What happens if you reach a settlement with one party, but not others?
In this case, Chelsea Building Society had repossessed and then sold a property, but then wished to pursue the mortgagors for the shortfall. The mortgagors were a husband and wife who had subsequently got divorced. The Building Society reached an agreement with the ex-husband only that it would settle the matter on payment of £5000 in full and final settlement, but then still wished to pursue the ex-wife.
The ex-wife claimed that the full and final settlement with the ex-husband released her from her liabilities.
In a multi-party situation if a creditor is settling with one party, but wishes to pursue the other parties, it should expressly reserve that right in an agreement.
If that term is not expressly reserved, the court will need to determine whether a term is necessarily to be implied from the circumstances which existed at the time of the agreement.
The way the court at first instance had considered the matter was by asking the question whether there was a positive agreement between the ex-husband and the Building Society to the effect that the ex-wife’s liability would be discharged. In posing the question this way, the court at first instance had reversed the burden. The burden of establishing whether a term could be implied lay with the Building Society. The Court of Appeal looking at the evidence did not consider that it was a necessary implication of the agreement that it was reserving its rights and so the Building Society failed to meet the burden of proof of establishing the reservation either expressly or by implication. Accordingly it could not pursue the ex-wife.
At a late stage in the proceedings, the Building Society also attempted to argue that it was not bound by the agreement because it is not bound by part payment of an undisputed debt and so no consideration moved from the ex-husband to the Building Society. As the Court noted, this is a point which is of interest and it is not necessarily straightforward. However, as the point was made at a stage when no evidence could be taken on the issue, it was too late to make this point.
This case is a salutary reminder that when settling with one party in a multi-party situation, a creditor should expressly reserve its rights to pursue the other parties.
Chelsea Building Society v Lorraine Nash [2010] EWCA Civ 1247