Out-Law Legal Update 3 min. read

Court uses correspondence to clarify settlement wording

LEGAL UPDATE: Companies and lawyers must be clear and unambiguous when drafting settlement agreements, a court ruling has reminded them. A liquidator had to drop some claims after a court used correspondence to clarify exactly what was meant by the phrase 'whole of the claim' in a compromise agreement. The ruling does not affect the liquidator's claim against another person because she was not mentioned in the correspondence.

In 2016 LBDL Limited entered compulsory liquidation. The liquidator brought a claim against Alexandre Meerson and Marie Antoinette Meerson who were respectively director and secretary of the company as well as shareholders in it.

The liquidator applied to the court seeking a declaration that Alexandre Meerson was in breach of his fiduciary and statutory duties as a director and that he should account to the company for numerous payments he made prior to LBDL's insolvency.

The payments could be grouped into three classes:

  • payments made out of the business account which were not in the best interest of the company;  
  • payments made to connected company Meerson Editions Ltd, and
  • payments made to Marie Antoinette Meerson, described in the company accounts as dividends.

The liquidator also ran an alternative argument against Marie Antoinette Meerson for repayment of the alleged dividends on the basis they were void under section 127 of the Insolvency Act 1986.

Before the litigation began the liquidator also made claims about Alexandre Meerson and an overdrawn directors' loan account and post-petition payments. Those claims were settled by way of compromise agreement based on an offer to settle the "whole of the claim".

The original time estimate for the trial was too short but the parties had identified that there was a preliminary issue that the court could determine – had the liquidator settled all of the alleged claims against Alexandre and Marie Antoinette Meerson? Both parties agreed that a compromise had been met, however, the wording of the settlement agreement was ambiguous and referred to the "whole of the claim". At the time of the settlement agreement, no claims had actually been issued. The judge was therefore asked to decide whether all, or some, of the liquidator's claims had been compromised and which could continue.

The liquidator argued that the settlement only related to the claims against Alexandre Meerson related to his overdrawn directors' loan account and some post-petition payments. The Meersons disagreed and said that the "whole of the claim" meant all of the liquidator's claims or potential claims against either of them.

The judge, confirming existing case law, said that where the parties have used clear and unambiguous language the court must apply it. If there is ambiguity the court should take the context of the negotiations and correspondence between the parties into account. The judge confirmed that the conduct of the parties afterward was not admissible as an aid to interpretation.

The judge found that the phrase the "whole of the claim" in the settlement offer was too ambiguous as there was no "claim" before the court. The offer needed to be looked at in the context in which it was made.

The correspondence between the parties and their solicitors prior to settlement outlined the claims against Alexandre Meerson. No mention was made to the claim against Marie Antoinette Meerson for the dividends. It also clearly demonstrated a willingness on the part of the liquidator to accept a global sum which would have the effect of bringing the matter to an end. In the context of the correspondence, the judge said that would reasonably be understood to be those matters which had previously been highlighted in correspondence, meaning all the alleged claims.

The judge rejected the liquidator's suggestion that the "whole of the claim" was limited to the loan account and post-petition payments. He said that the "whole of the claim" meant all the issues that had been addressed in correspondence and potentially forming the subject of a claim against  Alexandre Meerson. However, he did not accept that the acceptance of the settlement offer compromised the liquidator's claim against Marie Antoinette Meerson as the offer was addressed to Alexandre Meerson's solicitors and referred to him as their client.

As a result the liquidator was forced to accept that the offer compromised all of the potential claims against Alexandre Meerson and he had to withdraw the proceedings. The proceedings against Marie Antoinette Meerson could continue.

This judgment reiterates the importance of ensuring that the wording in compromise agreements is clear and unambiguous. Although prior correspondence can be considered at court, the cost and uncertainty can be significant.

Gemma Kaplan is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com

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