Contract law update 2023: Settlement agreements

Contract law update 2023

It is very common, when a dispute is settled, for parties to provide releases expressed in broad terms. On their face, these releases will often extend well beyond the matters that were the subject of the particular dispute. A question that often arises for courts is whether to give such releases their literal meaning, or whether they should be read down having regard to the dispute that was settled.

The leading case in Australia on this issue is a 1954 decision of the High Court in Grant v John Grant & Sons Pty Limited¹. In that case, the court established three principles when considering deeds of release:

As a matter of contractual interpretation, general words in a release are to be interpreted by reference to the particular issues referred to in the recitals.
As a matter of contractual interpretation, general words of a release are limited to those matters in contemplation by the parties at the time the release was given.
A court might, in its equitable jurisdiction, prevent a party from relying on a release to avoid liability regarding matters unknown to the parties at the time the release was executed (in the absence of clear language indicating such an intention).

In Protheroe v Protheroe², the New South Wales Court of Appeal emphasised the distinction between the two contractual principles of interpretation and the equitable jurisdiction to prevent unconscionable reliance on the terms of a release. In particular, the court noted that there would be no need for equity's intervention unless, on the proper construction of a contract, a release would otherwise apply. On the facts of that case, the court applied the principles of contractual interpretation to find that the apparently general words of a release did not apply to the dispute before the court.

A similar approach was taken by the Victorian Court of Appeal in RW & Me Smith Pty Ltd v Boral Resources (VIC) Pty Ltd ³. That case is a particularly graphic example of how a court, in applying the rules of contractual interpretation, can give a narrow construction to apparently very wide words used in a release.

Given the similarity between the principles of contractual interpretation and the grounds for equity intervening, it would be quite rare for a party to need to rely on equity's intervention.

Scope of general releases provided for in deeds of settlement - when the equitable doctrine in Grant v John Grant will be enlivened

In this case, the New South Wales Court of Appeal considered whether a release provided for in a deed of settlement was wide enough to extinguish a claim for proprietary estoppel. The release was restricted to claims 'in connection with or arising out of' a statement of agreed facts. The court held that on its proper construction, the release did not apply to the proprietary estoppel claim, as it was not 'in connection with' any matter set out in the statement of agreed facts.

The appellant, Colin Protheroe, owned two farms in northern New South Wales. The respondent, Brian Protheroe, is his son. They were both parties to a deed of settlement that concerned debt recovery proceedings brought by NAB. Clause 7.2 of the deed released both Colin and Brian from all claims 'in connection with or arising out of' a statement of agreed facts.

The statement of agreed facts recorded that Colin was the owner of the two farms. However, Brian contended that he had an equitable interest in them, as Colin had made representations over many years that he would be entitled to the farms upon Colin's retirement or death.

Brian brought a claim against Colin for proprietary estoppel in the New South Wales Supreme Court and was successful at first instance. Justice Slattery upheld his claim and made a declaration that the two farms were held by Colin on constructive trust for Brian. Colin subsequently appealed the decision.

The New South Wales Court of Appeal dismissed Colin's appeal, on the basis that the release in clause 7.2 of the deed did not apply to Brian's proprietary estoppel claim.

In his judgment, Justice Meagher (with whom Justices Mitchelmore and Basten agreed) noted that in order for Colin to succeed, Brian's claim had to be one that was 'in connection with or arising out of' the statement of agreed facts. However, his Honour did not consider that Brian's claim arose out of the fact that Colin was the legal owner of the two farms; rather, it arose out of representations made by Colin over a long period of time, and on which Brian had relied to his detriment.

Colin argued that in the absence of a reference in the statement of agreed facts to Brian holding any beneficial interest in the farms, the reference to his 'ownership' should have been understood as conveying that Colin's legal interest was not subject to any such beneficial interest. Justice Meagher rejected this argument, and considered there was no reason to read the reference to Colin's ownership as saying anything about any beneficial interest in the two properties held or claimed by Brian.

His Honour also considered the application of the equitable doctrine relating to general terms of release outlined by the High Court in Grant v John Grant (1954) 91 CLR 112. The doctrine restrains a party from unconscientiously relying on the general words of a release to defend a claim that falls beyond the true purpose of the release or claims the parties had no knowledge of at the time of execution. However, as Justice Meagher noted, the doctrine can only be enlivened where a claim falls within the terms of the release. For the above reasons, the release in clause 7.2 of the deed of settlement, on its proper legal construction, did not apply to Brian's claim. Therefore, in this case it was not necessary for the court to consider whether he was entitled to equitable relief.

Scope of release clauses

In this case, the Victorian Court of Appeal considered whether a release, drafted in wide and general terms, should be confined to apply only to specific subject matter.

The court held that, when properly construed, the relevant clauses only released and indemnified the respondent from claims arising under a short-term contract made after termination of the principal contract. The respondent could not rely on the release in a claim against it for breach of the principal contract.

This case contains an important discussion of the principles of contractual interpretation in relation to the scope of release clauses, and illustrates the tendency of courts to read down the scope of releases.

