Khanty-Mansiysk Recoveries Ltd v Forsters LLP

The issue on this appeal from Sir Bernard Eder is the scope of a settlement agreement. I can take the facts from the judge’s clear judgment, which can be found at [2016] EWHC 522 (Comm).

Forsters is a firm of solicitors. In that capacity they were instructed on behalf of and acted for a company, Irtysh Petroleum plc (“Irtysh”), in relation to the acquisition of an oil exploration opportunity in Russia and, in particular, in a share purchase agreement (the “SPA”) entered into on 20 May 2010.

Irtysh was in fact incorporated only shortly before the execution of the SPA i.e. on 12 April 2010 for the purpose of acquiring and developing the oil exploration opportunity. Before the incorporation of Irtysh, Forsters had already been retained in January 2007 by one of Irtysh's directors and shareholders, Rupert Galliers-Pratt (RGP), to carry out work preparatory to the incorporation of Irtysh and the acquisition.

The oil opportunity took the form of three oil exploration licences in the Khanty-Mansiysk region of Russia. Under the terms of a privatisation agreement, a Russian company Yugra Balt Invest LLC (“YBI”) owned 49% of three companies each holding an oil field exploration licence (the other 51% was owned by the regional government and there was a mechanism in place by which YBI could increase its ownership to 99.9%). By the SPA, Irtysh agreed to buy 100% of the shares in YBI from Interguarantee Limited (“Interguarantee”) in return for the allotment of shares in Irtysh. Interguarantee was controlled by Dr Alexander Shadrin.

In the period January 2007 to the end of June 2010, Forsters incurred fees and disbursements in respect of this project for which they issued an invoice (Invoice No. 301594 dated 1 July 2010) to Irtysh in the sum of £110,557.61 plus VAT (£19,295.61) totalling £129,853.22 (the “Invoice”). On its face, the Invoice expressly stated that it was in respect of Forsters' “Professional Services” and “Disbursements” for the period “January 2007 to June 2010”. This sum remained unpaid for some time and eventually became the subject of the settlement agreement.

In about July 2010, Irtysh/RGP wished to move from Forsters to Fladgate LLP. Forsters insisted on a personal guarantee from RGP in respect of the outstanding fees. In the event, RGP did provide a personal guarantee in the form of a letter dated 12 July 2010 expressed to be executed as a deed and signed by him. The guarantee was in short form and stated simply as follows:

The figure of £74,837.18 plus VAT is significantly lower than the total sum of £110,557.61 plus VAT stated in the Invoice and was calculated by reference to the work done by Forsters on the instructions of RGP in relation to the project before Irtysh's incorporation.

July 2010 marked the cessation of relations between Forsters and Irtysh/RGP. It is Forsters' case that thereafter they did not know what was going on with the project but, unsurprisingly, they continued to press for payment of their outstanding fees.

RGP disputed the amount of the Invoice. He complained that much of it represented time allegedly spent by Forsters with Dr Shadrin, the director of Interguarantee who acted on behalf of Interguarantee in the SPA. On 13 April 2012, Forsters emailed RGP seeking confirmation of when Irtysh expected to execute financing facilities and when it would be paying the Invoice. RGP replied the following day copying in Dr Shadrin, saying that “We are scheduled to complete all the documents … on Monday. I will confirm when all done. I am copying Alexander [Dr Shadrin] on this as the vast majority of the time that you have billed relates to the many hours that he spent with your colleagues”. There then followed further exchanges (including with Dr Shadrin) and, after some further delay, on 22 June 2012, Forsters chased RGP again for payment on his guarantee, enclosing a draft Claim Form and reminding him that he had assured them that the completion of Irtysh's loan facility had been imminent. RGP replied again disputing the quantum of the Invoice, saying “As you know, I did not see any breakdown of these statements at the time that I was requested by your firm to sign document with Forsters. Since I was not present when the majority of the 'billed' hours were recorded, I have no way of knowing whether they are correct. Alexander Shadrin does not agree with your costings”.

In early July 2012, Forsters then issued proceedings against RGP (the “Guarantee Action”). The Particulars of Claim endorsed on the Claim Form stated:

On being informed that the Guarantee Action had been issued, RGP responded saying:

Thereafter, following negotiations, the settlement agreement dated 3 December 2012 was executed. The settlement agreement is a tripartite agreement between Forsters, RGP and Irtysh respectively designated as Party A, Party B and Party C. It consists of 5 typewritten pages which began by reciting:

The main operative clause, clause 2, provided (so far as relevant) as follows:

Clause 1.1 defined the “Settlement Sum” as being £90,000 inclusive of VAT (whether or not chargeable) and costs.

The scope of the settlement agreement is clearly tied to the definition of “claims” because it was those that were compromised. Clause 1.1 defined “Claims” as:

Clause 3.1 provided for a covenant not to sue:

The remainder of the settlement agreement contained various other provisions which the judge accepted were (at least in part) “boilerplate”.

