High Court implies term into settlement agreement enabling claims against remaining parties to continue

In the context of claims relating to an allegedly fraudulent investment scheme, the High Court has held that a settlement agreement reached between the applicant liquidators and two of the respondents did not preclude the applicants from continuing their claims against the remaining respondents: Biscoe and Baxter as Joint Liquidators of Equitable Law Capital Limited v Milner [2021] EWHC 763 (Ch).

The decision contains a helpful review of the authorities regarding the impact of a release of liability where settlements are concluded with one or more of a number of potential defendants.

It is of particular interest in illustrating the court’s approach where a settlement agreement deals with some claims where the settling defendants were jointly liable with other parties, and other claims where the liability was merely concurrent, but the agreement does not distinguish between the two. This can give rise to difficulties, given the different legal tests for the effect of a release of liability in these two situations.

The key practical point for those settling multi-defendant litigation is that the drafting of the relevant agreement needs to be considered carefully to ensure it is clear what impact, if any, the settlement is to have on claims that are not included in the settlement. If the intention is that the claimant can continue to pursue other claims, that should be expressly stated to avoid the sort of dispute that arose in this case (and of course the settling defendants may wish to consider seeking an indemnity in respect of any contribution claims they may face if such claims are pursued). Equally, if the settlement is intended to bar the pursuit of any remaining claims, that should ideally be made clear.

Background

The proceedings arose following the collapse of Equitable Law Capital (ELC), which ran an investment scheme called “the ELC Legal Redress Scheme”. The Scheme’s purpose was to fund claims against financial institutions for the mis-selling of bonds. During the lifetime of the Scheme investors put in about £3.3 million but only received payments of just over £230,000. ELC was put into insolvent liquidation in November 2016.

In January 2019 the joint liquidators of ELC issued an application for various orders for payment and compensation against the respondents, all of whom had been involved in various capacities in the running and administration of the Scheme. Together they had received almost £2.2 million from the Scheme, either in their own hands or through their companies. The claims alleged included dishonest assistance and/or knowing receipt, conspiracy, transactions at an undervalue, and wrongful and fraudulent trading.

By the time the trial took place in early 2021, the claims against the first and second respondents, Mr and Mrs Milner, had been settled for the sum of £190,000.

There were a number of issues for the court to decide, including the question whether the terms of the Settlement Agreement with the Milners barred the claims continuing against the other respondents. That is the focus of this blog post.

Terms of the Settlement Agreement

The relevant terms were as follows:

• The settlement amount was said to be accepted in “full and final settlement of the Claims”.
• The Claims were defined to include any claims ELC or the liquidators might have against the Milners including any such claims “in respect of the Application Notice dated 30 January 2019 with allocated claim number CR-2019-000812”.
• Clause 3.1.2 provided that: “Mr and Mrs Milner shall provide to the Liquidators' Solicitors, upon Completion, copies of all such information and documents they hold relating to the assets of [the third respondent]….”
• Clause 3.1.3 provided that: “Mrs Milner has agreed to give evidence in support of the Company and/or the Liquidators' claims as detailed in the Application Notice dated 30 January 2019 with allocated claim number CR-2019-000812, and has agreed to provide… a witness statement setting out details of the Respondents' involvement in the Company.”
• Clause 5.1 headed “Agreement not to sue” provided that each party agreed “not to sue, commence, voluntarily aid in any way, prosecute or cause to be commenced or prosecuted against any other party any action, pursuit or other proceeding concerning the Claims in this jurisdiction, or any other…”

Liquidators’ submissions

The liquidators submitted that the Settlement Agreement did not affect the claims against the remaining respondents, either in respect of liability or quantum. They argued, in summary, that:

• The common law rule, namely that the release of one joint tortfeasor discharged all others, applied only in relation to joint tortfeasors. The Milners were not joint tortfeasors with the other respondents in relation to most of the claims.
• Even if the common law rule was engaged, the starting point for the court was to determine the proper meaning of the Settlement Agreement in its appropriate factual context to ascertain whether it operated as a discharge against any of the remaining respondents.
• It was clear that that was not the effect of the Settlement Agreement, whether as a matter of construction or the implication of terms. The liquidators pointed in particular to:
  • the agreement to provide evidence in support of the claims against the other respondents, and information in relation to the third respondent’s assets, which showed it could not have been the parties’ intention to settle the claims against the remaining respondents; and
  • the fact that the settlement sum was less than £200,000 in the context of claims worth over £2 million; the settlement sum had been agreed on a means basis, and there was no suggestion that the parties intended to release the claims against the other respondents.

