Drafting settlement agreements: what are you giving up?

A concern when parties enter into a settlement agreement is that they are giving up rights that they do not yet know that they have. For example, what if you do not know about a claim when you reach your settlement but the other side does? In addition, can your agreement amount to an abuse of process in certain circumstances? Those issues came up in two recent cases: Yukos Hydrocarbons v Gerogiades and Integral Petroleum v Petrogat.

The Yukos agreement

In Yukos Hydrocarbons v Gerogiades, the parties entered into a settlement agreement which, in the usual way, released the defendant from all liabilities "for damages, loss or injury however arising [relating to an earlier contract between them], present or future, known or unknown at this time".

The claimant subsequently complained that the defendant had been aware of a potential claim (of which the claimant was unaware) at the time the settlement agreement was concluded and that this amounted to "sharp practice". The claimant relied on an observation by Lord Nicholls in BCCI v Ali [2002] that "in some circumstances, seeking and taking a general release…without disclosing the existence of the claim or possible claim, could be unacceptable sharp practice".

Moulder J accepted that the wording in the settlement agreement did amount to a "general release" because it used "widely drawn general words" (even though it was also limited to liabilities relating to a particular contract).

However, the use of the words "known or unknown at this time", plus various other factors, led her to conclude that she should not intervene in the parties' freedom to contract. The parties were sophisticated and of equal bargaining strength and the agreement was reached for valuable consideration. There was also a requirement for a personal warranty from one of the parties that he was not aware of any facts or circumstances which might give rise to a claim (and so the settlement agreement already contained a remedy for any actionable misrepresentation). What is not clear from the judgment is whether the absence of any of these factors might have led the judge to intervene.

Can you promise to stop contempt proceedings in your settlement agreement?

Prior case law has recognised that it can be an abuse of process (and itself a contempt of court) to threaten to start or continue contempt proceedings against the other side in order to force the other side to agree to settle (where that was the party's "real and substantial purpose"). It has also been held that "without prejudice" privilege will not apply where the threat is made during settlement negotiations.

In Integral Petroleum v Petrogat, an application to commit for contempt of court against the defendants had already been started when the claimants made a "without prejudice save as to costs" offer proposing "an amicable settlement of all disputes between the parties, including the Claimants' application to commit [the defendants] to prison and the LCIA Arbitration".

Foxton J held that this did not amount to an abuse of process. The amount sought by the claimants was lower than the amount being sought in the arbitration: they did not use the committal proceedings to demand an unreasonable sum. The overall thrust of the letter was that the settlement would save everyone a great deal of legal costs.