Drafting Effective Releases

Introduction

Legal advisers are frequently called upon to document the terms of a settlement reached between disputing parties often after lengthy and complex negotiations. Settlement deeds typically incorporate releases which may be unilateral but are often mutual.

There is now a significant body of case law dealing with the principles governing the construction and interpretation of releases and a failure to keep these principles front of mind when drafting may lead to error and unwelcome consequences.

The purpose of this short article is to review the governing principles and through the case law to consider specific examples of releases which have been subjected to the blow torch of analysis by the courts.

Releases and covenants not to sue: The taxonomy

The first step in any analysis of the principles is to revisit and clarify some fundamental concepts. The following propositions can be distilled from the Australian case law:¹

• At common law, a release is a discharge under seal of an existing obligation or right of action.
• Historically, the common law rule was that the release of a cause of action once accrued may only be effected by a deed under seal.
• However, with developments in the common law the release of an obligation created other than by deed could be brought about by an accord and satisfaction. In Thompson v Australian Capital Television Pty Ltd,² Gummow J explained the concept as follows:

Accord and satisfaction (the former being the agreement or consent to accept the latter) requires acceptance of something in place of the full remedy to which the recipient is entitled, coupled with provision of the consideration agreed upon.

• In the case of both a release by deed and a release by accord and satisfaction, the relevant obligation is discharged and extinguished.
• At common law, an obligation created by deed could only be released by deed. Thus, an accord and satisfaction was not pleaded in bar of an action upon a speciality. However, in equity an agreement for value to release an obligation was enforceable whether or not the obligation was originally created by deed.³
• A covenant not to sue does not extinguish an obligation. However, where it involves a single promisor, is unlimited in time and is general and unconditional it may be pleaded in bar to avoid circuity of action.
• Importantly, the release of one joint promisor or one joint tortfeasor discharges all. Similarly, the release of one co-guarantor releases the others. However, a covenant not to sue will not operate as a release in this scenario, a drafting advice often utilised by the banks.

The principle in Grant v John Grant & Sons Pty Limited

Grant⁴ is the seminal decision of the High Court on the construction of deeds of release. There are two key elements of the decision.

First, in drafting a release the content of the recitals is critical. Relevantly, Dixon CJ, Fullagar, Kitto and Taylor JJ in their joint reasons said at 131:

The question is whether upon a proper interpretation of the deed the general release clause should be restrained to matters in dispute within the meaning of these recitals. The question depends primarily on the application of the prima facie canon of construction qualifying the general works of a release by reference to particular matters which recitals show to be the occasion of the instrument. But it is also affected by the general tenor of the deed. It is unnecessary to say more about the canon of construction or to discuss further the contents of the deed. As to the first all that remains is to apply the principle that prima facie the release should be read as confined to the matters forming the subject of the disputes which the deed recites. (emphasis added)

Accordingly, legal advisors should pay particular attention to the drafting of the recitals which need to clearly spell out the nature of the dispute and the range of claims which are intended to be released. A court will interpret the release on the basis of these recitals.

Secondly, acceptance of the equitable principle that the general words of a release should be confined to the true purpose of the transaction. The scope of this principle is set out in the joint reasons as follows at 129-130:

From the authorities which have already been cited it will be seen that equity proceeded upon the principle that a releasee must not use the general words of a release as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question and the actual intention of the releasor.

Interestingly, the English cases take a somewhat different approach. Thus, in Bank of Credit and Commerce International SA v Ali⁵, Lord Nicholls said at 267:

Thus far I have been considering the case where both parties were unaware of a claim which subsequently came to light. Materially different is the case where the party to whom the release was given knew that the other party had or might have a claim and knew also that the other party was ignorant of this. In some circumstances seeking and taking a general release in such a case, without disclosing the existence of the claim or possible claim, could be unacceptable sharp practice. When this is so, the law would be defective if it did not provide a remedy.

Subsequently, Pembroke J in The Owners Corporation of Strata Plan 61390 v Multiplex Corporate Agency Pty Ltd (No 2)⁶ commenting on the equitable aspect of Grant said:

29 In other words, equity permits an investigation of the circumstances, including consideration of the actual intentions of the parties, in order to determine whether enforcement of the general words of a release would be against conscience.

Multiplex involved the interpretation of a release in a complex building dispute in which Multiplex made an application that certain issues relating to the release be determined as separate questions. In that context, Pembroke J noted:

34 Importantly, in a case such as this where the releasor was represented by skilled solicitors, where the terms of the release were negotiated over a considerable time and where the circumstances tend to suggest that the parties intended that all claims - whether presently known or not - other than those that were specifically excluded and defined, should be released, evidence of the non-awareness of the existence or likelihood of certain claims may not be significant. After all, the very point of the contractual language chosen by the parties in the Deed in Clause 5.1(a) and in the definition of "Claims" appears to have been to cover unknown claims.

