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Full and final settlement: the risk of giving up claims before you know you have them

It is often a great relief to get a final account agreed and paid after a hard-fought negotiation, but what have you given up? 

Deals are often expressed to be in full and final settlement – which begs the question: ‘Settlement of what’? We need to look at the risk of giving up claims before you know you have them.

In Point West London Ltd v Mivan Ltd [2012] EWHC 1223 the Technology and Construction Court declared the scope of a settlement agreement to include all patent defects, including patent defects of seriousness not fully appreciated by the parties at the time they entered into it.

Persistent unresolved defects

Point West appointed Mivan to carry out phase 4 of the development of the old West London air terminal. Practical completion was certified in June 2001 and the final account was agreed in July 2002.

In October 2007, the parties entered into settlement agreement by correspondence. As we will see below, the background is important.

At the time, both parties were aware of persistent, unresolved defects in Mivan’s renewed curtain walling system, and the tenant living in the penthouse flat had sent both parties a report on defects in Mivan’s heating and cooling system.

Wording of the settlement agreement

Point West had decided to commence proceedings against the tenant for rent arrears. The settlement agreement included the words: “The agreement comprises a further payment of £50,000… thus achieving full and final settlement in respect of the [phase 4] works, together with any and all outstanding matters. We would confirm that this final agreement concludes Mivan’s responsibilities and obligations in respect of their works at the above project…”

Point West responded on 18 October, confirming: “The contents of your letter are accepted subject to you being prepared to assist me in the legal aspects of the case on Flat 1601… but I am not looking to you to do any further remedial works.” Mivan agreed.

Damages for the defects

In November 2007, Point West commenced proceedings against the Penthouse flat’s purchaser and the tenant. This backfired when the court ordered Point West to pay damages in respect of the building defects.

“Settlement agreements should be drafted simply. They must cover all, but not more than, the actual and possible claims that the parties intend to release.”

Point West applied to the Technology and Construction Court for a declaration that the settlement agreement reached with Mivan in October 2007 did not settle any liability which Mivan had or would have in future to pay damages in respect of defects.

Point West argued that it had not released Mivan from liability for defects which existed but whose consequences were not fully understood at the time of the settlement agreement.  

It said that the issues with the curtain walling and heating and cooling had been thought to be minor. There was no dispute with Mivan about them at the time and no reason for either party to suppose that they were settling them.

Settlement agreement in context

Mr Justice Ramsey declined to make the declaration that Point West had applied for. Instead, he held that the settlement agreement released Mivan from its liabilities for:

  • All defects in Mivan’s work which were patent at the date of the settlement agreement; and
  • All defects forming the subject matter of the county court proceedings involving the tenant and purchaser.

The courts construe disputed settlement terms objectively, with reference to how the contractual terms would have been understood by a reasonable person given the “factual matrix”.

The factual matrix can include “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”.

In this case, Mr Justice Ramsey held that it was against the background referred to above that the settlement agreement had to be construed.

The court will not rewrite or improve upon the terms of a settlement agreement, or convert them into an agreement that the parties did not make.

Settlement agreements should be drafted simply. They must cover all, but not more than, the actual and possible claims that the parties intend to release.

Laura Phoenix is an associate at Thomas Eggar

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