Would Settlement Agreements Cover the Servants or Agents of a Party?
Introduction
It is common for insurers and assured parties to settle a dispute by entering into a settlement agreement. In the recent English High Court decision Starlight Shipping v Allianz Marine and others (The “Starlight”) [2014] EWHC 3068 (Comm), it raised a concern on whether settlement agreements would cover the servants or agents of a party to the settlement agreements and this issue will have some implications on how we should draft a settlement agreement.
Background
Starlight Shipping Company was the ship-owner of the vessel “Alexandros T” (“the Vessel”) and Overseas Marine Enterprises was the manager of the Vessel (together “the Insured”). The Vessel sank in 2006, following which the Insured commenced proceedings in the Commercial Court against three Applicant insurers, the Companies Market (“the CMI”), the Lloyd’s market (“the LMI”) and Hellenic Hull Mutual Association PLC (“Hellenic”) (together “the Insurers”) claiming an indemnity under two policies of marine insurance. The Insurers in defending the proceedings made allegations that the Vessel was unseaworthy. The Insurers further alleged that the Insured had knowledge about the unseaworthiness but refused to notify the Vessel’s flag state authority. In response to these allegations, the Insured made allegations that the Insurers had been spreading “malicious scuttlebutt” about the Insured and had offered bribes to key witnesses to give false evidence.
In 2007-2008 the Insured entered into three settlement agreements with the Insurers. The settlement agreements provides, among other things:
1. The governing law was English law and the parties irrevocably submitted to the exclusive jurisdiction of the High Court in England.
2. The claim was in full and final settlement of all and any claims against the Insurers and the Insured agreed to indemnify the Insurers against any claim brought by the insured.
Regarding the second provision, the settlement agreements with the CMI and the LMI provided that “…indemnify the Underwriters signing below against any claim that might be brought against them…” and the CMI and the LMI were the signing parties. In the preamble of those settlement agreements the term “Underwriters” only refers to the Insurers and not their servants or agents. The wording in the settlement agreement with Hellenic was slightly different from the two agreements with the CMI and the LMI, which provided “…indemnify the Underwriters signing below against any claim that might be brought against it and/or against any of its servants and/or agents and/or managers…”
In 2011 the Insured commenced proceedings in Greece against the Insurers, including their officers and employees, and against the Insurers’ solicitor and the adjuster which had investigated the claim claiming for damages on the ground that the Insurers sought to avoid payment by intentionally fabricating false evidence and disseminating false information regarding the sinking. In response to the Greek proceedings the Insurers sought to enforce the settlement agreements in England. The English Court held that the Greek proceedings breached the exclusive jurisdiction clauses in the settlement agreements and granted an order for specific performance against the Insured to indemnify the Insurers.
So far as the application in The Starlight was concerned, the CMI and the LMI sought, among other things, declaratory relief that the Insured had settled against their officers and employees. The key issue in The Starlight was who was covered by those settlement agreements: whether the term “Underwriters” in the settlement agreements encompassed only the underwriters or also their officers and employees.
The Applicants’ arguments
The CMI and the LMI argued that on the true construction of the provision the “Underwriters” should encompass both the Insurers and their officers and employees:
1. The intention of these settlement agreements should result in a clean break between the Insured and the Insurers. As legal entities, the CMI and the LMI could only act through human agents. If the Insured was free to claim against those human agents, the settlement would become meaningless because the CMI and the LMI were under legal obligation to indemnify their officers and employees. If so, there would be no clean break.
2. It would be commercially unreasonable if the term “Underwriters” in the second provision must mean the same as in the preamble, which was defined to include only the Insurers and not their “servants or agents”. If this approach was accepted, the Insured would be free to pursue claims against their officers and employees in Greece which, if successful would entitle their officers and employees to an indemnity from the CMI and the LMI. Under these settlement agreements, the Insured would have an obligation to indemnify the CMI and LMI in respect of any proceedings in relation to the settled claims. As such, the Insured would not be able to make any recovery against the officers and employees.
3. The construction of the provision should be consistent with the joint tortfeasor principle in English common law that where there is a joint cause of action against two or more persons, settlement with one of them constitutes settlement with all others. The governing law was English law so that the Insured should be deemed to have known the effect of this principle.
The Court’s ruling in The Starlight
The Court ruled in favour of the Insurers and in particular accepted the arguments raised by the CMI and the LMI. The reasons are as follows:-
1. The wording “in full and final settlement of all and any claims” in the settlement agreements was a classic example of a general release. This demonstrated the partiers’ intention to achieve a clean break.
2. The Court applied the principle in Rainy Sky SA v Kookmin Bank [2011] 1 W.L.R.2900 to construe the agreements. The principle provides that the court is entitled to prefer the construction consistent with business common sense if there were two possible constructions of an agreement. The Court accepted the second argument raised by the Insurers. Whether “Underwriters” was a defined term in the preamble or not was only a factor to be considered in construing the settlement agreements, but not a decisive factor. If the literal interpretation had the effect of defying business common sense, the Court would reject it. So, the Court rejected the Insured’s argument that “Underwriters” was defined to include only the Insurers and not their “servants or agents”.
3. The common law principle joint tortfeasor rule also indicated that “Underwriters” encompassed servants and agents. At common law a settlement against one tortfeasor operated as a discharge against all other tortfeasors in respect of the same cause of action, subject to two exceptions:
a. a settlement agreement that merely embodies the claimant’s covenant not to sue the defendants for good consideration and does not exclude the cause of action allows the claimant to sue all other joint tortfeasors outside the benefit of the covenant (see Duck v Mayeu [1892] 2 QB 511); and
b. a settlement agreement that contains a reservation of the claimant’s right to sue the other joint tortfeasors. The reservation may be express or implied (see Watts v Aldington [1999] L&TR 578).
However, the wording “full and final settlement”is more than a mere covenant not to sue. Furthermore, there was no implied reservation of the right to sue because such implied reservation was not necessary. The settlement agreements were clearly intended to achieve a clean break to end the dispute.
Implications
The decision was grounded upon a very basic, yet significant issue – who was covered and protected by a settlement agreement. If the insured parties want to pursue a further claim against the insurers’ employees in spite of a settlement, they should pay attention to the following issues:
1. the term “Underwriters” or any other terms having a similar meaning should be clearly defined to include only the insurers and exclude other third parties such as the employees and agents;
2. the agreement should be made expressly that it is a covenant not to sue and the cause of action remains intact;
3. the wording “in full and final settlement” or any other wordings having a similar meaning should be avoided; and
4. there should be a clear and express reservation of the insured’s right to sue the servants and agents.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
