Interpreting release clauses in settlement agreements

Using a settlement agreement to extinguish a legal claim is common practice among most lawyers involved in litigation. These agreements have the benefit of providing certainty to parties and avoiding the costs and risks associated with litigation.  However, the decision in IBM Australia Ltd v State of Queensland [2015] QSC 342 (IBM v Queensland) is a reminder that lawyers need to exercise caution when drafting settlement agreements, and in particular compromise terms such as release clauses.

Background

In 2007, IBM Australia (IBM) was engaged by the State of Queensland (The State) to design and implement a centralised system for government services (the 2007 Contract).  Subsequently however, the centralised system concept was abandoned and the initial contract was revised so that IBM was only engaged to provide a new payroll system for Queensland Health.

The payroll system went live in March 2010, however, it had numerous alleged problems in its design and operation which allegedly caused losses for the State. The State issued a Notice to Remedy Breach to IBM which set out the various alleged breaches.  It later issued another notice, which asserted that IBM had failed to remedy the breaches outlined.  IBM denied the breaches.

In late 2010, the parties entered into a Supplemental Agreement which contained releases by each of the parties in relation to any actions, claims or proceedings.  Despite these, in 2013 The State commenced proceedings against IBM for breach of the former Trade Practices Act 1974 (now the Competition and Consumer Act 2010) and for damages in tort.  The claim related to alleged misleading representations made by IBM before the contract was executed.  IBM defended the proceedings on the basis that the Supplemental Agreement had extinguished the alleged liability.

The terms of the release

The following are recitals from the Supplemental Agreement:

“The State and IBM are in dispute over certain matters in relation to the Contract and have agreed to resolve their dispute, without any admission of liability by either party, on the terms of this agreement, pursuant to the dispute resolution process in the Contract”.^[1]

“If on 31 October 2010, there are:

(A) no Severity Level 1 Defects which the State notified to IBM before 29 October 2010 in the Queensland Health payroll solution as delivered by IBM (under the Lattice SOWs and this agreement), and

(B) no unremedied material breaches of this agreement by IBM in respect of which the State has given IBM a written notice; and there are:

(i) no Severity Level 1 Defects which occurred on 29, 30 or 31 October 2010 in the Queensland Health payroll solution as delivered by IBM (under the Lattice SOWs and this agreement) (which the State must immediately notify to IBM) and which have not been rectified within 7 days, and

(ii) no unremedied material breaches of this agreement by IBM in respect of which the State has given IBM a written notice,

then the State releases the IBM Parties from all Claims (“State Release”) and agrees that the IBM Parties may plead this agreement to bar any Claim and the State agrees that it will not sue those parties in any jurisdiction in respect of the Claims and agrees that such covenant will not be terminated (“State Covenant”).”^[2]

The parties’ positions

IBM argued that the release by the State applied to “all claims” which were defined very broadly to include a wide range of legal proceedings or causes of action.  IBM relied on clause 7.3 of the 2007 Contract which extends to any claims “the State had, has or might have had against an IBM party in respect of IBM’s obligations and acts or omissions prior to 1 September 2010”.^[3]  IBM submitted that the broad meaning of “claims” should be given full effect, and to adopt the State’s approach would be unduly narrow and not achieve commercial efficacy.

The State argued that the definition of “claims” did not apply to conduct, including any alleged misrepresentations, which were made by IBM Australia prior to the commencement of the 2007 Contract.  The State alleged the release in favour of IBM was not broad enough to extinguish such pre-contractual claims.

Held

The Court had to determine how the Supplemental Agreement should be interpreted and whether or not it prevented the State from prosecuting damages proceedings.  Martin J observed the following:

• the phrase “in respect of” found in the definition of “claim” was of very broad effect and alluded to a broad range of conduct. It referred to any kind of rights that the State might have in connection with the 2007 Contract before 1 September 2010;^[4]
• the use of the words “may exist” and similar phrases in respect of a claim or dispute, “signifies that the parties intend that the release covers claims about which they may not be conscious”;^[5]
• the phrase “according to the provisions of this agreement” does not confine the operation of the settlement but rather concerns the mechanics of the settlement.^[6]

The Queensland Supreme Court ultimately found in favour of IBM.  Justice Glenn Martin held that, on the proper construction of the Supplemental Agreement, IBM was released from the claims made by the State.  Therefore, it was unnecessary to grant an injunction.  The Court awarded IBM costs on an indemnity basis for its 2015 appeal, and ordered the State to pay IBM’s costs incurred from the original 2013 proceedings.

Takeaways

The case of IBM v Queensland highlights the importance of careful drafting in settlement agreements.  If not for the release clause contained in the Supplemental Agreement, the State may have been able to pursue IBM for damages.  Lawyers need to exercise caution when drafting settlement agreements to ensure client instructions are fully reflected, in particular compromise terms such as release clauses.  When drafting a settlement agreement, it is important to first identify with precision the particular dispute, and whether the release clause work as it is intended to.

Links and further references

Cases

IBM Australia Pty Ltd v State of Queensland [2015] QSC 342

Further information about settlement agreements

If you need advice regarding a litigious matter and the terms of any settlement agreement please telephone me for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] IBM v Queensland at para 23.

[2] IBM v Queensland at para 27.

[3] IBM v Queensland at para 28.

[4] IBM v Queensland at para 80-88.

[5] IBM v Queensland at para 78.

[6] IBM v Queensland at para 89.

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