Court of Appeal interprets settlement agreement as releasing party's own affiliates, including former administrators and their solicitors

The Court of Appeal has held that a settlement agreement between a bank and a group of companies which included releases of the parties' affiliates prevented the companies from later pursuing claims against their own affiliates. Those affiliates were held to include former administrators appointed by the bank and the administrators' solicitors: Schofield v Smith [2022] EWCA Civ 824.

The court found that each party to the settlement agreement had agreed to release all entities meeting the definition of "Affiliates" - including its own affiliates, not just those of another party. That was the natural reading of the release provisions and was supported by consideration of the commercial context. Specifically, it was presumed to be in the bank's interest to prevent the companies from proceeding against the administrators and solicitors, so as to protect itself from "ricochet" contribution claims and draw a line under the dispute.

The judgment will also be of interest to insolvency practitioners for the court's consideration of the affiliate status of the administrators and their instructed solicitors, adopting a broad interpretation of agency for these purposes.

The result in this case might be considered surprising when viewed from the usual litigation perspective of participants falling into one or other of the opposing "camps".  However, it illustrates the courts' preparedness to give effect to clear contractual wording, particularly where there is a plausible commercial reason why that wording may have been used.

Once again, it reinforces the need for parties negotiating contractual releases to consider very carefully what potential claims (including between which entities) they wish to release, and to ensure that the language covers all and only those claims.  That includes giving specific thought to what entities could potentially be caught by releases that extend beyond the contracting parties.

Background

The settlement

The underlying dispute arose out of loan facilities provided by a bank to several companies under the control of an individual, Mr Schofield. The facilities were accompanied by interest rate hedging agreements ("swaps"), referenced to LIBOR.

When a payment demand was not met, the bank appointed joint administrators to three companies in the group ("the Companies"). The administrators in turn instructed solicitors to review certain claims the Companies had asserted against the bank for rescission of the swaps and compensation for alleged misselling and manipulation of LIBOR ("the swaps claims").

The administrators did not pursue the swaps claims and the administrations came to an end by February 2015 (following various actions resulting in payments to the bank and other creditors). By that time, the Companies had commenced proceedings against the bank pursuing the swaps claims ("the swaps litigation").

The swaps litigation was settled following a mediation, and a settlement agreement entered into in December 2015 ("the agreement"). The parties to the agreement were the bank and the three Companies but, as detailed below, the broadly drafted release clauses extended to the parties' "Affiliates" (as defined), and the agreement provided for such Affiliates to be able to enforce those provisions in accordance with the Contracts (Rights of Third Parties) Act 1999.

Neither the administrators nor the solicitors were involved in the mediation or the negotiation of the agreement.

The present proceedings

The proceedings considered in the present appeals were issued over three years after the settlement and were brought (variously) by Mr Schofield, two of the Companies, and a further company in the group (together "the Rhino claimants"). They comprised:

• claims against the administrators alleging breach of fiduciary and other duties and/or misfeasance, in accepting the appointment and the manner in which they carried it out (including failure to pursue the swap claims)
• claims against the solicitors alleging breach of fiduciary and other duties in accepting the instruction and in their assessment of the swap claims.

The administrators and the solicitors applied for strike out / summary disposal on the grounds that they had been released by the settlement agreement from such claims as they were "Affiliates" of the Companies. The Rhino claimants disputed that they fell within that defined term and, in any event, argued that the agreement only released claims against the Companies' Affiliates where the claims were brought by the bank.

The High Court (HHJ Davis-White QC) held that, correctly interpreted, the agreement was that each party released its own "Affiliates", not just those of another party.  The court went on to:

• accept that the administrators were the Companies' "Affiliates" and that all the claims against them had been released and were therefore to be struck out /summarily dismissed
• accept that part of the solicitors' role involved them acting as the Companies' agent and therefore an Affiliate, and the releases therefore applied to the claims in respect of that role - but not the claims alleging breach of duty to advise, which were left on foot..

The Rhino claimants appealed both decisions, and the solicitors appealed the decision to strike out only part of the claim against them.

Decision

The Court of Appeal (i) dismissed the Rhino claimants' appeals, and (ii) granted the solicitors' appeal, holding that the claim against them should have been dismissed in its entirety.   Lord Justice Newby gave the lead judgment, with which Lord Justices Arnold and Warby agreed.

