Natural meaning of a settlement agreement releases claims against party's own affiliates

In Schofield & Anor v Smith & Anor [2022] EWCA Civ 824 the Court of Appeal held that a settlement agreement which included releases of the parties’ affiliates had the effect of preventing one of the parties from bringing a later claim against its own affiliates, not just the affiliates of the other party. The court dismissed the appellants’ argument that statements made before the conclusion of the settlement agreement could cast light on what the compromise reached in the settlement agreement was intended to achieve and which entities were covered by the releases. Pre-contractual negotiations were not admissible as evidence of the parties’ intentions.

Background

The case arises out of a dispute between a group of companies and Barclays Bank Plc (the “Bank”). The Bank had provided loan facilities to, and had entered into interest rate hedging agreements with, the group. Upon the group’s failure to meet its repayment obligations, the Bank appointed administrators to three companies in the group. The administrators instructed solicitors to review various claims the companies had asserted against the Bank. The administrators did not pursue these claims. However, by the end of the administrations and the discharge of the administrators, the companies had issued claims against the Bank on the grounds that it had missold swaps and made dishonest representations about LIBOR. This dispute was eventually concluded by a settlement agreement between the Bank and the three companies (the “Settlement Agreement”).

Several years after the Settlement Agreement, the companies issued proceedings against (i) the administrators claiming that they should not have accepted the instructions and had breached fiduciary duties in the way they carried them out, including failing to pursue the claims against the Bank, and (ii) the solicitors appointed by the administrators alleging breach of fiduciary and other duties in their assessment of the companies’ claims against the Bank. The administrators and solicitors applied to summarily dismiss these claims on the basis that the Settlement Agreement released them from such claims as they were “Affiliates” of the companies. The Judge agreed that the Settlement Agreement had released all the claims asserted against the administrators and most asserted against the solicitors. The Judge relied on the natural interpretation of the Settlement Agreement, which provided that the agreement was “in full and final settlement of all Claims any Party has or may have against any other Party or against any other Released Party” and "Each Party agrees that it will not bring any Proceedings against any Released Party in relation to a Claim or otherwise assert a Claim against any Released Party.” "Released Parties" was defined as "the Parties and their Affiliates". The Judge held that “Affiliates” included each parties’ own affiliates, not just those of another party, and accepted that both the administrators and the solicitors were the companies’ affiliates.

On appeal to the Court of Appeal, the companies claimed that it was never intended that the Settlement Agreement should operate to release its claims against the administrators and solicitors.

Court of Appeal decision – interpretation of the Settlement Agreement

The Court of Appeal dismissed the companies’ appeal. Newey LJ upheld the conclusion that the natural meaning of the Settlement Agreement was that each party released its own "Affiliates" as well as those of other parties. This literal and natural meaning was reinforced by the commercial context as the Bank had an interest in preventing the companies’ claims against the administrator to avoid facing any contribution claims from the administrators. The Judge considered that the administrators were "Affiliates" as the term was defined in such a way as to include a person's "Employee" and in turn the definition of "Employee" included "any former ... officers ... and agents". The administrators came within the definition as they were both officers and agents of the companies. Similarly, the solicitors were agents of the companies.

Newey LJ further dismissed the appellants’ argument that discussions between the Bank and the companies prior to the signing of the Settlement Agreement could be relied on as evidence of the meaning of its terms. Newey LJ relied on well-established rules in case law that the process of contractual interpretation involves assessment of the objective meaning of the language which the parties have chosen to express their agreement. “The law excludes from admissible background the previous negotiations of the parties and their declarations of subjective intent” (per Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society (No.1) [1998] 1 WLR 896).

Newey LJ considered the appellants’ argument that throughout the settlement negotiations, the Bank had repeatedly distanced itself from involvement in or responsibility for the actions of the administrators and that the Bank’s representatives had stated that the administrators were acting independently of the Bank. However, the Judge found that (i) the statements by the representatives did not cast any significant light on the compromise embodied in the Settlement Agreement, (ii) case law establishes that it is not permissible to rely on what a particular party said during pre-contractual negotiations for the purpose of drawing inferences about what the contract should be understood to mean (the “exclusionary rule”) and (iii) what the appellants sought to establish in relying on the pre-contractual negotiations were not “objective facts” so as to bring them outside the exclusionary rule. The evidence was therefore caught by the rule.

Key takeaway

The case highlights the court’s willingness to give effect to clear contractual wording. Parties negotiating contractual releases should carefully consider which potential claims they wish to release and between which entities. Care should be taken to ensure the drafting accurately reflects the agreed position, and this should include checking whether other entitles could potentially be covered by the releases.

With thanks to Alice Devenuto for her assistance in preparing this post.