35 On the other hand, non-awareness by the releasor coupled with knowledge by the releasee of the circumstances that may give rise to a claim, may in some cases possibly be sufficient to invoke the equitable principle. However it will not necessarily do so. Much will depend on the quality of the releasee's knowledge - whether it is specific or general and whether in some way that knowledge should be seen as affecting the conscience of the releasee.

In Bank of Credit and Commerce International SA v Ali, Lord Nicholls acknowledged that the wording and context of a general release may operate to extend the release to unknown claims. However, his Lordship added the following caveat at 266:

This approach, however, should not be pressed too far. It does not mean that, once the possibility of further claims has been foreseen, a newly emergent claim will always be regarded as caught by a general release, whatever the circumstances in which it arises and whatever its subject matter may be. However widely drawn the language, the circumstances in which the release was given may suggest, and frequently they do suggest, that the parties intended, or, more precisely, the parties are reasonably to be taken to have intended, that the release should apply only to claims, known or unknown, relating to a particular subject matter. The court has to reconsider, therefore, what was the type of claims at which the release was directed.

In Amaca Pty Ltd (formerly known as James Hardie & Co Pty Ltd) v CSR Ltd⁷, Bergin J noted that the Bank of Credit and Commerce decision provided helpful guidance to the case before her Honour.

Turning to Amaca.

In 1964, James Hardie entered into a partnership with CSR for the manufacture and distribution of insulation products. Bradford Insulation Industries (Bradford) was appointed by the partnership as the sole selling and distribution agent.

The products contained asbestos.

In 1995, proceedings were commenced against James Hardie by a third party who suffered injury as a result of exposure to the asbestos. Earlier in 1974, James Hardie and CSR entered into a Deed of Partnership Dissolution. The deed contained the following release:

8 As and from the date of dissolution James Hardie, CSR and Bradford Insulation, by their execution hereof agree that the Partnership will be at an end, that all rights, duties and obligations of all the parties under the Principal Deed or any of them shall then cease and further that subject to Clause 9 hereof James Hardie, CSR and Bradford Insulation jointly and severally release the other parties and either of them from all such actions, causes of action, demands or claims which any of them has had or but for this Deed might have had against the others or either of the others… (emphasis added)

Clause 9 contained a joint and several indemnity in favour of Bradford.

CSR conceded that James Hardie had an entitlement to a 50% contribution from CSR in respect of the liability to the plaintiff.

In these proceedings, James Hardie sought contribution from CSR who pleaded the release in bar. James Hardie argued that the claim arose because the dangers of asbestos and the fact that the injured party proceeded against only one of the partners were unforeseen circumstances at the time of execution of the deed in 1974. Accordingly, CSR was not entitled to rely on the release.

Having considered the authorities, Bergin J held that the release did not extend to James Hardie’s claim to contribution. Her Honour said:

96 The granting of the indemnity to Bradford in the Deed also suggests to me that the partners were intending that they would be jointly liable for partnership products rather than releasing each other from such liability, in particular releasing each other in contemplation of the chance that an end user might sue only one of the partners in respect of the liability.

97 In considering the surrounding circumstances on this aspect of the matter I am applying the approach of giving to the Deed the meaning which ought reasonably be ascribed to the words having due regard to the purpose of the contract and the circumstances in which it was made. It is these circumstances and purpose which convince me that the words, although apparently broad enough on one view of them to include the claim in these proceedings, do not in fact include it.

98 I am satisfied that in the context of the Deed, the partners relationship at the time and the surrounding circumstances, the terms of the Release do not include the claim of the type in these proceedings. However if that finding were not to prevail I regard it as prudent to deal with the second matter as to whether in fairness or equity CSR is entitled to rely upon the Release if its construction were to include the claim in these proceedings.

The latest case law

First, in Sarina v Fairfax Media Publications Pty Ltd⁸ the Full Federal Court noted:

20 …Thus, where, as often occurs, a deed recited that the parties have had a particular dispute, but the clause creating the release did not expressly confine its operation to the dispute mentioned in the recitals, the principles of construction at common law read down the wide words of the release to apply only to the dispute in the recitals. Indeed, Dixon CJ, Fullagar, Kitto and Taylor JJ explained (Grant 91 CLR at 124 and 131) that the common law principle was that a written instrument expressed in general terms (be it a deed or statute) had to be construed having regard to the circumstances to which the instrument must have intended to apply. This in substance accords with the modern principles applicable to the construction of contracts and deeds…

Secondly, in Mason v Cashel Financial Services Pty Ltd⁹ Harrison AsJ considered the application of a release in a settlement agreement with third party investors which incorporated the following acknowledgement:

3.1 Each of the Parties acknowledge that they are aware that they, their advisers, agents or lawyers may discover facts different from or in addition to the facts that they now know or believe to be true with respect to the subject matter of this Deed, but that it is their intention to, and they do, fully and finally settle all Claims between Parties between which releases have been exchanged pursuant to the terms of this Deed.

