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Drafting settlement agreements: do you know what claims you’re releasing?

A crucial part of any agreement recording the settlement of a dispute is the description of the releases being given by one or both parties as part of the settlement.

A key issue for the parties to consider is whether the releases should extend to future claims and, in particular, claims that are unknown at the time of the settlement (either because the facts giving rise to the claim have not yet occurred or, more commonly, because they have occurred but the claimant is not aware or not fully aware of them).

In the interests of finality, parties will often wish to use the opportunity to put an end to all existing and potential disputes between them, and not just the dispute that has given rise to the settlement. However, this will not always be the case. Failure to properly address this issue in the drafting of releases can (and not infrequently does) result in a party discovering down the track that they are facing another round in a dispute they thought they had drawn a line under fully or, conversely, that they are precluded from pursuing a valuable claim that would otherwise have been available to them.

There is no legal obstacle to parties compromising claims of which they are unaware at the time of settlement and even claims of which they could not be aware. That much was made clear by the House of Lords in BCCI v Ali. However, that case is also authority for a “cautionary principle” that, in the absence of clear language, the court should be very slow to infer that a party intended to surrender rights and claims of which it was unaware and could not have been aware (in that case, because the claim only became recognised as actionable as a result of a retrospective development in the law after the date of settlement).

Nevertheless, in the context of the more common scenario where a further claim is pursued following some new factual circumstances coming to light after the settlement, three recent decisions suggest a quite narrow operation for that “cautionary principle”.

Known unknowns v unknown unknowns

In Brazier v News Group Newspapers and Leslie v News Group Newspapers, the claimants had entered into settlement agreements with the defendant newspaper group settling proceedings they had brought alleging phone hacking. They then sought to bring fresh claims relying on new evidence of alleged further hacking which had emerged after the settlement.

The releases in the settlement agreements were, on their face, drafted narrowly, by reference to the specific claim numbers of the original proceedings and with no mention of the releases covering future or unknown claims. The claimants argued that the further claims related to different and distinct instances of hacking to those alleged in the original proceedings and so were not encompassed within the releases.

In a judgment subsequently upheld by the Court of Appeal, the High Court rejected that argument, holding that the further claims had already been compromised, and struck out the claims.

Following a review of the pleadings in the original proceedings, the court held that the claims in those proceedings had been drawn widely enough that they (and therefore the releases) covered the new allegations. As the court emphasised, it was clear that the claimants were not totally ignorant of the possible further claims. They positively averred in the pleadings that there were wider phone hacking activities, though they could not particularise them. Accordingly, at the time of the settlement, the further hacking claims were matters of which they knew they were ignorant, that is, “known unknowns”. The court contrasted this with the situation in Ali, where the possibility of the further claim was an “unknown unknown”, because there was no basis to believe that such claims were actionable at law as at that date.

In this case, the claimants’ clear statement that they were aware of the possibility of further claims (and the fact that they elected to compromise their claims before awaiting disclosure that may have provided the missing details) makes the result fairly unsurprising. However, even in a case where there are no such clear statements, there is clearly the potential for a release drafted by reference to specific proceedings to apply to a broader range of conduct than may have been the focus of the parties’ attentions in the proceedings, depending on how broadly the pleadings have been drawn.

How much knowledge is required?

By contrast, in Khanty-Mansiysk Recoveries Ltd v Forsters LLP, there was no dispute that the claimants were, at the time of the earlier settlement, totally ignorant of the facts giving rise to the further claims they were now pursuing. Nevertheless, the release was held to have caught those claims.

A company and one of its directors had entered into a settlement agreement with a firm of solicitors in a dispute over the solicitors’ unpaid fees. The release expressly extended to any claims or potential claims, whether or not within the contemplation of the parties, arising out of or in connection with the solicitors’ invoice. Some time later, alleged deficiencies in the work performed by the solicitors came to light and an action alleging breach of contract and professional negligence was brought. The defendants relied on the earlier release as having compromised those claims.

The High Court held that the negligence claims were sufficiently connected to the solicitors’ invoices to fall within the express wording of the releases. Notably, the court observed that, although the grounds for the negligence claim were not suspected at the time of the settlement, an objective bystander would not have said that such claims were impossible and could not have been within the parties’ contemplation. To that extent, the judgment appears to treat the professional negligence claims as akin to a “known unknown”; in other words, they were among the type of claims that one might contemplate a client could have against a firm of solicitors in relation to work performed by the solicitors, but of which they knew they had no knowledge. This was in contrast to the “unknown unknown” in Ali.

Releasing fraud-based claims

It is widely accepted that the cautionary principle referred to in Ali in respect of unknown claims should also apply with even greater force to fraud-based claims (see for example Satyam Computer Services Ltd v Upaid Systems Ltd).

However, the recent decision in Tchenguiz v Grant Thornton UK LLP illustrates that the principle has its limits even in the fraud context.

In the course of the Serious Fraud Office’s (SFO) investigation into the collapse of the Icelandic Kaupthing Bank, the defendant (who was a member of the bank’s winding up committee) was said to have made allegations to the SFO that the claimants had engaged in criminal behaviour in their dealings with the bank. The SFO investigation was ultimately discontinued without any findings against the claimants and they entered into a settlement agreement with the defendant in respect of their dealings with the bank, including a restructuring of loans. However, they subsequently sought to pursue a further action in the High Court against the defendant in respect of its involvement in the SFO investigation, including claims of conspiracy and malicious prosecution.

In considering whether the claims had already been compromised, the court noted the principles set out in Ali and Satyam. However, it distinguished Satyam on the basis that the background to this claim made it quite different to a normal commercial settlement, where it would usually be reasonable to expect that the party giving the release would have baulked at any suggestion at the time that it was giving up its rights regarding any undisclosed fraud.

In this case, the releases in the settlement agreement were broad ranging, by reference to various subject matters including “investigations carried out by any authorities” and ”the provision of any documents or information to any authority”. Further, they expressly included unknown claims. In the court’s view, given the SFO investigation, the parties must have had in contemplation claims alleging deliberate wrongdoing, as these were just the type of allegation likely to be asserted in any attempt by the claimants to ground a claim against this defendant. Indeed, the court thought it difficult to see any other basis for such a claim. Accordingly, it was held that the claims had been released.

Conclusion

In summary, all three recent decisions acknowledged the caution expressed in Ali regarding the release of unknown claims, but nevertheless proceeded to rule that the claims in question had in fact been released, despite the fact that they (or at least the details of them) were unknown at the time of settlement.

The decisions illustrate that, in all cases, it will be a question of the court comparing the release against the nature of the claim subsequently being pursued, to assess whether a reasonable observer at the time would have thought the further claims were included, taking into account the wording used, the relevant context and the facts known to the parties. They suggest that key considerations will include:

  • Whether or not the releases expressly included claims not currently known or contemplated. While this factor was not solely determinative in any of the three cases, it is highly advisable that such wording be included if this is what is intended, in order to limit the potential for arguments based on the Ali cautionary principle.
  • In cases where the release is drafted by reference to specific proceedings, the scope of those proceedings. It will be important to consider what factual scenarios and causes of action could feasibly have been pursued in those proceedings based on the state of the pleadings, even if those issues had not been the focus of the proceedings by the time settlement was reached.
  • Whether the further claims are among the type of claims that the parties might have contemplated as a possibility, given the nature of their dealings.

The bottom line is that the parties on both sides of a settlement release should ensure that they are clear as to what they intend the release to cover with respect to unknown claims and make this explicit in the drafting where possible.

Herbert Smith Freehills Jan O’Neill

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