against Forsters in negligence and sought damages in excess of £70 million in respect of the failure to transfer the shares in YBI (“KMR’s Claim”).

Decision

The question before the Court was whether KMR’s Claim fell within the definition of Claims under the Settlement Agreement.

The Court held that “the mere fact that the parties did not in fact know that there was a claim against Forsters in negligence is not enough to side-step the settlement agreement”.

In the present case:

  • Forster had already performed the services for which they were seeking payment and, as such, any claim for breach of contract and/or negligence in respect of those services had already accrued;
  • had a claim in negligence been raised, it would either have reduced or extinguished Forsters’ claim;
  • the claim for negligence overlaps with and is dependent on the services provided by Forsters and in respect of which Forsters were claiming payment; and
  • the damages claim was caused by Forsters’ services, in respect of which Forsters were claiming payment.

As such, the Court held that KMR’s Claim fell within the definition of Claims and therefore no further damages could be claimed by KMR from Forsters pursuant to the terms of the Settlement Agreement.

The above decision shows that parties must be very careful in entering into settlement agreements to ensure that they do not accidentally give up any rights or claims which either come into existence or come to light at a later stage.

The fact that any potential new claim which comes to light is significantly larger than any amount paid to settle the original claim will not assist the parties in trying to demonstrate that the intention cannot have been to settle the new claim.

Note, however, that if Party A (i) knows about the existence of a claim that Party B has against Party A; and (ii) knows that Party B is unaware of the claim, a Court is unlikely to allow Party A to benefit from such a clause.

There may be certain situations where a general release will not be interpreted as covering a particular claim, for example where the claim being brought did not exist as a matter of law at the time that the settlement agreement was entered into. Examples have also been given in the case law where general words may not cover particular kinds of claim, such as where the claim is in respect of industrial disease, a personal injury claim or a claim for libel.

However, settlement agreements will be interpreted in the same way as any other contract and appropriate language may result in the release of any claims or rights. As such, it is important to ensure that you consider the position carefully before agreeing to any settlement wording of this nature, or alternatively seek to agree very narrow wording in respect of the claims settled in order to avoid accidentally prejudicing any claim that comes to light in the future.