Turning to the facts.

Cashel Financial Services (Cashel) was the holder of an Australian Financial Services Licence. It entered into an Authorised Representative Agreement (Agreement) with Mason. Under the Agreement Mason’s company was defined as the Adviser and Mason, the Key Consultant. He was appointed a sub-authorised agent and agreed to indemnify Cashel for any breaches of the Agreement.

Investor clients brought proceedings against both Mason and Cashel relating to dealings with Mason. Cashel claimed indemnity from its PI Insurer in respect of the investor proceedings. The indemnity was granted by the insurer subject to a retention of $50,000.

Cashel commenced proceedings against Mason seeking payment of the $50,000 under Mason’s indemnity in the Agreement.

Mason relied on releases from the investor clients which were contained in five separate settlement deeds to which Cashel, Mason and the relevant investor were each a party.

In finding that the releases did not extinguish Mason’s liability to Cashel, Harrison AsJ said:

102 In construing the deed, the Magistrate preferred the construction that “fully and finally settle all Claims between Parties between which releases have been exchanged pursuant to the terms of this Deed” meant that only parties who had exchanged releases had reached full and final settlement. On this reading, the deeds did not supersede any liabilities Mr Mason might have to Cashel under the Agreement.

103 Counsel for Mr Mason submitted that a more natural reading of the deeds is that they were intended to fully and finally settle all claims between parties between which releases have been exchanged more broadly, such that the deeds settle any claims Cashel might seek to bring against Mason.

104 There are several reasons not to adopt Mr Mason’s construction. To begin with, I do not accept that it is the more natural reading of the plain wording of the deeds. It was entirely open to the Magistrate to conclude that a reasonable businessperson would understand the reference to “all Claims between Parties between which releases have been exchanged pursuant to the terms of this Deed” to be a reference to Mr Mason and Cashel’s exchanged releases with the investor plaintiffs. Nowhere under the deeds did Mr Mason and Cashel exchange releases between each other.

Thirdly, in Leach v Commonwealth of Australia¹⁰, the Federal Court considered whether the general words of a release given by the plaintiff in relation to her unfair dismissal claim extended to a subsequent claim for damages for sexual harassment under the Sex Discrimination Act 1984 (Cth). The deed of release was entered into following a conciliation conference conducted by the Fair Work Commission. The deed purported to release the Commonwealth from any claims arising out of, or any way related to her former employment.

Lee J having cited extensively from the Multiplex decision, found that the release barred the plaintiff’s sexual harassment claim against the Commonwealth. His Honour made the following observations:

19 Needless to say it is Ms Leach, as the moving party, who bears the onus of establishing that the reliance by the Commonwealth on the legal terms of the Deed would, in all the circumstances, be contrary to conscience such that equity would intervene.

...

43 …I am comfortably satisfied that if something had have been said during the course of the conciliation conference which expressly conveyed to Ms Leach that she could continue to bring a Sexual Harassment Claim (in contradistinction to the Compensation Claim) then this would have been something which would have been the subject of comment, at some time prior to the formalisation of any settlement, by Ms Mann and/or Ms Barons. The fact that there was no such correction leads me to the conclusion that something to this effect was simply not said. For the same reason, I do not think there was anything said by Ms Leach in clear, understandable terms which indicated to Ms Mann and/or Ms Barons that Ms Leach believed that post-settlement she could sue the Commonwealth for the Sexual Harassment Claim…

Summary of key points

1. The principles of the common law informing the interpretation of releases as set out by the High Court apply to the interpretation of deeds of release.
2. Although the House of Lords in Bank of Credit and Commerce stated that no special rules apply to releases that statement is not entirely accurate in respect of Australian law having regard to the decision of the High Court in Grant v John Grant & Sons Pty Limited.
3. In drafting a deed of release it is critical to ensure that the recitals identify the categories of claim intended to be captured by the release. If the release is intended to cover any claim whatsoever whether known or unknown this should be spelled out clearly. However, despite such clarity there remains a risk that a court will read down a release having regard to background and the actual intentions of the parties.
4. It is a principle of equity as applied in the Australian courts that a releasee may not be entitled to plead a release in bar of a claim by the releasor where it would be unconscionable to do so. Such a situation may arise where the subsequent claim made by the releasor is outside the contemplation of the parties based on evidence of the circumstances at the time of the execution of the release. The courts will also proceed on the assumption that a party would not in the absence of clear words surrender a right or a cause of action.
5. In interpreting the scope of a release evidence of the releasor’s actual intention is admissible notwithstanding as a general principle, evidence of subjective intention is not admissible in the interpretation of written documents. The House of Lords in Bank of Credit and Commerce addressed this issue but refrained from making a final decision whether evidence of actual intention was admissible under English law.