Settlement Agreements – Two Cautionary Tales

Associated Retailers Limited v Toys Unlimited Pty Ltd & Anors and Blue Moon Grill Pty Ltd

A Victorian barrister, Jonathan Evans, travelled to Cairns to attend a mediation of a claim made by Associated Retailers Limited (“ARL”) for monies it alleged were due by Toys Unlimited, trading as Toyworld in Cairns, and various guarantors. At a mediation that was conducted in Cairns with Toys Unlimited all but one of the guarantors (“the settling parties”) entered into a compromise evidenced in writing whereby the settling parties jointly and severally agreed to pay ARL the amount of $25,000.00 in full and final settlement of ARL’s claim (“the Settlement Agreement”). The guarantor who did not settle, a Mr Paul Moore, subsequent to the mediation amended his defence to add an allegation that the Settlement Agreement had the effect of discharging him from any liability he may otherwise have had to ARL. Mr Moore’s argument was that as Toys Unlimited, who was the principal debtor, was released from further obligations in consideration for entering into the Settlement Agreement then there was no longer any debt that was guaranteed by Mr Moore.

Mr Evans was not accompanied by an instructing solicitor on his visit to Cairns for the mediation. Mr Evans was joined by ARL as a further defendant to the proceedings. ARL alleged that if the Settlement Agreement had the effect of discharging Paul Moore’s liability to ARL then Mr Evans was liable to ARL and negligent.1

As between ARL, Mr Moore and Mr Evans there was an issue of whether or not the Settlement Agreement was to be characterised merely as an agreement that provided a covenant on the part of ARL not to sue or an accord and satisfaction that had the effect of discharging the principal debtor Toys Unlimited. The terms of the Settlement Agreement relevantly provided:

(a) That the settling defendants pay $25,000.00 by instalments on the date set out in the Settlement Agreement “in full and final settlement of the plaintiff’s claim against them inclusive of all interest, costs and disbursements”;

(b) That the proceeding which was issued out of the Victorian Supreme Court be struck out with a right of reinstatement in the event that any payment due under the instalment schedule was outstanding for more than two days after the due date. Upon reinstatement ARL was to have the right to enter a judgment against the settling parties for all amounts remaining to be paid under the terms.

Kyrou J said as follows in respect of the legal issues arising from the arguments between the parties:-

“183. At common law, a release of one of a number of co-debtors who are jointly, or jointly and severally, liable for the same debt releases all of them. Similarly, if a creditor, without having received full payment or performance from the debtor, agrees to release the debtor, any guarantor will also be released.

184. This rule does not apply where the creditor enters into a covenant not to sue a debtor because such a covenant does not affect the underlying liabilities of the co-debtors or guarantors.

185. The question of whether a contractual term operates as a release or as a covenant not to sue must be determined by construing the term in the context of the contract as a whole. If it appears that the term, properly construed, was intended by the parties to the contract not to operate as a release of all co-debtors or guarantors, then the term should be construed only as a covenant not to sue the debtor purportedly released by the contract.

186. In James v Surf Road Nominees Pty Ltd, the New South Wales Court of Appeal observed that ‘[t]he question of construction is not always easy to resolve’ and the court may have ‘to search for factors that may determine the matter one way or the other.’ The Court identified the following three factors:

(a) where there is a joint obligation, a term that is expressed to be a release will usually be construed to have that meaning;

(b) even if there is a joint obligation, if any intention to reserve rights against the co-debtors or guarantors is found, expressly or impliedly, in the contract, then it is most likely that the parties intended the term to operate as a covenant not to sue; and

(c) the court may have regard to the surrounding circumstances in determining whether the term was intended to operate as a release or as a covenant not to sue the party who bears a joint or joint and several liability.

187. It is clear that the first factor identified above is subject to the second factor. In Dorgal Holdings Pty Ltd v Buckley, for example, the creditor and one of three co-debtors executed a deed of settlement by which the debtor agreed to make partial payment of the alleged debt in ‘full and final settlement’ of all moneys owing by him, and the creditor expressly agreed to release him from any further liability. The deed also provided that it did not ‘extinguish or limit in any way the rights, remedies and claims of [the creditor] against any other person’. McLelland CJ in Eq held that the deed should be construed as a covenant not to sue, and that it did not operate to release the other co-debtors.”

