Settlements, judgments and sharp practice

Imagine two scenarios:

• An Employer's claim against a Contractor regarding a defective roof on a building constructed by the Contractor is concluded (by a settlement, consent order, award or judgment). Can the Employer bring a subsequent claim for, say, defective flooring in the same building when at the time the first claim was determined the flooring defect was: - patent? - latent?
• An Employer's delay-based claim against a Contractor is concluded (by a settlement, consent order, award or judgment). Can the Employer bring a subsequent claim for defective works in respect of the same project when at the time the first claim was determined the defects were: - patent? - latent?

In both examples, all depends on the compromise wording and the nature of the claims. However, the House of Lords decision in BCCI v Ali (given on 1 March 2001) provides a reminder of the limits of settlement agreements in finally determining all disputes the parties to a project have or may have in relation to it. BCCI v Ali was an employment case, but the principles stated by the Law Lords apply equally to the settlement of any dispute.

The Claimant was made redundant by BCCI in 1990. Following consultation with his trade union and the Advisory Conciliation and Arbitration Service (ACAS), the Claimant was offered in addition to his redundancy pay, one month's gross salary in return for signing a form drafted by ACAS, which recorded that he accepted the sum: "in full and final settlement of all or any claims whether under statute, Common Law or in Equity of whatsoever nature that exist or may exist and, in particular, all or any claims, rights or applications of whatsoever nature that [the Claimant] has or may have or has made or could make in or to the Industrial Tribunal".

The Claimant signed the agreement and duly received almost GBP 10,000 ( GBP 2,772.50 of which was paid in return solely for signing the form). The following year, the bank collapsed and it became generally known that a significant part of its business had been carried out in a corrupt manner. The Claimant (and many other past employees) then issued claims against the bank seeking "stigma" damages to compensate them for the alleged handicap that they had suffered in the labour market as a result of their association with it. The bank's liquidators argued that the settlement barred the bringing of the stigma claim, even though it was not until 1997 that such a claim was recognised to exist in law.

The two issues before the House of Lords were:

• Did the settlement agreement include the stigma claim?
• If so, would the bank in any case be prevented from relying upon it, given that at the time the agreement was concluded the bank must have known that it was engaged in a corrupt business and that the Claimant was ignorant of this?

The settlement agreement

The Law Lords (by a majority of 4:1) decided that the settlement agreement did not include the stigma claim. They held that although the parties could agree to settle claims of which they were not, and could not, be aware, the courts would be slow to infer that they had done so in the absence of clear language to that effect. They concluded from the settlement wording used that the parties did not intend to settle claims that they never realistically had in contemplation (given the state of the law at the time of the agreement).

This is a somewhat surprising decision given the width of the settlement (and presumably surprised Miss Cherie Booth QC who, when acting for the Claimant at first instance, conceded that the words of the settlement agreement included the stigma claim).

It is apparent that it will take clear words (such as "all or any claims whether contemplated or not") to include within a settlement claims not contemplated by the parties. This applies to claims based on defects latent at the time of the agreement (such as the defective flooring claim in our example above). The presumption will not apply where the parties knew of the subsequent claim when the settlement was concluded (which in our example 1 would invariably be the case where the defect was patent).

The "context" of the settlement may also give rise to a presumption that it does not include a subsequent claim. For example, the courts would recognise the unlikelihood that in settling a loss and expense claim the parties to the settlement also intended to settle a claim based on defects latent at the time of the agreement. However, where the defects were patent at the time of the settlement, the words of the agreement would not need to be nearly so clear to include a claim based upon them.

It also appears from the decision that a settlement reached before the parties set out their cases in any detail (for example, before any dispute arises) is more likely to be construed to include subsequent claims than agreements reached once the nature and extent of the claims between the parties are set out (e.g. in pleadings). This is because the claims contemplated by the parties and their "context" will be more apparent to a court interpreting the settlement agreement.

These presumptions of interpretation produce much uncertainty in assessing the finality of settlement agreements. Some might conclude that however tight and comprehensive a settlement agreement, there will always be courts that strain its wording to avoid what they perceive to be injustice.

Sharp practice

Given the majority decision reached by the House of Lords on the interpretation of the settlement agreement, the issues of knowledge and reliance did not fall to be decided. Nevertheless, Lords Nicholls and Hoffmann both addressed the generic situation where one party knows that the other party has a claim of which he is unaware and they conclude a settlement agreement that includes such a claim without the "aware party" disclosing his knowledge to the other. Lord Nicholls termed this "sharp practice".

Since the comments of Lords Nicholls and Hoffmann were not a necessary part of the House of Lords' decision they are therefore not strictly binding as authority. However, given the status of the judges their comments carry appreciable weight and are of considerable importance.

Unfortunately both gave what some might call "the rule against sharp practice" a somewhat cursory treatment, producing much uncertainty as to when and how it applies.