Respondents’ submissions

The respondents submitted that the effect of the Settlement Agreement was to bar the remaining claims. They argued, in summary, that:

• The true effect of the Settlement Agreement was to release the Milners from any liability in respect of the claims, including the liability to make a contribution to any other respondent. The agreement not to sue clause should be read as prohibiting not merely claims made by the liquidators but also claims that might lead to other claims being commenced against the Milners, including contribution claims.
• The Settlement Agreement contained no express reservation of the liquidators’ right to sue the remaining respondents and such a term would not readily be implied. To do so would undermine the full and final settlement intended.
• To the extent that the Milners were not jointly liable with the remaining respondents, the liability was in respect of the same damage, or the remaining claims were closely analogous to claims made against the Milners. For such claims, the question was whether the settlement had fixed the full value of ELC’s loss, in which case the remaining claims were barred. That was a matter of the interpretation of the Settlement Agreement, and it was clear from the agreement as a whole that that was the case.

Decision

The High Court (Mr Justice Meade) found, in favour of the liquidators, that the settlement did not bar the remaining claims.

Meade J noted that, as was common ground, the general common law rule is that, where there is a joint cause of action, a discharge of one defendant operates as a discharge of all. However, a mere covenant not to sue does not have this effect.

He reviewed the authorities, including Gladman Commercial Properties v Fisher Hargraves Proctor [2013] EWCA Civ 1466 (considered here) in which the Court of Appeal recognised that there is an exception to the common law rule where the settlement agreement contains a reservation of the right to sue others, which may be express or implied. The question of whether a term is to be implied must be determined in accordance with the approach restated by the Supreme Court in Marks & Spencer Plc v BNP Paribas [2015] UKSC 72 (considered here).

Where the parties are merely concurrent tortfeasors (ie they have separately caused the same loss), the common law principle does not apply. As established in Heaton v Axa Equity & Law Life Assurance Society plc [2002] 2 AC 329 (HL), the question in such a case is whether, on the true construction of the settlement agreement, the settlement amount has been accepted as representing the full measure of the claimant’s loss (since, if so, there will be no remaining loss to pursue). Some cases have suggested that the same might apply where the parties are not concurrent tortfeasors but their position is “closely analogous” to that of concurrent tortfeasors.

In the present case, Meade J stated that, insofar as the Milners and the other respondents were joint tortfeasors, the test was whether a term could be implied into the settlement agreement permitting the remaining claims to proceed. Insofar as they were concurrent tortfeasors, the question was whether the settlement should be interpreted as fixing the full measure of ELC’s loss.

The judge observed that this gave rise to a difficulty. The case concerned a settlement of a number of different claims against multiple defendants, where some would give rise to joint liability and others to concurrent liability, but the Settlement Agreement did not distinguish between the claims in this way. While one solution might be to consider whether a term could be implied with respect to the joint liability claims, and address the concurrent liability claims by way of interpretation, it was unlikely that the parties intended that the claims should be treated differently in terms of whether the liquidators could proceed against the remaining respondents.

In any event, if the strict test for implication of a term were applied in relation to all the causes of action, the judge held that a term should be implied to the effect that the liquidators could continue to pursue all the claims against the remaining respondents. This was for the following reasons:

• While recognising the “generally strong expectation” that claims against joint tortfeasors would be released, the existence of clauses 3.1.2 and 3.1.3 was a “powerful and overwhelming factor” in the other direction. Those clauses clearly and explicitly contemplated the continuation of the claims against the other respondents.
• The surrounding context of the Settlement Agreement provided further support for this conclusion. The settlement with the Milners was made on a means basis and the settlement amount was a small proportion of the total claims. It was obvious that the settlement agreement did not settle the full measure of ELC’s loss.

Given that conclusion, it was not necessary to determine which other claims in the proceedings might be closely analogous to the settled claims.