Settlement agreements: what claims are you releasing?

Nathan Holden, Freeths, Nottingham

Khanty-Mansiysk Recoveries Ltd v Forsters LLP [2016] EWHC 522 (Comm)

The Claimant and one of its Directors entered into a settlement agreement with the Defendant law firm, regarding a dispute over an unpaid invoice for £130,000. As part of the settlement, the general release clause stated that the agreement was “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)”. Claims were defined as “… any claim, potential claim … whether known or unknown, suspected or unsuspected … however and whenever arising … arising out of or in connection with the Action or the invoice.”

Some two years after the execution of the agreement, the Claimant issued a complaint against the Defendant, alleging breach of contract and professional negligence, suing them for £70 million. The Defendant relied on the release in the settlement agreement, arguing the claim could not be successful.

The High Court agreed with the Defendant, stating that the alleged negligence claims were sufficiently connected to the solicitor’s invoice to fall within the wording of the release; the claim was not an ‘unknown unknown’. It was clear from the wording that the release went far beyond just the dispute that existed at the time and although this claim was unsuspected at the time the agreement was executed, the objective bystander would not have said that it was impossible.

Practice points

When drafting release clauses ensure that the release of claims is limited to the particular subject matter you intend to capture. This will avoid any potential claims being inadvertently compromised in future. Take particular care with the phrases “in connection with” and “arising out of”, as these have different meanings. In this instance, the court’s reasoning was that the words “in connection with” invited a much wider interpretation than the words “arising out of”. So, although the Claimant’s claim did not arise out of the guarantee action and the invoice, it was “connected with them” for the purpose of the settlement agreement.

For further information, please contact Nathan Holden 0845 077 9646