In this case, the Victorian Court of Appeal considered whether a release, drafted in wide and general terms, should be confined to apply only to specific subject matter.

facts

The applicant is a company owned by Robert Smith and his wife. The applicant delivered concrete for the respondent, Boral Resources, under a concrete cartage agreement (the agreement). In July 2015, Boral summarily terminated the agreement by written notice to the applicant after Mr Smith and another employee of the applicant, Mr Pickering, helped Boral employees replace a broken drive chain on an elevator at Boral's concrete plant. Boral alleged the applicant engaged in serious misconduct when assisting with the repair. However, to allow the applicant time to sell its three trucks, Boral and the applicant agreed that the termination would only take effect from 21 August 2015 and, in the meantime, the applicant would continue to provide concrete delivery services to Boral, under a different driver arrangement excluding Mr Smith and Mr Pickering. On 21 August 2015, the parties executed an initial deed of termination in expectation of the completion of the sale of the applicant's trucks to the incoming contractor. The sale could not be completed at that time, so, with consent, the applicant continued providing concrete delivery services to Boral until 13 October 2015, when the truck sales were concluded and a second deed of termination, in identical terms to the first, was executed (the termination deed).

In August 2020, the applicant commenced proceedings in the County Court, alleging that Boral had unlawfully terminated the agreement or, in the alternative, even if the applicant breached the agreement, the conduct giving rise to the breach was done at Boral's direction, and Boral was estopped under section 20 or 21 of the Australian Consumer Law (the ACL) from relying on its own conduct to terminate the agreement. Boral denied the applicant's claims and alleged that, in the alternative, even if it unlawfully terminated the agreement or contravened the ACL, the claim was barred due to the operation of a release and indemnity within the termination deed dated October 2015.

On 30 May 2022, the County Court judge dismissed the claim, finding that:

The applicant had not proved that the summary termination was wrongful.
Even if the termination were wrongful, Boral would have terminated the contract on three months' notice regardless, and the applicant would have suffered the same financial consequences.
The applicant had released Boral from liability, and was precluded from an award of damages by the operation of the release and indemnity contained in the deed of termination.

The applicant sought leave to appeal the decision.

Justices McLeish, Niall and Macaulay allowed the applicant's appeal, set aside the orders made by the County Court and ordered that judgment be entered for the applicant, the amount to be assessed upon the matter being remitted to the County Court.

The court found that the applicant did not breach the agreement and therefore Boral's right of summary termination was not enlivened. Additionally, the court rejected the primary judge's finding that Boral would have terminated the agreement on three months' notice.

In assessing whether the applicant had released Boral from the claim for wrongful termination under the release and indemnity in the termination deed, the court considered whether the wide, general words of the release and indemnity should be confined to apply to specific subject matter. It considered two principles of contractual interpretation adopted by the High Court in Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112; [1954] HCA 23 (and accepted and applied consistently since in Wardman v Macquarie Bank Ltd [2023] FCAFC 13, Reid v Commonwealth Bank of Australia [2022] NSWCA 134 and Burness v Hill [2019] VSCA 94):

The general words of a release are to be restrained by the particular occasion referred to in the recitals. If there is 'introductory matter' in a deed, that will qualify the general words of the release.
The general words of a release are limited to those things that were in the contemplation of the parties at the time the release was given.

Finding that there was residual uncertainty as to the object of the termination deed, based on its 'introductory matter' (ie applying the first principle in Grant), the court looked to the circumstances in which the termination deed was made, and what a reasonable person in the position of the parties would have understood the release to mean having regard to them. The court held that:

Both parties understood and proceeded on the basis that the agreement had ended after the written notice issued by Boral on 22 July 2015.
The agreement made on 22 July, that the applicant would provide further services, was not a continuation of the agreement, but a 'new bargain', for a limited purpose (to allow the trucks to be sold), on different terms (different driver arrangements), and for a different and defined period.
There was no suggestion that a release of past liability would be sought as the price of securing further work or Boral facilitating the sale of the trucks.
A reasonable person in the position of the parties would have understood that the 'Contract' referred to in the 'Background' section of the termination deed referred to the short-term contractual arrangement entered into from 22 July 2015, not the agreement that preceded this.
Looking at the whole of the termination deed, the intention of the parties when executing it was to terminate the short-term contractual arrangement and to finalise any of Boral's payment obligations.
Applying both interpretive principles in Grant, the release and indemnity must be construed as only releasing and indemnifying Boral from liability arising from the short-term contract, and the vehicles, equipment and drivers used and engaged in the provision of concrete delivery services under that contract.
The claim pursued by the applicant could not be characterised as arising from that contract, and therefore the release and indemnity in the termination deed had no application in this case.

Footnotes

(1954) 91CLR 112.
[2023] NSWCA 328.
[2023] VSCA 182.

Settlement agreements

Releases expressed in broad terms

Protheroe v Protheroe [2023] NSWCA 328

RW & ME Smith Pty Ltd v Boral Resources (Vic) Pty Ltd [2023] VSCA 182

Footnotes