Court of Appeal construes “affiliates” in settlement agreement release clause widely to include own as well as other party affiliates

Schofield v Smith [2022] EWCA Civ 824

The question

Will a court give a broadly drafted “full and final settlement” release clause its natural meaning to release all affiliates including a party’s own affiliates?

The key takeaway

The courts will focus on the natural meaning of the words used, when interpreting a contract. When conducting settlement negotiations, practitioners should ensure that the claims intended to be given up by their client are sufficiently captured by the settlement agreement entered into. 

The background

The underlying dispute concerned a loan facility and several interest rate hedging agreements between a group of companies owned and controlled by Mr Schofield and Barclays Bank plc. A payment demand by the bank was not met resulting in the bank appointing administrators to three companies in the group. The administrators instructed solicitors to review certain claims the companies had asserted, to rescind the swaps and recover compensation from the bank on the basis of mis-selling and manipulation of LIBOR. 

The litigation settled following a mediation and a settlement agreement was entered into. The parties to the agreement were the bank and the group of companies but the settlement agreement release clauses extended to the parties’ “Affiliates”.

In 2019, Mr Schofield and one of the companies brought misfeasance proceedings against the administrators. At the same time, two of the other companies brought proceedings against the solicitors on the basis that they should not have accepted instructions and they breached fiduciary duties in their assessment of the swap claims. 

In 2020, the solicitors and administrators issued applications to strike out the proceedings against them and for summary judgment on the basis that the settlement agreement released them from any claims. The judge at first instance held that all claims against the administrators were released; claims against the solicitors had been released but only for breach of duty “whilst acting as agents” and not for breach of duty to advise. Mr Schofield and one company appealed against the striking out of their claims against the administrators. The other group companies appealed against the partial strike out against the solicitors. The solicitors appealed against the decision to strike out the claims against them partially rather than in their entirety.

The decision

The Court of Appeal dismissed the group companies’ respective appeals, holding that, on the natural and correct interpretation of the settlement agreement, each party agreed to release its own “Affiliates” in addition to those of any other party.

The release clause stated: “This Agreement is made in full and final settlement of all Claims any Party has or may have against any other Party or against any other Released Party”. 

The court found that the terms provided that the claims being settled encompassed all claims that the parties had against each other or any other released parties (Released Parties having been defined as “the Parties and their Affiliates”). The court made a further finding that the bank would likely have wanted the settlement agreement to release each of the parties’ own affiliates in order to give it protection against “ricochet” claims (ie where a released party is brought back into litigation when a releasing party makes a claim against a third party who, in turn, claims contribution against the released party).

The court found that the definition of “Affiliate” included a person’s “employee” which in turn captured “any former…officers… and agents”. The solicitors were found to be agents of the companies because they acted on their behalf and their involvement extended beyond just giving advice. The administrators were considered affiliates because they were officers and agents of the companies and therefore “employees”. 

Why is this important?

The courts are prepared to give effect to the natural meaning of a drafted clause. While one side in a settlement agreement negotiation may not have in mind the implications of a broadly drafted release clause, the other side may be aiming to include a widely defined group of affiliates, for example to avoid ricochet claims.

Any practical tips?

In the context of a settlement agreement, parties need to be comfortable with what potential claims they are actually releasing, including against third parties (both known and unknown). Parties should be cautious that any agreement they enter into is not wider than intended, particularly where insolvency is even a remote possibility. 

This analysis is based on RPC article Back to basics on contract interpretation as Court of Appeal finds that natural meaning of settlement agreement prevails by Suera Hajzeri and Daniel Hemming published on RPC’s Perspectives blog. 

Autumn 2022