The cost of ambiguity in settlement agreements

The recent High Court (Chancery Appeals) decision in Obaid & ors v RLS Solicitors Limited [2024] EWHC 1899 (Ch) serves as a reminder to all parties compromising disputes of the need for very careful drafting of settlement agreements, to ensure that they reflect the parties’ intentions and are unambiguous in their effect.

Background

The Defendant firm of solicitors (RLS) were said to have been instructed by the second claimant (C2) and another company (OFY) around January 2015 in relation to certain proposed property acquisitions. (C2 was a company under the control of C1, and the Claimants’ position generally was that C2 was the correct Claimant, but C1 and C3 were joined out of an abundance of caution).

The Settlement Deed, dated 19 June 2019, settled various disputes between the three Claimants (referred to as the ANBO Parties) on the one hand, and on the other a former business associate of C1’s (Dr Al-Hezaimi) and two of Dr Al-Hezaimi’s companies (OFY and another referred to as Latifah) (together the KAH Parties). These disputes included a previous set of proceedings in England & Wales between the ANBO Parties and the KAH Parties (the Previous Proceedings).

The Previous Proceedings were primarily concerned with the purpose of various payments made by C1 and C3 to Dr Al-Hezaimi and/or a related company; in particular whether they were for the purpose of investing in the proposed property acquisitions or otherwise. They were concluded by the Settlement Deed which was entered into part-way through trial.

The background to the present proceedings similarly involved various agreements and payments said to have been made between C1 and Dr Al-Hezaimi, the upshot of which was that, on the Claimants’ case, RLS were instructed on a joint retainer for C2 and OFY in relation to certain property acquisitions, but only took instructions from Dr Al-Hezaimi, thereby breaching various duties owed to C2. The properties were ultimately purchased in the names of OFY and Latifah; again on the Claimants’ case, the properties belonged beneficially to C2. The Claimants therefore claimed damages from RLS for professional negligence and/or in equitable compensation.

RLS applied for strike out and/or reverse summary judgment on the grounds the claims against them were captured by the provisions of the Settlement Deed. In a judgment dated 11 December 2023, Deputy Master Lambert concluded that the Settlement Deed did operate to release RLS, as an ‘Affiliate’ (as defined in the Settlement Agreement) of OFY and Latifah (as well as C2), from the present claim, and granted the application.

The High Court’s decision on appeal

The key points are as follows:

• Clause 4 of the Settlement Deed provided that:

“4.1 Each of the Parties agrees, on behalf of themselves and their respective Affiliates;

4.1.1 that this Deed shall constitute full and final settlement of all Claims against each of the other Parties and their respective Affiliates

4.1.2 covenants and undertakes …. that

(A) they shall not make or maintain any Claim against any of the other Parties or their respective Affiliates….” (emphasis added).

• ‘Affiliate’ was defined as an ‘Agent of any Party’, and ‘Agent’ was further defined as including professional advisers of the Parties. RLS was therefore an Affiliate of both C2 and OFY, and it was on that basis that the Deputy Master had considered that RLS was released from all ‘Claims’, including claims by its own clients.

• The Judge considered, however, noting the use of the word ‘respective’, that the aim of the Settlement Deed was to release every other Party’s agent, such as RLS, in its capacity as that other party’s agent. That interpretation would also be consistent with the aim of the Settlement Deed stated in the recitals, which was to resolve the parties’ disputes in relation to the beneficial ownership of certain assets. In the Judge’s view this did not suggest that it was intended to prevent actions between a party and its own professional advisers.

• The Judge also distinguished the terms of the Settlement Deed from the settlement agreement in question in Schofield v Smith [1], which had been found to operate to release a party’s own agent.

• He further rejected the suggestion, referring to obiter comment in Schofield, that it was ‘very hard to see’ how it could work in practice for a release by a party of an Affiliate of more than one party could be confined to the Affiliate’s activities for that single party, where the Affiliate was acting for each of them in connection with the same transaction. The Judge cited the example of a solicitor acting for two individuals on the joint purchase of a house and failing to put one of their names on the deeds.

The judgment also briefly considered further submissions by RLS in relation to potential contribution and ‘ricochet’ claims (the latter considered in Schofield), what constituted a barred ‘Claim’, and RLS’s status as an ‘Agent’ or otherwise at the date of the Settlement Deed, however none of these altered the Judge’s earlier conclusions.

The Claimants’ appeal was therefore allowed, the order of the Deputy Master set aside, and the Defendant’s application for strike out/summary judgment was dismissed.

Takeaway

Settlement agreements are, by their nature, designed to achieve finality between parties to a dispute; however, there is still a surprising number of cases that come back before the Court where the terms of a settlement agreement are then pored over. This is particularly so where there are multiple parties and/or elements to the dispute, some of which may be intended to be caught by the settlement and others to remain ongoing.

At the time settlement in principle is achieved, if a party considers it may still have claims it wishes to pursue against the other party or third parties, it should ensure either that the settled claim is very carefully defined and any remaining potential claims are expressly excluded.

Similarly, a defendant party should ensure that all potential claims against it are included within the settlement agreement to achieve the finality it had believed it was achieving. Failure to do either in the drafting could well expose the parties’ lawyers to negligence claims.

___

[1] Schofield v Smith [2022] EWCA Civ 824

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.