Wiping the slate clean
2 April 2001
9 May 2014
16 July 2014
3 September 2013
M&A Weekly Update: when is there a duty of good faith between contracting parties; prospectuses: acceptable languages; and more
9 April 2014
25 September 2013
When a dispute is being settled or a relationship ended, the parties often wish to ensure that not just the particular dispute is resolved but that the slate is wiped completely clean. This includes matters that were not the subject of the dispute, or even known about. To do this, language such as "this agreement is in full and final settlement of all or any claims of whatever nature that exist or may exist as between the parties" may be used. And until the recent House of Lords decision in BCCI v Ali, it was a fair assumption that this should cover all claims, known about or not, between the parties.
In 1990, Sheikh Ali Abdullah Bugshan accepted £10,000 from BCCI on the termination of his employment in a full and final settlement, the form of which was predominantly as described above. After BCCI wound up and Ali had difficulty finding other work, he sought damages from BCCI for the stigma of being associated with it. This type of claim only became sustainable following a 1998 House of Lords ruling. BCCI then said that Ali's claim was already covered by the previous settlement and so was barred from bringing it. The Court of Appeal agreed on the basis that the settlement referred to "all or any claims" (although they allowed the claim on another ground).
In March, the House of Lords reversed the decision on the settlement's interpretation, saying that it did not cover this "stigma" claim. Their Lordships said that in construing the agreement, one must look to the parties' intentions, as gleaned from the factual background. Parties can waive claims of which they were not aware if clear language is used. At the time of the agreement, neither party knew of the stigma claim (even imputing to those at BCCI who signed the agreement that the bank was operating fraudulently) because stigma-type claims were not then considered sustainable and so could hardly have been in the parties' contemplation. Consequently, the clause did not cover the stigma claim and in effect could not be read literally. So, following this decision, it is evident that:
Such agreements cannot be read literally;
The parties' intentions must be ascertained by looking at the facts to see what they contemplated - matters which were not known about cannot have been contemplated and are not covered;
Only clear language will suffice to ensure that the agreement includes unknown claims;
Although parties can contemplate "unknown claims", such a phrase has no different effect to "claims that exist or may exist". Therefore, inclusion of such wording may not be sufficient.
It is also worth noting Lord Hoffman's dissenting judgment, as he gave the leading judgment in West Bromwich Building Society v Investors Compensation Scheme, which previously offered definitive guidance on the interpretation of agreements.
So, when drafting settlements, practitioners need to think very carefully about whether the factual background will support the meaning that the client is seeking to give the words. In BCCI v Ali, it is hard to see how the agreement could have been better drafted, given that stigma claims were not known about. Their Lordships emphasised that they wanted to encourage further debate on the interpretation of agreements - this will not be the last we hear on this subject.
Tom Price is an associate at Wragge & Co