Settling more than you bargained for: release clause in director's compromise agreement defeats subsequent IP claims against director and co-defendants
16 September 2016
A release in a director’s settlement agreement was sufficiently wide to cover liability for later claims of trade mark infringement and passing off against the director and two co defendants. Oran Pre-Cast Ltd v Oranmore Precast Ltd  EWHC 1846 (IPEC) reinforces the importance of providing unambiguous parameters to the scope of a release when negotiating any sort of settlement.
Oran is an Irish entity that provides goods and services for the construction industry. Oranmore was incorporated in the UK by Mr Melville and Mr Burke, both of whom previously worked for Oran. It provides identical and similar goods and services to Oran, and has substantially the same commercial sign as Oran. The other directors of Oran were aware of these facts by June 2012. Mr Burke’s directorship of Oran was terminated when he was made redundant in December 2011. He was owed EUR 600,000 in back pay in addition to redundancy pay. When Oran failed to discharge this debt, Mr Burke issued proceedings in the Irish High Court, and was granted summary judgment for the back pay. In lieu of enforcing the judgment, Mr Burke entered into a compromise agreement in May 2013 in which Oran provided a wide release for all claims against him. In November 2015, Oran brought trade mark infringement and passing off claims (IP Claims) against Oranmore, Mr Burke and Mr Melville as joint tortfeasors. The defendants relied on the release provision in the compromise agreement as their defence to the IP Claims.
The compromise agreement was made up of three documents. The first was a release given by Mr Burke to Oran for “all sums due and owing” in exchange for a payment of EUR 26,092. This figure represented his outstanding redundancy pay. The second document was the release from Oran given to Mr Burke, in exchange for him compromising his rights under the back pay summary judgment, and confirming that Oran had no claim against him “…whether arising by contract, common law and/or statute”. The final document was labelled as a “Discharge Form” in which Mr Burke compromised any other claims he might have against Oran.
The defendants’ position was that the release given by Oran provided a complete answer to the IP Claims: it was “unambiguous and wide ranging, covering present and future claims of whatever nature”.
Oran argued that the compromise agreement did not cover claims beyond Mr Burke’s employment and its termination, and as such, the IP Claims were not caught by the release. Oran also contended that the wording of the compromise agreement did not amount to a release of claims against Mr Burke, but was merely a promise not to sue. If this line of argument had been successful, the other defendants would not have been able to rely on the compromise agreement as a defence to the claims.
In light of the factual, documental and commercial context in which the agreement was made, the widely drafted wording in the agreement was sufficient to release Mr Burke from any liability. In the absence of an express or implied reservation against his joint tortfeasors, Oranmore and Mr Melville were also held to be released from any liability.
The court found that a “reasonable person with the relevant background knowledge of the parties” would interpret the scope of the release given by Oran to extend beyond claims relating solely to Mr Burke’s employment and termination. Taking into account the fact that Mr Burke waived his rights under the judgment for EUR 600,000 in his favour, the judge assessed that it had been Mr Burke’s intention to compromise all future claims against him to “enable him to draw a line in the sand…and get on with his working life” at Oranmore. Equally, as Oran would have struggled to have paid the amount owing to Mr Burke, or to have secured commercial credit in light of the summary judgment, it too had a “commercial imperative” to settle.
The judge also held that the wording of the compromise was “unambiguously a release” and not a promise not to sue. This meant that not only was Mr Burke released from liability, but so too were his co defendants in their capacity as joint tortfeasors. At common law, a settlement that releases one tortfeasor where there are several will also have the effect of releasing the other tortfeasors, save where the drafting includes an express reservation of the right to sue the others. In the absence of such reservation, the other defendants in this case were able to rely on the release given to Mr Burke.
In the absence of clear drafting, the courts will rely on context when examining the effectiveness of a release clause. The judgment found that Mr Burke had purposefully sought to wipe the slate clean, compromising his right to an award of EUR 600,000 in exchange for the release from Oran. It was clear, in light of the factual and commercial context, that the release was intended to catch future IP Claims arising out of the use of the Oranmore name and similar Oran sign. Even if this was not explicit, it could be implied.
However, as shown in Khanty Mansiysk Recoveries v Forsters LLP  EWHC 522 (Comm), unknown claims (that arise outside of the particular circumstances in which a settlement agreement is negotiated) can also be inadvertently caught by a wide release clause. The parties in that case were settling claims relating to unpaid legal fees. A breach of contract and negligence claim was not in contemplation at the time of signing. However, because it was not inconceivable that such a claim could arise in future, it was held to be caught by the release. This can be distinguished from the case of Bank of Credit and Commerce International SA v Ali  1 AC 251 in which a claim was not caught by a wide release clause, because the nature of the claim was an “unknown unknown”. At the time the clause was entered into, the claimant was not aware, and crucially, could not have been aware, that his claim would arise. His claim could not, therefore, be caught by the release he had provided earlier.
In both Khanty Mansiysk1 and Oran Pre Cast Ltd the lesson remains that great emphasis needs to be placed on making the release clause as clear as possible: carve out specific existing or potential liabilities which are not being settled to avoid inadvertently doing so, and make it as explicit as possible which specific liabilities are being settled, to avoid having to rely on a catch all clause. Of equal importance is to ensure that when providing a release – rather than a promise not to sue – the drafting must be unambiguous, and that appropriate reservations of the right to sue other parties are included, so as not to unintentionally release joint tortfeasors.
The judgment in this case pointed out that the courts are aided by “assistive or explanatory text” in the wording of a release clause. Clearly, this is a fact specific case, but it serves as salutary reminder of the importance of ensuring that the scope of any release is carefully tailored to the matters at hand, clearly drafted, and with consideration given to the wider commercial context in which it is provided.
Further informationThis case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Sarah Garvey email@example.com, or tel +44 20 3088 3710.