William Chetwood Partner
Be careful what you agree: A cautionary tale
Falcon Trident Shipping Ltd v. Levant Shipping Ltd  EWHC 2204 (Comm)
This case is a salutary reminder to be very careful about the wording of settlement agreements and the use of standard “boiler plate” clauses. The Court considered that although an initial offer included various pre-action costs, the wording of a subsequent settlement agreement which referred to and appended that offer nonetheless excluded such pre-action costs and as a result, they were not recoverable.
The background facts
The parties’ vessels collided off India. The Defendant later admitted liability. Thereafter the parties corresponded about quantum.
The Claimant sent a schedule setting out their final claim in the amount of US$ 876,682.79. This figure included over US$ 60,000 costs, mainly relating to a ship arrest in India. The Claimant then sent a Part 36 offer which identified the principal settlement sum of US$ 775,000, plus their pre-action costs. Part 36 is the section of the English Civil Procedure Rules that allows parties to make offers and enjoy costs and other benefits if the offer is not accepted, and the offering party does better than the offer.
The Defendant responded, stating that the offer of US$ 775,000 inclusive of interest was accepted, including reasonable and recoverable pre-action legal costs to be agreed or assessed.
About three hours later, the Defendant wrote to the Claimant saying “We will let you have a draft settlement agreement”. On the next working day, the parties signed a settlement agreement which read in material part:
D. The "FALCON TRIDENT" Owners submitted their claim following permanent repairs to the "FALCON TRIDENT", in the total sum of US$876,682.79 plus interest and legal costs (the "Claim").
F On 12th May 2020, the "FALCON TRIDENT" Owners made a Part 36/without prejudice save as to costs offer set out at Annex I to this Settlement Agreement (the "Offer"). The Offer was accepted by the "NEW LEVANT" Owners on 22nd May 2020 (the "Acceptance").
1. In accordance with the Offer and the Acceptance, the "NEW LEVANT" Owners will pay and the "FALCON TRIDENT" Owners will accept:
a. the sum of US$775,000, inclusive of interest (the "Principal Sum"); and
b. the recoverable pre-action legal costs of "FALCON TRIDENT" Owners up to the Acceptance in accordance with CPR Rule 36.13 (the "Costs")
in full and final settlement and discharge of the Claim and all losses, damages, expenses and costs whatsoever and howsoever arising between the Parties out of the Collision.
3. The Costs of the "FALCON TRIDENT" Owners shall be assessed by the High Court of Justice in London, if not agreed between the parties.
7. This agreement constitutes the entire agreement between the parties, with regard to its subject matter, and supersedes the terms of all previous agreements, whether written or oral between the Parties. …"
At this stage, no proceedings had been commenced.
There was no dispute about the US$ 775,000 or the legal costs of the Claimant’s English solicitors. However, the Claimant considered that it could also recover the pre-action costs of about US$ 60,000, as set out in the accepted Part 36 offer. It argued that the settlement agreement did no more than record what had already been agreed, not least because the settlement agreement referred to, and appended, the Part 36 offer. The Defendant disagreed. It said that the terms of the settlement agreement constituted a new agreement which excluded the various pre-action costs.
The Commercial Court Decision
The Court held that the settlement agreement did indeed supersede, rather than merely memorialise, the original Part 36 offer, and was intended to provide a fuller agreement designed to set a clearer basis for the recovery of costs. The Court agreed with the Defendant’s construction that Clause 1 operated to exclude the pre-action costs. The Court concluded that “[o]n its ordinary meaning, paragraph 1 had to be read together with the recital identifying the Claim to be settled by reference to the Scott Schedule and would be understood to mean that all items within the sum of USD876,682.79 given in the summary of claims would be settled by payment of USD775,000.”
This decision provides a reminder that it is important to consider very carefully the scope of the terms of any agreement. Settlement agreements are no exception to this general rule, and very careful thought should be applied to the final terms of closure.
One of the key factors in the Court’s decision was the use of the “entire agreement” clause in the settlement agreement. Such clauses are often put forward in draft agreements and careful consideration needs to be given in each case as to whether their use is appropriate. In this case, its inclusion allowed the Defendant to change the previous agreement to pay the pre-action costs and significantly reduced the value of the Part 36 offer that it had previously accepted.
The financial consequences of getting these things wrong can be severe. As the Court commented, the legal costs of the dispute about just over US$ 60,000 must have greatly exceeded this sum.