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A step into the unknown?

The recent Court of Appeal decision in Khanty-Mansiysk Recoveries Ltd v Forsters LLP [2018] EWCA Civ 89 serves as a useful reminder of the importance of considering the scope of settlement wording and the potential impact that a settlement may have on subsequent litigation. In unanimously dismissing the appeal, the Court of Appeal ruled that a company could not advance a professional negligence claim against its former legal advisers for £70million because of a settlement agreement that had been signed years before the alleged negligence was known about. A link to our article on the first instance decision can be found here:

Reported background

Forsters solicitors were instructed on behalf of a company (IR), in relation to a share purchase agreement (the "SPA") entered into on 20 May 2010. Forsters had in 2007 been retained by one of company IR's directors and shareholders (RGP) to prepare IR for incorporation. By the SPA, IR agreed to buy 100% of the shares in a Russian company (YBI) from another company (IGL).

Forsters issued an invoice for their services on the above in the period from January 2007 to June 2010. In July 2010, IR and RGP wished to change solicitors. Forsters insisted on a personal guarantee from RGP in respect of the outstanding fees, which RGP provided. In mid-2012, Forsters issued proceedings against RGP for the outstanding fees. Following negotiations, in December 2012 the Settlement Agreement between Forsters, RGP and IR was executed.

The Settlement Agreement was executed in relation to an amount being paid which was said to be in full and final settlement of "any claim, potential claim… whether known or unknown, suspected or unsuspected, however and whenever arising… whether or not such claims are within the contemplation of the Parties at the time of this Agreement." The Agreement also provided for a covenant not to sue one another "in connection with… (either directly or indirectly)" the original matter. 

In February 2013 IR found out that there had never been an actual transfer of YBI shares from IGL to IR according to Russian law; and that it did not own YBI. IR was put into liquidation. In October 2015 the Claimant KMR pursued a claim against Forsters alleging negligence in the transaction and seeking damages in excess of £70 million. KMR said that it had acquired IR's claim from the liquidators.

The judgment

The judge found that the wording of the Settlement Agreement was sufficiently wide as to result in the claim being “caught” by the definition in the Settlement Agreement.  Therefore the £70million claim alleging negligence had already been compromised, even though the facts giving rise to the negligence claim were not known at the time of entering into the Settlement Agreement.

KMR appealed that decision. The issue on appeal was the scope of the Settlement Agreement and whether it prevented the negligence claim from being brought.

The Court of Appeal's decision

The Claimant's appeal was unanimously dismissed by the Court of Appeal. The following issues were considered:

The interpretation of the Settlement Agreement

The general rule is that in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware. In the leading case of BCCI v Ali the majority of the House of Lords (4-1) refused to give effect to a widely-drafted general release signed by an employee upon redundancy from the bank on the grounds that at the date of the settlement the type of claim the claimant subsequently wished to pursue post-settlement did not exist in law. The claimant could therefore not have been aware of such a claim when signing the settlement agreement. In this case Lewison LJ distinguished BCCI v Ali on the grounds that on these facts, the possibility of a claim for the negligent performances was "plain enough".

'The wording of the Settlement Agreement

Lewison LJ considered that the Settlement Agreement was clearly intended to go further than the compromise of the known claims, since it expressly referred to "unknown" claims and claims not "in the contemplation" of the parties.

Lewison LJ agreed with the first instance judge that the words of the clause were wide enough and clear enough to embrace the claim. In addition, the claim was "in connection with" the original matter.

Comment

For law firms (and other professional advisers) attempting to settle disputes with former clients over unpaid fees, it will no doubt be comforting to have this confirmation that settlement clauses that encompass "unknown" claims can be enforceable.  Such clauses could provide law firms and their professional indemnity insurers with a reasonable level of certainty that a former client will not be entitled to a 'second bite of the cherry' by pursuing negligence allegations after the fee dispute is resolved.

For lawyers tasked with agreeing settlement terms on behalf of any client, this judgment highlights the importance of advising the client about the potential implications of such a clause, and of taking careful instructions as to whether such terms could leave the client without a remedy later on.  Settlement agreements are often concluded on the basis of 'template' terms without detailed consideration of whether those template terms are truly suitable for that particular client's situation.  Where clients unexpectedly find themselves without a remedy because they had settled "unknown" claims without sufficient advice, the lawyer would certainly be vulnerable to a complaint or a claim in negligence for the lost chance to pursue that claim when it does eventually come to light.

For any professional facing a claim, and the lawyers acting for them, this case also highlights the importance of delving into the previous relationship between the parties.  It would certainly be worth searching for any previous settlement agreements (or similar) between the parties, in case there is wording that could be deployed to completely defend the claim, which would save the time and expense of investigating the substantive allegations.

Contact

For further information please contact Jessica Williams, Trainee Solicitor on +44 (0)207 645 4595, or Joanne Staphnill on +44 (0)207 280 8874.

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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