Major Projects & Construction 5 Minute Fix 97: settlement agreements, liquidated damages, misleading or deceptive conduct

Settlement agreements — it's not over ‘til it's over

Settlement agreements — it's not over ‘til it's over

The aim of a settlement agreement is to resolve a dispute with finality and without the costs of further litigation. However, two recent cases in the NSW Supreme Court are a reminder that careful drafting is required to avoid further disputes about the interpretation of rights and liabilities set out in the agreement.

Unsurprisingly, what matters is the objective intention expressed in the words of the agreement itself – even when inconsistent with a contracting party's subjective intention to bring future claims or be paid by a specific date.

New claims

In Collinson v Paxus Australia Pty Ltd (No.3) [2022] NSWSC 438, the parties settled several workplace bullying proceedings in the Fair Work Commission. As part of the settlement, Collinson released Paxus Australia, the Department of Transport and Career Corporation from liability for any “Claims” in connection with Collinson’s employment and performance of services on the work site. However, the definition of "Claim" also included a carve-out stating, in effect, that Collinson could subsequently bring a claim for work injury damages against Paxus only.

Following execution of the release deed, Collinson sought work injury damages against Paxus Australia for negligently failing to provide a safe workplace in connection with the same bullying allegations. In the event Paxus Australia was liable, Paxus Australia argued that it was entitled to contributions from the Department of Transport and Career Corporation. A threshold question arose for the Court as to whether Collinson had only intended to release the Department of Transport and Career Corporation from Fair Work Commission claims, not common law negligence claims potentially worth much more than the settlement sum.

The Court found that the actual words of the deed, and its recitals, released the Department of Transport and Career Corporation from a claim in common law negligence. In particular, the parties had an opportunity to include carve-outs to the release to narrow the definition of "Claim", but only carved out a right to claim work injury damages against Paxus, not claims for common law negligence against the Department of Transport and Career Corporation. The latter kinds of claim therefore remained subject to the release.

Time for payment

In Fatseas v Fatseas bht Basha [2022] NSWSC 402, the parties executed a Heads of Agreement following mediation of a probate dispute, which both parties acknowledged was a binding contract. In dispute was the time for payment which was embodied in mandatory terms which did not "sit happily together". The clauses provided that:

• the defendant shall pay the settlement sum by an identified date; but
• if payment was not made by that date, the defendant shall make payment (with interest) following subsequent trigger events (for example, death or sale of property).

The Court found that the proper construction of the clauses provided the defendant with an option to elect to pay by the identified date or, subject to interest, upon the occurrence of subsequent trigger events. 

Informal agreements foregoing delay-related entitlements

Mansion Place Ltd v Fox Industrial Services Ltd [2022] BLR 19 demonstrates that the old idiom “talk is cheap” is not always true. The UK’s Technology and Construction Court determined that an informal conversation could constitute a binding agreement.

Fox Industrial Services argued that during a conversation between its managing director (Mr Kite) and a director of Mansion Place (Mr Ramanathan), Mansion Place had agreed to forgo any entitlement to liquidated damages in return for Fox Industrial Services agreeing to forego any right to claim payment for loss and expense as a result of the delay.

Justice Eyre held that whether an unrecorded conversation can constitute a binding agreement depends upon whether, viewed objectively and having regard to the surrounding circumstances, but without reference to undisclosed subjective intentions or beliefs of the parties, there was an offer and acceptance in circumstances where the parties were objectively intending to enter legal relations.

Weight was placed upon the fact that the Mansion Place’s internal documentation did not mention the alleged agreement and that Manion Place continued to pursue liquidated damages after the conversation. However, it was held that Mr Kite’s recollection of the conversation “was in substance” more likely to have occurred than Mr Ramanathan’s recollection. Despite recognising that the agreement might have gone further than Mr Ramanathan believed he had gone, Eyre J held that there was a legally binding agreement to forego the liquidated damages claim. Ultimately, Mr Ramanathan’s subjective beliefs were irrelevant.

Justice Eyre also considered the enforceability of liquidated damages clauses in the context of the UK’s penalties doctrine. The law of penalties in the UK differs from Australian law. In this judgment, Justice Eyre stated that a liquidated damages clause will be a penalty where the damages payable under the clause are out of all proportion to that interest or loss such as to be exorbitant or unconscionable. On the other hand, the Australian High Court's approach to the doctrine of penalties permits LDs clauses to protect an interest that is different from, and is potentially greater than, the damages that could be recovered for breach of contract.

On the question of penalties, it was argued that the amounts in the contract were standard figures that Mansion Place and related entities habitually used on other projects, and on that basis did not constitute a genuine reflection of actual loss suffered. Justice Eyre did not accept this argument – Fox Industrial Services had negotiated modest amendments to the liquidated damages clause, and delays to the project (the construction of apartments) could have led to lost rental income that was not out of proportion to the quantum of the liquidated damages. Accordingly, the liquidated damages clause would have been enforceable but for the binding agreement to forgo the entitlements.

Limitation periods and the limits of "immunising" against liability for misleading or deceptive conduct

The New South Wales Court of Appeal's decision in CBRE (V) Pty Ltd v City Pacific Ltd (in liq) [2022] NSWCA 54 highlights the difficulties inherent in seeking to rely upon disclaimers to avoid liability for misleading or deceptive conduct under the Australian Consumer Law (ACL).

In 2007, City Pacific Ltd attempted to purchase land via its wholly owned subsidiary, Martha Cove Marina Pty Ltd, who was named as purchaser. To this end, City Pacific transferred $11.1 million, which was never recovered. Eight years after the failed purchase, City Pacific commenced proceedings against CBRE – the valuers of the land – asserting that the valuations had been negligently prepared and contained misleading or deceptive representations under the then applicable Trade Practices Act (now the ACL).

At first instance City Pacific was successful in part because the trial judge held that there was an implied loan between City Pacific and Martha Cove Marina, which was not repaid, and which had the effect of delaying the commencement of the applicable limitations period by delaying the date upon which City Pacific was said to have accrued loss.

CBRE appealed the finding about the implied loan, and the finding that the valuation was misleading or deceptive given the disclaimer in the valuation report, and the fact City Pacific was not a listed recipient. The disclaimer included the following:

"This valuation is for the use only of the party to whom it is addressed and for no other purpose. No responsibility is accepted to any third party who may use or rely on the whole or any part of the content of this valuation."

CBRE was successful on appeal despite a finding that the disclaimers, and the fact that City Pacific was not a listed addressee, were insufficient to avoid liability under the Trade Practices Act. It was held that the "impugned conduct must be viewed as a whole" requiring consideration of more than the listed addressee.

CBRE’s success was based upon a finding that City Pacific’s claims were statute-barred due to the passage of more than 6 years since the City Pacific’s cause of action accrued. In this respect, on appeal it was held that there was no implied loan and that therefore there was no informal extension to the limitations period to account for the extra time until repayment to City Pacific from Martha Cove Marina became impossible. The subsidiary, Martha Cove Marina, was unable to sue 8 years after the failed sale, because its cause of action arose when the initial instalments of the purchase payments were made. In these circumstances the holding company, City Pacific, which actually made the payments was not able enjoy a different and substantially longer limitation period by the device of treating what occurred as a loan to its subsidiary.