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Court of Appeal: broadly-worded settlement clause precluded later claim for negligence

A broadly-worded settlement clause between a London law firm which sued its former client for unpaid fees was sufficient to prevent a later claim for negligence, the Court of Appeal has confirmed.13 Feb 2018

The claim, brought on behalf of a Russian oil firm which is now in liquidation, "entirely overlaps with and is dependent on the allegedly defective performance of the very services for which Forsters [the firm] were claiming payment", according to judge Lord Justice Lewison.

The judgment is "a timely reminder of the need to take care when drafting release clauses and claims definitions", said professional negligence expert Suzie Davies of Pinsent Masons, the law firm behind Out-Law.com.

"A widely drafted clause may limit your ability to bring unknown claims in the future," she said.

"The general purpose of a settlement agreement is to wipe the slate clean in respect of the claims falling within its scope. Therefore, the scope of a settlement is critical. For a claimant, this means ensuring that the claims being settled are defined as narrowly as possible to enable further claims to be brought in the future. For a defendant, the aim is to prevent future claims being brought through a widely drafted settlement clause," she said.

"Here, the crucial wording was 'in connection with'. This resulted in the finding that the negligence claim was connected to the claim for unpaid fees as they both arose out of the same legal services," she said.

Forsters, the London law firm, had acted on behalf of Irtysh Petroleum on a May 2010 share purchase agreement (SPA) relating to a Russian oil exploration project. Before this, they had also acted on behalf of one of Irtysh's directors and shareholders on some preparatory work. In July 2010, Forsters invoiced Irtysh for various fees and disbursements related to the project. The invoice remained unpaid for some time, and was eventually the subject of a settlement agreement.

Shortly afterwards, Irtysh and its director, RGP, decided to move their business from Forsters to another law firm. Forsters insisted on, and received, a personal guarantee from RGP in respect of its outstanding fees, albeit limited to a sum lower than that outstanding on the invoice. The invoice was first disputed, and then settled in December 2012. The settlement agreement contained a covenant not to sue "in connection with or in relation to (either directly or indirectly) the claims".

In February 2013, Irtysh discovered that there had been no actual transfer of shares in accordance with Russian law under the SPA. Following Irtysh's liquidation, its successor decided to pursue a claim in negligence against Forsters. The High Court refused the claim on the grounds that it was precluded by the settlement agreement. KMR, which acquired Irtysh's rights against Fortsters from the liquidator, appealed.

Appeal judge Lord Justice Lewison noted that the wording of the settlement agreement was "clearly intended to go further" than the compromise over the fees, because it "expressly referred to 'unknown' claims and claims not 'in the contemplation' of the parties". He noted that a negligence claim was " conceivable" in any event, as "the supply of professional services necessarily carries with it the possibility that the services have been defectively performed".

He then went on to consider whether the negligence claim was a claim 'in connection with' either the compromised action or the invoice. He found that it was.

"It is ... common ground that the settlement agreement did not encompass all claims that RGP and Irtysh might have had against Forsters," he said. "If, for example, RGP had wished to complain about negligence in domestic conveyancing, or if he had been injured on a visit to Forsters' offices, claims relating to those matters would have been outside the scope of the agreement. But that is because they would not have been connected with the particular invoice."

Suzie Davies of Pinsent Masons noted the judge's comment that a supply of services "will always carry with it the possibility that the services have been defectively performed".

"Therefore, a claimant should consider whether claims for negligence ought to be expressly excluded from those claims being settled," she said.