BEWARE: The Unintended Consequences of Full & Final Settlement Clauses!

Speedread

Full and final settlement clauses are standard in agreements that settle construction disputes. Current market practice is to include in a settlement agreement a full and final settlement clause in the broadest language possible, in order to avoid parties whose relationship has broken down returning to the negotiation table with additional claims in the future. This approach, although seemingly sensible on its face, can have adverse unintended outcomes.

Recent case law from the UK has signalled a warning for settling parties to use precise and specific language when setting out exactly what disputes are being settled, to avoid such unintended consequences.

Background

In Khanty-Mansiysk Recoveries Ltd v Forsters LLP1, the parties sought to settle a dispute in relation to legal fees payable by the plaintiff to the defendant (a law firm). The settlement agreement included a broad full and final settlement clause.

Post execution of the settlement agreement, it emerged that the defendant law firm had failed to carry out formalities associated with the purchase of shares by the plaintiff, which gave rise to a potentially significant claim in professional negligence.

The court found that, given the wide scope of the full and final settlement clause included in the agreement that concluded the fees dispute, the plaintiff was prohibited from pursuing an action for professional negligence – even though that claim could not possibly have been within  the contemplation of the parties at the time of the settlement.

In Point West London Ltd v Mivan Ltd2, the parties had settled a dispute in relation to outstanding invoice amounts in October 2007. On that date both parties had been aware that there were ongoing issues in respect of curtain walling and heating and cooling systems in a particular apartment, although at that point they were perceived to be relatively minor in nature. Notwithstanding those ongoing issues, the parties entered a settlement agreement in relation to the outstanding payments, which included a full and final settlement clause.

Subsequent to the 2007 settlement agreement, the owner of one of the properties was awarded damages against the plaintiff on the basis of defects in the curtain walling system and the heating and cooling system. The plaintiff sought to recover its losses in that case from the defendant.

The court found that the full and final settlement clause in respect of the invoice dispute was drafted sufficiently broadly as to bar an action by the plaintiff for the defective works in the future.

Key points to note

Although the above two cases are from the UK, they are of persuasive effect in this jurisdiction and provide a basis for a defendant seeking to avoid legitimate claims against it on foot of broadly drafted full and final settlement clauses.

The take away from these cases is that when entering a settlement agreement that includes a full and final settlement clause, the following points should be considered:

  1. What do you actually want the settlement agreement to cover – one dispute, a range of disputes, or all disputes that exist now and in the future? 
  2. That the full and final settlement clause, as drafted, achieves your intention in respect of what it is to cover i.e. it neither falls short nor goes beyond what it should; and,
  3. That any unintended consequences of the full and final settlement clause are identified so that these can be appropriately and specifically catered for, if necessary.  

If in doubt, always obtain advice on the terms of your settlement agreement before concluding the dispute – this is not only to ensure that your interests are as protected as possible, but also to ensure your commercial relationship with the party you are concluding the dispute with is maintained, so that your business together can continue to progress profitably. 

For more information please contact Killian Dorney, Associate or a member of the Construction team at A&L Goodbody.

Date published: 11 July 2019

1 [2016] EWHC 522 [2018] EWCA Civ 89

2 [2012] EWHC 1223 (TCC)