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Enforcement of Settlement Agreements - Avoiding the pitfalls

  • United Kingdom
  • Commercial litigation
  • Litigation and dispute management

02-02-2022

When disputes are settled, parties need to be confident that the often hard won drafting will stand up to challenge and has the meaning intended at the time of the settlement.  Deliberately wide ranging releases of liability may seem at first glance to cover all bases but can lead to questions including the extent to which an agreement can bind non-parties, the extent to which claims must be known or contemplated in order to be released and what, in the absence of clarity, were the intentions of the parties at the time.  There are also some provisions commonly requested such as so-called ‘gagging orders’ which parties are often surprised to learn can neither be ordered nor enforced by a UK court.  At a time when the enforceability of settlement agreement provisions comes under the public spotlight in a New York court, we consider how similar questions of enforceability might be determined in the courts of England and Wales.

Interpretation of settlement agreements – it’s a Balancing Act

The English Courts can have a tough balance to strike when asked to consider the objective meaning of words used in a settlement agreement and the conflicting interpretations put forward by stakeholders. Ultimately there is no escaping what is there in black and white; whilst the courts will strive to apply business common sense, they will not correct bad drafting to better serve a party’s interests.

By their very nature settlement agreements represent a compromise between parties. The English Courts recognise that this means relinquishing rights to obtain negotiated benefits, and the real possibility that a clause lacks clarity because the parties could not agree specific terms. Where gaps in meaning arise, parties cannot rely on terms being retrospectively implied into the agreement; the courts will only entertain doing so where it is considered necessary1  to give business efficacy to a contract which would otherwise lack commercial or practical coherence2.

Caution should also be exercised to ensure that all relevant terms of the compromise are included in the agreement itself. Too often parties are caught out by over reliance on lead in negotiations which fall outside the signed document or are excluded by an ‘entire agreement’ clause. In a decision last week3, the High Court permitted a claimant to rely on the terms of a covering email enclosing a settlement agreement on the basis that it formed part of the deal and/or aided its interpretation, but it remains good practice to record all settlement terms in one document.

The English Court, therefore, approaches questions of interpretation of settlement agreements in the same way that it would any other commercial contract. Where the settlement agreement flows from a mediation and the Singapore Convention on Mediation 2019 applies, this will not act as a bar to the English Court considering what has been agreed for the purposes of enforcement under the convention.

Attempting to settle future claims

A strategic attempt at an all-encompassing resolution often leaves parties exposed to arguments over enforceability. Widely drafted clauses which release liability, especially those which encompass future claims whether known or not, can give false hope to the over-optimistic reliant party.

The English courts have warned against using broad and generic releases of liability that may later be considered insufficiently clear to demonstrate a true intention to release future claims. This is especially the case where the clause attempts to catch potential future claims which have not yet arisen in law or which a party could not have been aware of at the time of drafting’4.

Parties negotiating a settlement also need to be aware that there are certain claims or liabilities that cannot be released by agreement such as rights of protection under the Public Interest Disclosure Act 1998, certain employment rights and rights of prosecuting authorities5.

Gagging orders and confidentiality clauses

Where disputes involve confidential information, trade secrets, or sensitive circumstances, it is natural to seek prevention of disclosure to third parties or the public domain, however, there are limitations on the level of protection that can be agreed. Attempts to include ‘gagging orders’ within a settlement agreement will likely fall at the first hurdle.

Gagging orders restrict a party’s ability to publicise or disseminate information. The consequences of breaching a gagging order include contempt of court, fines, imprisonment or seizure of assets. A gagging order, however, can only be granted by the court and any attempt to impose one by agreement will be unenforceable under English law.

Parties will instead need to rely on carefully composed confidentiality clauses, albeit with caution. Unlike a gagging order, an agreed obligation of confidentiality has a much weaker bite. Where a breach occurs, a claim for damages can often be inadequate compensation for the injured party whose business reputation has already been spoiled or top secret algorithm exposed.

Who is bound by the settlement agreement?

Privity of contract means that ordinarily the only parties bound by and entitled to rely on the terms of a settlement are those that have entered into it, but Claimants need to be careful here. In the absence of an express reservation of rights, releasing one defendant from liability can release all defendants6.

In some cases, there are commercial or practical reasons for seeking to confer the benefits of a settlement agreement onto third parties, however, difficulties can arise where parties attempt to include categories of third parties which, in an attempt to ‘catch all’, are not clearly defined. Vague terms such as ‘all persons connected to’ or ‘all potentially interested parties’ are likely to attract challenges as to scope. A failure to use clear language to identify third parties could well result in their intended benefit under the settlement being lost.

Other enforceability traps

Other areas where settlement agreements can be challenged are a lack of consideration (unless executed as a deed), allegations of duress where undue pressure has been applied, and arguments that the agreement is not yet operative for lack of satisfaction of a preliminary conditional element.

Conclusion - will the settlement agreement stand up?

The drafting of settlement agreements can often take place in highly pressured environments, late night negotiations or in response to looming court deadlines; all hostile environments for precision drafting. Focusing on the use of express provisions and clear language, especially when it comes to the scope of the settlement and the actions to be performed, will pay dividends should enforcement later become an issue. Widely drafted clauses and ambiguous language in an attempt to cover all bases are no replacement for carefully thought out clauses which pinpoint and express the parties’ specific requirements and intentions to offer the strongest protection going forward.

 


 

  1. Marks & Spencer v BNP Paribas [2015] UKSC 72
  2. Initiative International v Abul Kalam Azad [2017] EWHC 2105 (Ch)
  3. Latham Machinery Ltd v Dior Heavylift BV [2022] 1 WLUK 253
  4. Bank of Credit and Commercial International SA v Ali [2001] UKHL 8
  5. R (on the application of Siddiqui) v Westminster Magistrates Court [2021] EWHC 1648 (Admin).
  6. Watts v Aldington [1999] L. & T.R. 578, [1993] 12 WLUK 197