In February 2013 Irtysh found out that there had never been an actual transfer of YBI shares from Interguarantee to Irtysh according to Russian law; and that it did not own YBI. Much later, in 2015 Irtysh (by now a private limited company and no longer a plc) was put into liquidation. It is KMR's case that it acquired Irtysh's claims against Forsters from the liquidators by way of a written assignment dated 13 May 2015.

The claim that KMR now wishes to pursue against Forsters is a claim in negligence. The brief details of claim endorsed on the Claim Form state that KMR claims against Forsters “… damages and interest on damages for breach of contract and/or negligence in relation to the provision of legal advice and services to [Irtysh] in relation to the acquisition by the latter of shares in [YBI]”. The detailed Particulars of Claim set out a number of alleged breaches by Forsters including an alleged failure by Forsters to see to it that the SPA was effective to create an enforceable obligation on Interguarantee to transfer the shares in YBI; and a failure to see to it that the transfer took place. The damages claimed are said to be in excess of £70 million.

The question is whether that claim falls within the definition of “Claims” in the settlement agreement; and whether the current action is one in which the claimant is asserting a claim “in connection with or in relation to (either directly or indirectly) the Claims”. The judge held that it did.

Mr Davenport QC on behalf of KMR criticises the judge for not having given sufficient weight to the background facts in his interpretation of the settlement agreement. It is, of course, common ground that any contract must be interpreted in the light of the admissible background facts, and that interpretation is an iterative exercise in which competing interpretations are tested for their commercial consequences. Having said all that, the most important aspect of contractual interpretation is loyalty to the text. Nevertheless, in view of Mr Davenport’s criticism of the judge I begin with the background facts on which he relies.

The first point that he makes is that in the compromised action the only articulated dispute was about the quantum of Forsters’ fees. There was no dispute about the principle of liability, and no allegation of negligence was raised or pursued. Second, RGP’s guarantee was for a maximum liability of £74,837.18 plus VAT. At the then VAT rate of 17.5%, the maximum was therefore £87,933.69. That was the amount claimed by Forsters in the Guarantee Action, plus costs. The costs of the action, at the time of the settlement agreement, would have been low: the only step taken in the claim had been the issue of the claim form. Thus when the settlement sum is compared with RGP’s maximum liability it can be seen that Forsters gave up very little in return for the compromise. He accepted, however, that Irtysh received, at least in theory, a bigger reduction. Third, it is of particular relevance that all parties were anticipating that Irtysh would shortly obtain loan finance, based on its supposed ownership of YBI, out of which it would pay Forsters. That is why Forsters was pressing for confirmation that Irtysh had completed the anticipated loan agreements. Without such loan finance, Irtysh would be in no position to pay Forsters.

There is, in my judgment, another background fact of contextual importance. By the time that the settlement agreement came to be signed Irtysh/RGP had moved from Forsters to Fladgate LLP. It was to be expected that the settlement agreement would draw a line under the former solicitor and client relationship.

The leading case on the interpretation of settlement agreements remains the decision of the House of Lords in BCCI v Ali[2001] UKHL 8, [2002] 1 AC 251. A former employee of BCCI entered into a settlement agreement with BCCI in 1990 following his redundancy. In the following year BCCI went into insolvent liquidation in the course of which it was discovered that BCCI’s business had been corruptly managed, the stigma of which caused difficulties for its former employees in finding new jobs. In 1998 the House of Lords decided that a claim for “stigma damages” was a legally permissible claim. That was the claim that Mr Naeem wished to pursue. The critical point, to my mind, is that at the date of the settlement agreement in that case “stigma damages” were unknown to the law. Their Lordships all held that there were no special rules for interpreting settlement agreements, which were to be interpreted in the same way as other contracts: Lord Bingham at [8], Lord Nicholls at [26], Lord Hoffmann at [37] and Lord Clyde at [78]. Lord Bingham recognised at [9] that:

However, at [17] he recognised a “cautionary principle” which he set out at [10]:

Both parts of this cautionary principle are important. On the facts of that case Mr Naeem “could not have been aware” of his claim for “stigma damages” because at the date of the compromise agreement no such claim existed in English law.

Lord Nicholls recognised that the general purpose of a settlement agreement is “to wipe the slate clean.” At [27] he said:

At [28] he said:

Lord Nicholls came to his ultimate conclusion at [35]. He said (the emphasis is his):

It follows from these citations that the mere fact that the parties did not in fact know that there was a claim against Forsters in negligence is not enough to side-step the settlement agreement. Can it be said that such a claim was one which the parties could not have been aware? To put it another way: is the wording of the agreement wide enough and clear enough to preclude such a claim from being brought?

