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House of Lords - When is a Compromise Agreement not a Compromise Agreement?

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A very surprising, and highly controversial, judgment has been handed down today (1st March) by the House of Lords in the case of BCCI (In compulsory liquidation) v (1) Munawar Ali, (2) Sultana Runi Khan and Ors - yet another twist to the BCCI saga.

The decision is concerned with the scope/interpretation of COT3 compromise agreements signed by ex-staff of the bank, via ACAS.

In consideration for one month's salary offered by the bank, and after an interview with an ACAS official, the employees signed a COT3 agreement stating that the payment was:

"…in full and final settlement of all or any claims whether under statute, Common Law or in Equity of whatsoever nature that exist or may exist and in particular, all or any claims, rights or applications of whatsoever nature that the Applicant has or may have or has made or could make in or to the Industrial Tribunal, except the Applicant's rights under the Respondent's pension scheme"

Clear? One would have thought so. But the House of Lords disagrees by a 4:1 majority (Lord Hoffman dissenting). It held that the wording of this clause did not preclude the employees from proceeding with claims for 'stigma' damages arising from the collapse of the bank and their dismissal.

In the leading judgement, Lord Bingham held that:

"it is no part of the court's function to frustrate the intentions of contracting parties once these have been objectively ascertained. But …in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware" (paras. 9 -10).

Whilst this is put forward as a cautionary principle not a rule of law (para. 17), it led him to conclude that the parties did not intend:

"to provide for the release of rights and the surrender of claims which they could never have had in contemplation at all." (para. 19)

Lord Nicholls also holds that the applicant in singing cannot reasonably be regarded as having taken on himself the risk of a subsequent retrospective change in the law.

The House did not deal in any detail with the traditional view that parties were not entitled to avoid the plain and obvious meaning of a clause by reason of a mutual mistake as to the law (ie the existence of a right to claim stigma damages).

Two passages may make employment lawyers raise their eyebrows even further:

• Lord Nicholls described the signing of a COT3 agreement as an "informal release" - which seems rather at odds with the fact that it is a legally binding agreement under statute;

• Lord Nicholls also stated that the wording of the COT3 would probably not be sufficient to have compromised a claim for underpayment of wages ("What if it later came to light that due to a clerical error Mr. Naeem had been significantly underpaid while employed? It would be surprising if Mr. Naeem could not pursue such a claim") - para. 35.

Lord Bingham concluded his leading judgment by stating:

"On a fair construction of this document I cannot conclude that the parties intended to provide for the release of rights and the surrender of claims which they could never have had in contemplation at all. If the parties had sought to achieve so extravagant a result they should in m opinion have used language which left no room for doubt..."

One wonders what wording would suffice!