Important lessons for settlement deeds

A recent High Court decision highlights important issues for the execution of settlement deeds and provides a useful restatement of the extent of the disclosure obligations of parties to settlement negotiations: Silver Queen Maritime Ltd v Persia Petroleum Services Plc [2010] EWHC 2867 (QB). Claire Stirrup comments.

Key Points

• Where a party has executed a deed but wishes for it to remain revocable until some other event has occurred, this must be made very clear.
• The parties to settlement negotiations do not generally owe one another fiduciary duties or duties of disclosure. In most cases, therefore, it will not be possible to rescind a settlement agreement on grounds of non-disclosure.

Background

The claimant sued the defendant for approximately €10 million under a sub-contract to conduct geological studies in the waters offshore Iran. The claimant had previously held negotiations with the purchaser under the main contract, IOOC, seeking payment of sums due from the defendant. In the negotiations, the claimant had offered to accept a reduced sum for the work done (€7.5 million and then €6.5 million), but no agreement was reached.

Following service of Statements of Case in early 2009, the proceedings were stayed to allow time for settlement discussions between the claimant and defendant. These discussions resulted in an agreement to settle for approximately €8.1 million, the terms of which were reduced into a Settlement Deed in July 2009.

The defendant signed the Settlement Deed and (acting by its solicitors) sent it via email to the claimant's solicitors during the afternoon of 21 July. The covering email asked that it be signed for the claimant and returned to the defendant's solicitors. The following morning, the defendant purported to withdraw from the Settlement Deed on the grounds that the claimant had failed to disclose its discussions with IOOC. The claimant contended that it was too late for the defendant to withdraw from the settlement. It proceeded to execute the Settlement Deed and returned a copy to the defendant's solicitors during the afternoon of 22 July.

The question of the validity of the Settlement Deed was heard at a trial of preliminary issues in October 2010.

Judgment

The key issues before the court were:

• Was a concluded settlement agreement reached in July 2009?
• If so, could it be rescinded for non-disclosure?

The court held that the Settlement Deed had been delivered as a deed in escrow subject only to the conditions referred to in the covering email. The covering email had simply asked that the Settlement Deed be signed and returned to the defendant's solicitors. These conditions were satisfied by the email from the claimant's solicitors on the afternoon of 22 July and, since a deed is irrevocable from the time of its delivery, the Settlement Deed could not thereafter be recalled by the defendant. Accordingly, the court found that a concluded settlement had been reached in July 2009. It did not matter that the deed had not been dated.

The court further held that the Settlement Deed could not be set aside for non-disclosure. Parties negotiating for a contract do not generally owe a duty of disclosure to each other, and this principle extends to agreements to settle litigation. Indeed, the court found that if a fiduciary duty had existed between the parties, the hostilities of litigation would have extinguished any such duty. The court acknowledged that during negotiations to settle a claim, the basic principle is that the parties are entitled not to disclose information relating to that claim. The application of this principle does not depend upon the nature of the facts in question.

Practical implications for executing settlement deeds

The judge referred to previous case law establishing that there are three ways in which a deed, once it has been signed, can be dealt with:

1. delivered as an unconditional deed which is irrevocable and takes immediate effect;
2. delivered as a deed in escrow which is irrevocable but does not take effect unless and until the condition(s) of escrow have been fulfilled; and
3. handed to an agent who has instructions to deal with it in a certain manner, in which case it is recoverable unless and until it is so dealt with.

Under section 46(2) of the Companies Act 2006, a document executed as a deed by a company is presumed to be delivered upon execution, but this presumption can be rebutted if a contrary intention is proved. A party wishing to rely on this section to rebut the presumption will need to refer to objective evidence of the parties' intentions in relation to the deed.

In the Silver Queen, the defendant's solicitors' email attaching the Settlement Deed was accepted by the court as the best evidence of the parties' intentions in respect of the Settlement Deed. This email simply requested that the Settlement Deed be signed for the claimant and returned. Since it was irrevocable from the time of its delivery as an escrow, the Settlement Deed could not be recalled before it had taken effect.

Obligations in negotiating settlement

The court held that there was no duty on the claimant, either as a fiduciary or because of any particular circumstances of the negotiations, to disclose to the defendant its earlier offer to accept a lesser amount from IOOC. The claimant was not acting on behalf of the defendant in negotiating with IOOC, and so there was no basis for any agency or fiduciary relationship. Even if there had been a duty of this sort, it could not have survived the onset of litigation; as the court noted, no duty of loyalty exists in that context.

Although it is not cited, the judgment is consistent with the case of Thames Trains Limited v Railtrack Plc [2006] EWHC 3291 (QB), in which the court held that a defendant's solicitor was not under a duty to mention a previous more favourable offer when the opponent negotiated a settlement in ignorance of that previous offer.

These issues are highly fact-specific, but both cases underline that there is no general duty of loyalty or disclosure between parties to settlement negotiations.