Release of Affiliates in Settlement Agreements: An Analysis of Schofield & Anor v Smith & Anor ([2022] EWCA Civ 824)

Introduction

The case of Schofield & Anor v Smith & Anor ([2022] EWCA Civ 824) adjudicated by the Court of Appeal (Civil Division) of England and Wales on June 21, 2022, presents significant insights into the interpretation of settlement agreements, particularly concerning the release of affiliates. The appellants, comprising Mr. Jason Schofield and holdings, Properties, REL, and Askwith, challenged the orders striking out claims against joint administrators (JAs) and legal advisors, Clyde & Co LLP, arguing that the settlement agreement did not intend to release these affiliates from liability. The crux of the dispute centered on whether the settlement agreement's clauses effectively released the JAs and Clyde & Co from claims, thereby precluding further legal actions against them.

Summary of the Judgment

The Court of Appeal dismissed the appeals brought by Mr. Schofield and the holdings, REL, Properties, and Askwith, while allowing Clyde & Co's appeal. The primary judgment affirmed the High Court's decision to strike out the misfeasance proceedings against the JAs and to entirely dispose of claims against Clyde & Co. The court held that the settlement agreement effectively released the JAs and Clyde & Co as "Affiliates" and "Released Parties," preventing further legal actions against them. The judgment underscored the importance of interpreting settlement agreements according to their natural and ordinary meaning, upholding the inclusion of affiliates within the release clauses. Additionally, the court addressed the admissibility of evidence pertaining to the subjective intentions of the parties, reinforcing the principle that contractual interpretations rely on objective meanings rather than subjective intents.

Analysis

Precedents Cited

The judgment extensively referenced several landmark cases to underpin its reasoning:

• Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 ("ICS") – Outlined principles of contractual interpretation focusing on the objective meaning of language.
• Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 – Emphasized the integration of textualism and contextualism in contract interpretation.
• Bank of Credit and Commerce International SA v Ali [2001] UKHL 8 – Confirmed that ordinary contractual interpretation principles apply to releases.
• Heaton v AXA Equity and Law Life Assurance Society plc [2002] UKHL 15 and McGill v Sports and Entertainment Media Group [2016] EWCA Civ 1063 – Discussed the implications of compromise agreements on subsequent claims against third parties.
• Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 ("Reardon Smith") and Merthyr (South Wales) Ltd v Merthyr Tydfil CBC [2019] EWCA Civ 526 – Explored the admissibility of background facts in contractual interpretation.

Legal Reasoning

The court's legal reasoning hinged on the objective interpretation of the settlement agreement's language. It emphasized that the definitions within the agreement, particularly of "Released Parties" and "Affiliates," encompassed the JAs and Clyde & Co by virtue of their roles as officers and agents. The court rejected the appellants' arguments that the settlement did not intend to release these affiliates, highlighting that the natural reading of the clauses would include all affiliates to prevent "ricochet" claims. Moreover, the court dismissed the reliance on subjective intent, reinforcing that contractual interpretation should not consider parties' unexpressed intentions or pre-contractual negotiations, aligning with established precedents.

The court also addressed the appellants' application of the Ex p James principle, which generally restrains courts from allowing their officers to act contrary to societal standards. The court found no basis to apply this principle in nullifying the settlement agreement's release clauses, as the agreement was fairly negotiated and the release was clear and unambiguous.

Impact

This judgment reinforces the sanctity of settlement agreements, particularly in their capacity to release affiliates from liability. It underscores that the inclusion of affiliates within release clauses should be interpreted broadly, preventing third-party claims that could undermine the settlement's finality. For practitioners, this case highlights the critical importance of precise drafting in settlement agreements to ensure comprehensive releases. Furthermore, it affirms that courts will uphold the objective language of contracts over disputed subjective intents, providing clarity and predictability in contractual disputes.

Complex Concepts Simplified

Settlement Agreement: A legally binding contract where parties resolve their disputes without continuing litigation, often involving compromises such as financial payments and mutual releases of claims.

Released Parties & Affiliates: In this context, "Released Parties" refer to the entities or individuals from whom claims are waived, while "Affiliates" are related entities or individuals connected to these parties, such as employees or agents.

Ricochet Claims: Indirect claims that a third party may bring against a party not originally involved in the settlement, based on actions or claims involving the original parties.

Objective Interpretation: Understanding contract terms based on their clear, ordinary meaning, devoid of the parties' subjective intentions or pre-contractual discussions.

Ex p James Principle: A legal doctrine preventing court officers from acting in ways that society would find unacceptable, ensuring fairness and propriety in judicial conduct.

Conclusion

The Court of Appeal's decision in Schofield & Anor v Smith & Anor ([2022] EWCA Civ 824) serves as a pivotal reaffirmation of the principles governing the interpretation of settlement agreements. By upholding the broad release of affiliates, the court has provided clear guidance on the extent to which such agreements can shield related parties from future claims. This not only enhances the enforceability and reliability of settlement agreements but also ensures that parties can conclusively resolve their disputes without the looming threat of ancillary litigation. Legal practitioners must heed this judgment's implications, ensuring meticulous drafting of release clauses to encapsulate all intended parties comprehensively.