Back to basics on contract interpretation as Court of Appeal finds that natural meaning of settlement agreement prevails

In Schofield & Anor v Smith & Anor [2022] EWCA Civ 824, the Court of Appeal dismissed the appeals of a group of companies, finding that a settlement agreement entered into between the group companies and their bank released the companies' former administrators and their solicitors from all relevant claims, even though the settlement agreement had been agreed without the involvement of the administrators, and after the administration of the group companies had been concluded.

At the same time, the Court of Appeal allowed the solicitors' appeal in respect of the decision to strike out the claims against the firm partially rather than in their entirety, finding that the settlement agreement had released the firm from all claims arising from the relevant matters, rather than merely claims arising out of breach of duty.  

Background

The appeals concerned a group of companies ultimately owned and controlled by an individual, Mr Schofield. During a reorganisation of the group, certain of the group companies entered into a loan facility and several interest rate hedging agreements with Barclays Bank plc (the Bank).  The Bank demanded payment from certain of the group companies in their capacity as guarantors. When payment was not forthcoming, the Bank appointed administrators of those group companies. The administrators subsequently instructed the solicitor defendant to review claims which the group companies had advanced to rescind the swaps and recover compensation from the Bank on the grounds of mis-selling and manipulation of LIBOR. By the time the administrations came to an end, the group companies had issued legal proceedings against the Bank. The litigation was settled by an agreement in December 2015 (the Settlement Agreement).

In July 2019, Mr Schofield and one of the group companies brought misfeasance proceedings against the administrators, claiming that they had been wrong to accept appointment as administrators and to have conducted the administrations as they did. Two of the other group companies also brought proceedings against the solicitors alleging that the firm ought not to have accepted instructions and that they breached fiduciary or other duties in their assessment of the swap claims.  
 
In November 2020, the solicitors and administrators issued applications to strike out the proceedings against them and/or for summary judgment on the ground that any claims against them had been released by the Settlement Agreement.

The strike out/summary judgment applications were heard in May 2021. The judge concluded that the Settlement Agreement had released all the claims asserted against the administrators in the misfeasance proceedings. The judge also concluded that the solicitors had been released from claims only for breach of duty “whilst acting as agents”, but not for claims for alleged breaches of duty to advise. 

Mr Schofield and the group company appealed against the striking out of their claims against the administrators. The other group companies appealed against the partial striking out of their claims against the solicitors. The solicitors appealed against the decision to strike out the claims against them partially rather than in their entirety.

Decision

The court dismissed the group companies' respective appeals, holding that, on the natural and correct interpretation of the Settlement Agreement, each party agreed to release its own “Affiliates” in addition to those of any other party. Referring to clause 2.1 of the Settlement Agreement, which provided "This Agreement is made in full and final settlement of all Claims any Party has or may have against any other Party or against any other Released Party", the court found that the terms "most obviously suggest that the claims being settled encompass all that any “Party” has against any other “Party” or anyone else within the class of “Released Parties” ("Released Parties" having been defined as "the Parties and their Affiliates"). The court also considered that the Bank would likely have wanted the Settlement Agreement to release each of the parties' own "Affiliates" in order to give it protection against "ricochet" claims (i.e., contribution claims against itself).

The court held that Mr Schofield's evidence concerning the group companies' intention that the Settlement Agreement should not operate to release claims against the administrators or solicitors was inadmissible because, among other things:

• Mr Schofield's evidence sought to rely on what was said between the parties during pre-contractual negotiations; 
• Mr Schofield's evidence sought to rely on what he was told by representatives of the Bank months before the claim against the Bank was issued, which the court considered could not "possibly cast any significant light on what the compromise embodied in the Settlement Agreement […] was intended to achieve"; and
• Mr Schofield only offered evidence of subjective intent – no evidence was offered as to what, on an objective basis, a reasonable person in the position of the parties would have intended.  

In considering whether the administrators and solicitors constituted "Affiliates" under the Settlement Agreement ("Affiliate" having been defined as "in relation to any person, a Subsidiary of that person, a Parent of that person, any other Subsidiary of that Parent, and an Employee of that person, of its Subsidiaries and of its Parents"), the court found that the definition of "Affiliate" captured a person's "Employee" which in turn captured "any former ... officers ... and agents". Accordingly, the court held:

• The administrators were “Affiliates” within the meaning of the Settlement Agreement because they were officers and agents of the relevant group companies and therefore naturally met the definition of “Employee". Consequently, the administrators also came within the definition of “Affiliates” and “Released Parties”.
• The solicitors were “agents” of the relevant group companies because they acted on behalf of the companies, and their involvement extended beyond mere advice. Consequently, the solicitors also came within the definition of “Affiliates” and “Released Parties”.

The court also allowed the solicitors' appeal, holding that the Settlement Agreement released the solicitors from all relevant claims, rather than only claims arising out of breach of duty. In reaching this conclusion, the court noted that "Clauses 2.1 and 3.1 of the Settlement Agreement provide for a “Released Party” to be released from “all Claims”; “Claims” is defined to refer to “any and all Liabilities” arising from or in connection with the relevant matters; and “Liability” is expressly stated to extend to any obligation “however and whenever arising and in whatever capacity”".

Comment

When interpreting a contract, the courts will focus on the natural meaning of the words used. Although this is contract law 101, it is sometimes overlooked by parties and practitioners alike. Practitioners must ensure, particularly during the rush of settlement negotiations, that the claims intended to be given up by their client, and no more or no less, are sufficiently captured by the settlement agreement to be entered into. As can be seen from this case, the natural interpretation of a settlement agreement could ultimately provide a much greater shield than intended by a party. Accordingly, it is crucial that practitioners bear in mind the extent of the applicability of any settlement agreement to third parties (both known and unknown) when drafting, even in situations where the insolvency of an entity appears unlikely.