High Court Upholds Enforcement of Settlement Agreement in Clarkson v Future Resources FZE Case, Clarifies Penalty Clause Legality

Citation: [2019] EWHC 3830 (Ch)
Judgment on

Introduction

The judgment in Clarkson v Future Resources FZE & Ors [2019] EWHC 3830 (Ch) revolves around contractual disputes and the enforceability of a settlement agreement, including the legality of penalty clauses. The case demonstrates important legal principles that govern settlement agreements and the applicability of penalty clauses in contractual obligations. It provides insight into how the courts address the enforcement of such agreements and what is considered a valid defence to non-compliance.

Key Facts

In this case, the claimant, Mark Damian Clarkson, had earlier filed a claim asserting his status as the ultimate beneficial owner of a valuable property, and sought declaratory relief relating to various contracts. The proceedings were settled by a Tomlin order, which incorporated a settlement agreement that outlined the terms of the settlement, including the repayment of a loan by the first to fourth defendants (referred to as “the lenders”).

The settlement agreement included a clause that upon repayment of debt, certain shares would be transferred to TPT Corporate Services. It also specified the consequences of a “default” by Clarkson; if such an event occurred, clause 5.2 stipulated that the debt would become due immediately, and the lenders would validly own shares in Whiteacres Holdings Limited both legally and beneficially. Clarkson subsequently defaulted on the payment, prompting the lenders to seek enforcement of the agreement. Clarkson contended that the repayment clause and the consequences of default were unlawful penalties and sought to adjourn the matter, asserting that a freezing injunction prevented him from adequately challenging the settlement terms.

The case engages several legal principles:

  1. Enforceability of Settlement Agreements: Settlement agreements are contracts, and their terms bind parties except where provisions are unlawful or unenforceable.
  2. Penalty Clauses in Contracts: The claimant’s argument is grounded in the principle from Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis, which outlines the criteria for determining whether a contractual clause constitutes a penalty. A penalty clause is generally unenforceable if it imposes a detriment that is out of proportion to any legitimate interest of the innocent party.
  3. Specificity of Releases and Waivers: The court highlighted the specific nature of the settlement agreement’s release clause, which precluded the claimant from bringing claims arising out of, or connected with, the original claim or underlying facts.
  4. Stays of Proceedings: The Tomlin order imposed a stay on proceedings, pending the settlement terms being met. The court assessed whether lifting the stay was appropriate in this case.
  5. Adjournment and its Grounds: The court examined whether an adjournment was justified, considering both the claimant’s inability to bring proceedings due to the freezing injunction and the lenders’ position.
  6. Costs assessment and indemnity: Incorporated was a discussion of the legal basis for awarding costs, including the decision to award costs on a standard basis instead of indemnity, despite a clause seemingly requiring the claimant to indemnify the defendants for costs in certain situations.

Outcomes

The court ruled against adjourning the matter, deciding that the claimant was precluded from asserting beneficial ownership and thus had no standing to challenge the settlement agreement on the grounds of it being a penalty under clause 6. This preclusion also applied to clauses seeking to address any potential interest in the property under clause 4.5 of the settlement agreement.

The application by the lenders was granted to lift the stay and enforce the claimant’s obligation under the settlement agreement, thereby requiring him to submit an application to remove a unilateral notice from the Land Registry title to the property.

Concerning costs, the decision was made to apply the standard basis for costs assessment, discounting the hourly rate charged. A summary costs assessment led to a figure of £17,229.50, exclusive of VAT.

Conclusion

In Clarkson v Future Resources FZE & Ors, the High Court demonstrated the robustness of settlement agreements and the limited scope available for challenging their terms once signed, especially when those terms were agreed upon with professional legal advice. The judgment reinforces the principle that not all contractual penalties are per se unenforceable, and the plea for penalties can only succeed if an entitlement to assert a right underpinning such a challenge exists. This case reiterates the significance of the specificity of releases in binding parties and clarifies the scenarios under which adjournments are deemed unwarranted. It also gives a clear indication of how costs are approached where indemnification clauses exist. The judgment, therefore, serves as a cautionary tale for litigants to thoroughly consider the implications of settlement terms and to be mindful of the consequences of default.