In the recent case of Tomlinson v Tomlinson [2023] EWHC 2083 (Ch), the High Court provided useful guidance on the approach to the construction of parties’ obligations in settlement agreements. The key takeaway from the case is that careful consideration should be given when drafting the obligations in a settlement agreement to ensure that they operate in the way envisaged by the parties. Are the parties’ obligations dependent, or could one party end up being obliged to perform its obligations without receiving anything in return?

The case

Tomlinson v Tomlinson concerned a settlement agreement (recorded in the form of a Tomlin Order) between four brothers and the wife of one of the brothers which resolved a long-standing family farming partnership dispute. As part of the settlement, three of the brothers (the “Applicants”) agreed to pay the fourth brother (the “Respondent”) £1.1 million in instalments. The Respondent was required to execute a series of transfers of title to various properties to the Applicants.

The Applicants paid the first two tranches of the settlement sum but the Respondent did not execute the land title transfers. As a result, the Applicants refused to make the next payment due (the third instalment) and applied to the Court to enforce the terms of the settlement agreement. The Respondent issued his own application for (amongst other things) a declaration that the unpaid balance of £600,000 plus interest was due and payable within 14 days. The Respondent argued that the acceleration clause in the agreement had been triggered and that therefore he was entitled to an immediate payment of the outstanding balance of £600,000, despite having failed to perform his side of the deal. The Applicants maintained that their obligation to pay the third instalment was dependent on the Respondent performing his obligations and that as the relevant transfers were not performed, they were not obliged to pay the third instalment (and therefore the accelerator clause was not triggered).

The decision

The Court considered, on the precise wording of the settlement agreement, whether the Applicants’ obligation to pay was distinct (i.e. had to be performed whether or not the Respondent performed his obligations) or dependent (i.e. did not have to be performed if the Respondent was in breach of his own obligations).

Previous case law in this area (Mulville v Sandelson [2019] EWHC 3287 (Ch)) held that a paying party could not refuse to comply with their payment obligation under a settlement agreement despite not having received the agreed performance from the other party. However, the Court distinguished the present case from Sandelson, noting that the contract in Sandelson contained a number of distinct obligations, whereas the settlement agreement in this case clearly contained dependent obligations.  As a result, the Applicants were not required to pay the third instalment in circumstances where the Respondent had not performed its own obligations.

This conclusion was reached by reference to the precise wording of the settlement agreement which made clear that the obligations were inter-dependent and not detached. The Respondent’s obligation to relinquish his property interest was required ‘at Completion’ and the Applicants’ payment obligation was due ‘after Completion’. The use of the wording ‘at’ and ‘after’ Completion presupposes that the transfer must have occurred before the payment obligations can be engaged. Therefore, on a proper construction of the settlement agreement, it was not contemplated that the Applicants’ payment obligation would be engaged until the property transfers had been executed.

Practical implications

The takeaway from this case is to consider carefully the language used when drafting obligations in settlement agreements. It is important to avoid a situation where one party could be on the hook to do something, such as make a monetary payment, in the absence of receiving something in return (unless, of course, this is intended).

Where the respective obligations are intended to be conditional, they should be expressed as such in plain and intelligible language. Using temporal connectives and adverbs such as ‘after’, ‘then’, ‘before’ or ‘next’ as in the present case, is one way to achieve this. It is also possible to describe the obligations as conditional using express language, or by including wording such as ‘following this’ or ‘once this has been completed’.

Where obligations are intended to be distinct, this should also be made clear. In this scenario, it may be useful to express both obligations as arising following entry into the settlement agreement.

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