Lord Nicholls considered that in some circumstances when one party is aware that the other party has, and is ignorant of, a claim or a possible claim the law would be defective if it did not provide a remedy. While he preferred to leave discussion as to the basis on which the law would provide a remedy to another case, he said: "that there is a remedy in such cases I do not for one moment doubt". Lord Nicholls did not try to define the "some circumstances". Nor did he explain the remedy: would the "aware party" be prevented from enforcing the settlement in respect of the claim (or possible claim) of which he knew the "unaware party"was ignorant or would it unravel the entire agreement? If the latter, further claims might be possible that would otherwise have been barred by the agreement.

Lord Hoffman limited the rule to where one party is aware that the other party has, and is ignorant of, a claim (and did not extend it to possible claims). He seemed to envisage a general rule against sharp practice, except where the context showed that the parties intended to settle all claims, including those unknown to them. But Lord Hoffmann too was not specific as to the nature of the remedy.

Given the other Law Lords' opinions on the interpretation of the settlement agreement, any attempt to exclude the effects of "sharp practice"would no doubt require very clear words (say, "all or any claims whether contemplated or not by one or both parties"). The "aware party" will face a difficult tactical decision in suggesting the incorporation of such a clause (because, of course, by suggesting the clause he may put the "unaware party"on notice that he has or may have another claim that he has not yet raised).

Equality of bargaining power and means

It seems probable that both aspects of the decision in BCCI v Ali will be applied less vigorously where the parties had roughly equal bargaining power and means such that they were able to negotiate.

The finality of consent orders and judgements

The finality achieved by settlement agreements is worth comparing with the finality achieved when disputes are determined by consent orders, arbitration awards and judgments. For those seeking conclusively to determine all disputes that have arisen or may yet arise in relation to a given project, the settlement of litigation by a consent order will almost invariably have more inclusive effect than a settlement agreement alone or a final judgment. This is because not only do the parties control the wording of the settlement that the consent order will embody (and can make it as tight and as comprehensive as they choose) but, in addition, the consent order will be governed by the same rules that affect judgments.

A judgment or arbitration award is conclusive as to the facts on which it is based and the issues it decides as against the parties to the proceedings in which it was given (except, of course, for appeals). For example, in Conquer v Boot, the claimant recovered damages for the defendant's breach of warranty in not building a house in a good and workmanlike manner. He was prevented from making a claim for further loss suffered by him subsequent to the original litigation because it relied upon the same breach of warranty.

Generally speaking judgments also prevent further claims that could and should have been raised in the earlier proceedings. However, there can be uncertainty, particularly in so-called "special circumstances".

There is much caselaw on whether a claim (or counterclaim) could and should have been raised in earlier proceedings. If the right to bring the claim did not arise during the earlier proceedings (e.g. the breach of duty occurred subsequently) then a judgment in the earlier proceedings will not prevent the claim from being pursued in subsequent proceedings. Generally, where a claim was not contemplated by either party (or the claimant in the subsequent action alone), say, because it was based on a defect latent at the time, it can be pursued in subsequent proceedings, despite an earlier judgment on a dispute between the same parties concerning the same project. Claims based on defects patent at the time of the earlier proceedings should usually be included within them, if only to avoid later argument.

Where the earlier proceedings were pursued by arbitration, a party will usually be justified in not pursuing a claim known to him during those proceedings if it would have fallen outside the arbitrator's terms of reference.

Perhaps unsurprisingly, "special circumstances" are not specifically defined in the authorities although it is clear that there must be something more than negligence, inadvertence or accident. It is apparent though that relevant factors in determining whether "special circumstances" arise include:

• The lack of financial resources to pursue the claim earlier, especially if apparently caused by the defendant in the subsequent proceedings;
• The absence of legal advice during the earlier proceedings;
• Procedural reasons. An extreme example would be a Contractor not pursuing a GBP 1m loss and expense claim against his Employer when bringing a GBP 10,000 claim against him for damaged equipment. There would be some justification in saying that the latter claim should proceed to a fast track conclusion whilst the GBP 1m claim is properly prepared. It would be sensible though to obtain the court's directions in the earlier proceedings to avoid later argument.

Adjudication

Mention should be made of adjudicators' decisions. An adjudicator's decision lacks finality, unless the parties agree that it should be binding. It is enforceable, until the dispute is finally determined by proceedings or agreement. Therefore, if in our example, an adjudicator gave a decision on the defective roof claim (unless the parties agreed that the adjudicator's decision was binding) it would be enforceable until a court reached its own (final) judgment on the dispute. Also, the adjudicator's decision would not prevent the court from deciding the flooring defect claim (even if the defect was patent at the time of the adjudication).

Generally, one adjudicator's decision on a particular question in a dispute binds a subsequent adjudicator deciding a dispute between the same parties. However, there is no rule that prevents a party from raising in a subsequent adjudication claims that he could have raised in an earlier adjudication.

Conclusion

The decision in BCCI v Ali gives rise to some uncertainty in relation to the degree of finality achieved by settlement agreements both as to the possible future claims they include and the effect of any "sharp practice". Ironically this complements the uncertainty in relation to the degree of finality achieved by consent orders and judgments.

Finality largely remains in the hands of the parties and their advisers in drafting settlement agreements and consent orders. In fact an absence of finality may be desirable in certain situations.

For further information, please contact Rupert Choat at [email protected] or on +44 (0) 20 7367 3573.