Interpreting the settlement agreement

The key terms in the agreement provided that (emphasis added):

• the agreement was "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 Released Parties are released and forever discharged from all Claims" and
  "Each Party agrees that it will not bring any Proceedings against any Released Party in relation to a Claim or otherwise assert a Claim against any Released Party"
• the "Released Parties" were "the Parties and their Affiliates".  An "Affiliate" included an "Employee", which was in turn defined as "any former, present or future directors, officers, employees, shareholders and agents".

Newby LJ began by setting out the current state of the law regarding the correct approach to contractual interpretation. In particular, as most recently confirmed by the Supreme Court in Wood v Capita Insurance Services Ltd [2017] UKSC 24, a court seeking to ascertain the objective meaning of the language used by the parties may use both textual analysis and a consideration of the context (or "factual matrix") as tools. The extent to which each tool will be appropriate will vary depending on the particular agreement.

He also noted that it is settled law that ordinary principles of contractual interpretation apply to releases, with no special rules or presumptions (Bank of Credit and Commerce International SA v Ali [2001] UKHL 8).

The application of those principles here supported the conclusion reached by the High Court, that the agreement released the parties' Affiliates not only from claims by the opposing party but also claims by the party with whom it was affiliated.  In particular:

• That was the clear literal meaning of the words used. The Rhino claimants' proposed interpretation ran counter to the way in which the language would naturally be read.
• To the extent that the literal interpretation meant a party was technically releasing itself, the "release" was merely redundant. It did not undermine that interpretation.
• The literal meaning was reinforced by considering the commercial context. The bank could be expected to have wanted the agreement to draw a line under the Companies' complaints. The bank would, objectively, be expected to want to prevent the Companies suing the administrators to avoid triggering contribution claims against itself - particularly given that Mr Schofield had made it clear that he might pursue such claims. Whether or not a settlement agreement would usually effect a release of claims that a party might have against its own officers and agents, there was an obvious case for doing so in the present case.

The administrators as "Affiliates"

The administrators' case was that they were Employees (and thus Affiliates) both as "officers" and "agents" of the Companies (relying on case law as to the former, and express provision in the Insolvency Act 1986 as to the latter).

The Rhino claimants argued that an administrator is imposed on a company, acts primarily in the interests of its creditors and would not normally be referred to as an "affiliate" of the company. They submitted that, as the administrators here were recognised not to be in the same "camp" as the Companies, the drafters of the agreement could be expected to have identified them specifically as "Affiliates" if they had they been intended to be such.

The court rejected those arguments, holding that "the simple fact is that (they) were both officers and agents", and therefore Affiliates under the defined terms.  Newby LJ observed "Nor is it odd to speak of [the administrators] as having been "affiliated" to [the companies]. After all, they had charge of the companies' affairs and acted on their behalf."

The Rhino claimants also sought to rely on evidence from Mr Schofield to the effect that the bank had told him in the course of the settlement negotiations that it was not prepared to settle any claim the companies might have against the administrators and that Mr Schofield should bring any such claim against them. This was said to show that it was common ground between the parties that claims against the administrators (and advisors instructed by them) were not within the scope of the dispute being settled. The Court of Appeal agreed with the High Court's conclusion that such evidence was inadmissible under the well-established rule that excludes evidence of pre-contractual statements going to the parties' subjective intentions, or any consensus reached, for the purpose of drawing inferences about the meaning of a contract's terms (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896).  It rejected arguments that the evidence fell outside the exclusionary rule because it was permissible evidence of an objective fact or of the contract's aim.

Accordingly, the High Court had been correct to conclude that all the claims against the administrators had been released.

The administrators' solicitors as "Affiliates"

The Rhino claimants disputed that the solicitors were Affiliates by virtue of their role as agents. They argued that, to the extent there is any kind of agency between solicitors appointed by administrators and the company in question, it is one of an unusual nature. They submitted that "agents" here must refer to insiders within the party's organisation, such as a fulltime consultant, rather than external advisors such as the solicitors.

While noting that the word "agent" can have different meanings in different contexts, Newby LJ rejected that argument. As a matter of language, he considered its use here likely to refer to independent contractors who act on behalf of a party, regardless of whether they do so on a full-time basis, and so included the solicitors' agency role.

Further, the judge below had been wrong to conclude that the releases were limited to claims related to that agency role. Once a person was recognised as a Released Party, all relevant claims against that person were released, regardless of whether their liability arose in the capacity that made them a "Released Party". The Court of Appeal therefore held that the entirety of the claims against the solicitors should also be struck out or dismissed.