(footnotes ommitted)

The ultimate finding was that there was an accord and satisfaction as between Toys Unlimited as principal debtor and ARL as creditor.

Notwithstanding the finding that the Settlement Agreement reduced or released Mr Moore from his liability under his guarantee Mr Evans, the barrister, was not the subject of a judgment. Mr Evans was found to be negligent2 but Mr Moore succeeded on other defences to ARL’s claim that meant Mr Moore never had any liability to ARL, so that Mr Evan’s negligence did not cause any loss to ARL.

Blue Moon Grill Pty Ltd v Yorkeys Knob Boating Club Inc.

The case of Blue Moon Grill Pty Ltd v Yorkeys Knob Boating Club Inc.3 involved a settlement agreement where the issue was whether or not some terms of settlement agreed between the parties operated as in accord and satisfaction, immediately discharging liability or were “accord executory” whereby the proceedings were only to be deemed settled upon performance by the parties of the terms of settlement. The relevant terms of the “terms of settlement” included a concluding term as follows:

“Upon performance by the defendant and the plaintiff of the terms of this settlement the current Supreme Court proceedings between the parties in this matter be dismissed with no order as to costs, and the parties hereby discharge and release each other from any actions, claims or demands of whatsoever nature or howsoever arising out of this matter, and agree to instruct their solicitors to sign such documents and take such steps as necessary to give effect in the terms of this agreement”.

At first instance it was found that the last part of the relevant clause have immediate effect in respect of the Supreme Court proceedings the subject of the terms of settlement. On appeal it was argued that the word “hereby” when read in context in the terms of settlement did not have a temporal effect but rather had the effect of making the terms of settlement a release if not for the words after the word “and” that would have otherwise have to have been given after performance of the other terms of settlement.

The argument on behalf of those seeking to support the proposition that the terms of settlement operated as in accord and satisfaction was that the reference to the dismissal of the current Court proceeding after performance of the terms of the settlement was that the proceedings remained on foot only as convenient means of allowing enforcement of the terms of settlement.4

Ultimately the Court of Appeal favoured the approach that was contended for by the appellant that was arguing that there was no immediate release and discharge. This conclusion was reached after an analysis of the nature of the obligations placed on the parties by the other terms of settlement. Ultimately it was concluded that having regard to those matters it was unlikely the parties had intended to effect an immediate discharge.

Discussion

In both of the above cases the documents drawn by the parties to record the terms of settlement were prepared, as they often are, in less than ideal circumstances. For Jonathan Evans, he had travelled from Melbourne to Cairns and did not have the benefit of an instructing solicitor. Mr Evans was charged with providing representation and advice in multiple claims and was negotiating on behalf of ARL with two sets of defendants. Mr Evans was remote from his office and resources that may otherwise have been available to him in assisting in drafting terms of settlement in a way that would reflect what ARL wanted from the terms of settlement with those parties who were prepared to settle at the mediation.

In the case of Blue Moon Grill the parties reached their agreement between the opening of business and the commencement of an applications list in the Supreme Court in Cairns.

The above two cases however show that legal representatives acting for parties who are fortunate enough to reach agreement amongst themselves for the settlement of their mutual disputes must have a sound understanding of the rules that apply to the construction of documents that record such settlements or risk consigning the parties to further disputation. Worse still, the ARL case shows that a poor settlement agreement could attract a claim of professional negligence. Thought needs to be given prior to a mediation to the likely possible outcomes and how those outcomes could be recorded, rather than attempting a drafting exercise at the end of what can be a long day when parties may be anxious to leave.

It is unlikely that mediators would owe a duty to any of the parties in preparation of such documentation. Mediators have the advantage over the representatives of the parties in that they usually have the benefit of mediation agreements. Such mediation agreements often contain within them exclusions of liability on the part of the mediator for any parties supposed of dissatisfaction with the terms of settlement that may be drafted by or with the assistance of the mediator.

Footnotes

1. Associated Retailers Limited v Toys Unlimited Pty Ltd [2011] VSC 297 at paragraphs [1] through [8] inclusive .

2. Associated Retailers Limited vToys Unlimited Pty Ltd at paragraph [213]

3. Blue Moon Grill Pty Ltd v Yorkeys Knob Boating Club Inc. [2006] QCA 253 .

4. Blue Moon Grill Pty Ltd v Yorkeys Knob Boating Club Inc. at paragraph [25]