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Settlement Agreements – The Devil is in the Detail

Settlement Agreements – The Devil is in the Detail

Category

Litigation, Dispute Resolution

Date

June 5, 2024
The read

Every word holds weight in contract law.

The importance of precise wording in contract law

This is demonstrated by the recent High Court decision of Dawnvale Café Components Limited v Hylgar Properties Ltd, where the importance of precise wording and ensuring the wording truly reflect the parties’ intentions is highlighted. Neil Moody KC, sitting as a Deputy Judge, also provides clarity on what constitutes ‘the same or substantially the same’ dispute.

Pinder Sahota from our Dispute Resolution team takes a closer look.

The Case

In February 2020, Hylgar Properties Limited (“HPL”) contracted Dawnvale Cafe Components Ltd (“DCC”) for mechanical works on the Beacon development in the Wirral.  What ensued was a series of complications leading to contract termination just nine months later in November 2020, with both parties pointing fingers at each other for who was at fault.

HPL initiated adjudication proceedings in June 2021, claiming DCC’s actions had constituted a breach of contract and seeking repayment of £180,322.92. The adjudicator sided with HPL, ordering DCC to repay the overpayment plus VAT, interest, and fees. DCC failed to comply, leading HPL to begin enforcement proceedings.

Before reaching the Technology and Construction Court in Liverpool, both parties settled via a Tomlin Order. DCC agreed to pay the adjudicated sum in instalments over seven months. This agreement, though seemingly comprehensive, contained a critical clause that would later become the focal point of contention. Paragraph 4 of this Settlement Agreement stated:

“This Settlement Agreement shall immediately be fully and effectively binding on the parties. The payment of the Settlement Sum is in full and final settlement of any and all claims the Claimant may have against the Defendant arising from or in connection with these proceedings.”

The New Dispute

Fast forward to August 2023, HPL delivered a curveball and sought further adjudication for approximately £650,000 in losses due to DCC’s breach of contract.

DCC’s Legal Response

DCC responded with Part 8 Proceedings, seeking:

  1. A declaration that the Settlement Agreement barred further claims by HPL.
  2. An order preventing HPL from initiating further adjudication.
  3. A declaration that HPL’s new claims were ‘the same or substantially the same’ as the previous dispute.

Their argument rested on the belief that the Settlement Agreement should be construed broadly to encompass all potential claims under the contract.

 The Judgment

The court provided a valuable summary on interpreting settlement terms, focusing on phrases like “arising out of or in connection with” and “these proceedings.” The judgment underscored the necessity for precision in contractual language and cautioned against attempts to rewrite history based on subjective understandings. The Judge ruled against DCC, noting:

  • Parties’ subjective understandings of settlement terms are irrelevant.
  • “These proceedings” referred specifically to the enforcement action, not the broader contractual relationship and so there was no causative relationship with the proceedings.
  • HPL’s new claims for additional losses did not relate to the initial enforcement proceedings and that if parties had intended to settle all potential future claims they would have said so and used wording which would achieve that objective by referring to all claims referring from or in connection with one or all of “the contract”, “the works” or “the dispute(s)”

Thus, the settlement only covered the payment schedule for the adjudication award, not other potential claims. If the parties intended to settle all future claims, the terms should have explicitly covered all claims related to the contract, works, or disputes.

Regarding DCC’s argument that HPL couldn’t re-adjudicate the breach, the Judge found no merit. The first adjudication established DCC’s breach and overpayment, but the new claims involved different loss heads with no overlap with previous sums awarded. The Judge emphasised that requiring all loss heads to be adjudicated simultaneously would delay proceedings and obstruct cash flow, countering adjudication’s purpose of promoting quick resolutions and cash flow.

What can we learn from this?

This case serves as a critical reminder: precise language in settlement agreements is paramount. DCC’s failure to secure a comprehensive settlement means they now face another significant claim. This ruling underscores the courts’ objective stance on agreement construction and reinforces a pro-adjudication approach. Businesses entering contracts should be alert to the risks of not using precise language, and work with legal counsel to ensure their contracts aren’t at risk to interpretation that could be harmful or create legal challenges.