In Short


In the last edition of Navigate, Lourenzo Fernandez summarised key considerations to keep in mind when negotiating settlement agreements. Their summary can be read here. Lourenzo touched on the importance of release clauses and paying attention to the specificity of the wording of such clauses, depending on the nature of the settlement, to ensure that they achieve their desired outcome. In November, the High Court’s decision in FibreTech Holdings Ltd v Vero affirmed the importance of release clauses in settlement agreements.

Background


FibreTech owned an industrial building in Christchurch which was damaged in the 2010/2011 Canterbury earthquake sequence. FibreTech made a claim under their material damage policy after the 4 September 2010 earthquake. FibreTech and Vero entered into a settlement agreement on 11 May 2018 for a figure which recognised that FibreTech’s building was a total loss (Agreement).

The Agreement recorded the following:

The Settlement Sum is paid by Vero and accepted by the Insured in full and final settlement and discharge of the Claim and any claims, rights, demands and set-offs against Vero arising directly or indirectly out of, or in connection with the Earthquake Activity and/or the Earthquake Losses and/or the Material Damage Cover and/or the Policy whether such claims arise under statute, common law, or equity; …

FibreTech brought proceedings in the District Court for the recovery of premiums paid under its policy from 2013 to 2017 on the basis of the Agreement. Its case was that it had suffered a total loss of the building requiring full reinstatement to the maximum insured value, and as such, it obtained no benefit from the continuation of the policy after suffering the earthquake damage.

Vero argued that, with the release clause, FibreTech had discharged it from any claim in respect of the premiums paid through agreeing they would not make any claim against Vero arising directly or indirectly out of, or in connection with, the earthquake losses and/or the material damage cover.

Earlier this year, the District Court issued summary judgment for Vero on the basis that the settlement agreement provided a complete legal defence to the claim, but declined to strike it out. FibreTech appealed the summary judgment decision. Vero cross-appealed the decision, refusing the strike out.

Decision


The High Court dismissed FibreTech’s appeal. While noting that strike out would have been appropriate, the Court found that it was not necessary to formally allow Vero’s cross-appeal.

The Court held that the release clause, on an objective interpretation, as per Prattley, was intended to achieve finality for the parties. The Court rejected FibreTech’s argument that if there had been an intention to exclude a claim for premiums under the policy, there would have been express reference to it in the Agreement on the basis that the release clause was all-embracing. The Court was also of the view that even if FibreTech was unaware of their potential claim at the time of the settlement, it could have known, because it obtained an estimate for the cost of repairs which was consistent with it being a total loss under the policy which would have meant that Vero had to pay the full amount for replacement.

In addition, the Court held:

The claim to recover subsequent premiums was thus a claim arising directly or indirectly and in connection with the earthquake losses and/or the material damage cover. But for that damage and the cover which FibreTech had in respect of it, FibreTech could not have argued there was no consideration in return for the contracts of insurance and the payment of premiums in the years 2011 to 2017. Had it been necessary, I would also have found that, on this ground, by reason of those words in the release clause, Vero also had a complete answer to FibreTech’s claim.

Comment


Settlement agreements are often entered into after lengthy periods of litigation and negotiation. While they can be seen as a mere formality, Justice Nation’s decision is a timely reminder of the importance of taking care to ensure that the wording of the agreement, and the release clause in particular, is sufficient to achieve finality by releasing parties from future claims, if that is the intention.


If you would like to know more about the issues discussed in this article, please contact Peter Hunt or Lourenzo Fernandez.


This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.