As a matter of law, the possibility of a claim for the negligent performance of professional services is plain enough. That in itself distinguishes the case from BCCI v Ali. Lord Nicholls placed particular emphasis on the subsequent retrospective change in the law. Moreover, had such a claim in fact been raised at the time of the original action it would have precluded Forsters from recovering their fees if the work that they had done was, as is now alleged, useless (see Heywood v Wellers [1976] QB 446); or at the very least it would have operated by way of set off to the claim for fees because it would have been intimately connected with the liability to pay those fees. It would, therefore, have been a claim “relating to a particular subject matter;” namely Forsters’ entitlement to be paid.

The claim for professional fees was plainly a known claim. So, too, were RGP’s defences and counter-claims about the quantum of the fees. The settlement agreement was clearly intended to go further than the compromise of those claims, since it expressly referred to “unknown” claims and claims not “in the contemplation” of the parties. If it was not intended to cover the kind of claim now sought to be advanced, what else could it have been intended to cover? This point was put to Mr Davenport in the course of his submissions; and at least to my mind he struggled to give an answer, beyond saying that the compromise agreement did not preclude the claim now sought to be advanced. He offered two limitations on the apparent scope of the settlement agreement. First, that the agreement only captured claims that were “realistically supposed to exist;” and second, that the agreement did not cover “inconceivable claims”. Given that in BCCI v Ali all their Lordships accepted that, depending on its wording, a compromise agreement may encompass “claims which could not on the facts known to the parties have been imagined” (Lord Bingham) or “a claim whose existence was not appreciated” (Lord Nicholls), it is necessary to look at the wording of this particular settlement agreement.

The judge paid close attention to the words of the clause and held that they were wide enough and clear enough to embrace the claim that is now sought to be advanced. Subject to one point, Mr Davenport did not really attack the judge’s textual analysis. Since I entirely agree with it I will not try to express it in my own language. What the judge said was this:

As I have said, I agree. The first of Mr Davenport’s suggested limitations directly contradicts the express terms of the agreement; and in particular the provisions to which the judge drew attention at b) and d) above. So far as the second is concerned, as I have said the claim was legally conceivable. Moreover, as Mr Smith QC pointed out, the supply of professional services necessarily carries with it the possibility that the services have been defectively performed. Thus even if the parties did not in fact envisage that such a claim existed it would have been conceivable. I do not therefore accept either of Mr Davenport’s two limiting factors.

On the contrary I accept Mr Smith’s submission that the relevant limiting factor is the tailpiece of the clause; namely that the claim must be one “arising out of or in connection with the Action or the invoice.”

The judge went on to consider whether the claim now sought to be advanced was a claim “in connection with” either the compromised action or the invoice. Mr Davenport correctly submits that the phrase “in connection with” is a protean phrase with a mutable meaning which depends heavily on the context. However, in his written argument he argued that the phrase “in connection with” is narrower in its scope than “connected with”. The former phrase requires a causal link between the compromised action and the cause of action now sought to be advanced. This a very fine linguistic distinction, and Mr Davenport did not develop the point orally. I do not consider that it is supported by either of the cases on which he relies (Coventry and Solihull Waste Disposal Co Ltd v Russell[1999] 1 WLR 2093 and HMRC v Barclays Bank plc[2007] EWCA Civ 442, [2008] STC 476). On the contrary both those cases emphasise the protean nature of the phrase which takes it meaning from the context in which it is used: see Coventry at 2103 B-C (Lord Hope) and Barclays at [18] to [19] (Arden LJ). The context in our case is a widely worded compromise agreement.

In BCCI v Ali their Lordships gave a number of examples in which general words would not cover a particular kind of claim. Lord Bingham at [18] gave the example of an industrial disease or personal injury claim, or a claim for libel. Lord Nicholls at [28] gave the example of a settlement on final partnership accounts which would not preclude a claim by one partner against another in the event that it was discovered that tree roots from one partner’s property damaged the property of another partner. Another example is the decision of this court in Kazeminy v Siddiqi[2012] EWCA Civ 416 where the general words of a compromise made between A and B did not operate to exclude the bringing of a claim vested in C, which B had acquired by assignment after the date of the compromise.

It is, not surprisingly, common ground that the settlement agreement did not encompass all claims that RGP and Irtysh might have had against Forsters. 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. However, in the present case:

The services for which Forsters were seeking to be paid had all been performed for good or ill. It follows that in so far as there was a claim for breach of contract and/or negligence that claim had already accrued;

Had it been raised, it would at the very least have operated by way of set off to reduce or extinguish the claim;

The claim for negligence entirely overlaps with and is dependent on the allegedly defective performance of the very services for which Forsters were claiming payment.

To the extent that a causal link is required, the claimed losses were caused by the allegedly defective performance of the very services for which Forsters were claiming payment.

The judge put it thus at [40]:

I agree; and would dismiss the appeal.

I agree.

I also agree.