The most important aspect of a settlement agreement which provides for the payment of a sum of money, is that the parties involved are clear on the amount which is to be paid over.
This lack of clarity was at the heart of the recently reported decision in the High Court* involving a Mr Barden and the CRU Group.
Mr Barden had been an employee of the Group. He left his employment in 2008 and entered into a severance agreement. Afterwards, a dispute arose as to the terms of his leaving. The dispute centred on his entitlement to a long-term incentive payment when the CRU Group was sold.
Mr Barden brought a claim which went to mediation.
At the end of the mediation, a settlement agreement was entered into in the early hours of the morning. The crucial clause in the settlement agreement was headed “PAYMENT OF AGREED SUM” and provided for CRU to pay £1.35 million (the Settlement Sum) by a specified date.
CRU maintained that income tax should be deducted from the payment to be made to Mr Barden and Mr Barden maintained that the £1.35 million should be paid to him gross. In the event, CRU paid £676,822.84 direct to Mr Barden and £673,177.16 to HMRC in respect of Mr Barden’s tax liability.
It was common ground that the income tax payable was a liability of Mr Barden and that CRU was required to make the deduction and to pay the relevant income tax on his behalf.
Mr Barden’s point was that he only agreed to settle his claim for £1.35 million because the settlement agreement provided that that was the sum he would receive – he certainly did not agree to settle his claim against CRU for a payment of £676,822.84; he had it in mind that he would be able to claim a tax credit for the amount of tax paid by CRU to HMRC so that the Settlement Sum would be worth that much more to him.
The Judge had little difficulty in construing the agreement against Mr Barden, describing the meaning of the payment clause advanced by Mr Barden as a commercial absurdity.
The Judge first referred to it being well known that an employer pays income tax by way of PAYE on behalf of an employee so that when an employment contract provides that an employee’s salary is £x per month, no employee expects the gross sum of £x to be paid every month, but expects to be paid £x less the income tax due which is to be paid to HMRC by the employer on the employee’s behalf.
The Judge went on to point out that under Mr Barden’s construction, CRU would be required to pay an additional £1.35 million on Mr Barden’s behalf (because under Revenue rules the £1.35 million would have to be treated as being a net payment and grossed up at a marginal tax rate of 50%), without any such liability being mentioned in the settlement agreement; also, the settlement agreement itself defined the £1.35 million as the Settlement Sum clearly indicating that this was the sum in exchange for which Mr Barden agreed to settle his claims.
The Judge went on to record that if he had construed the payment clause as Mr Barden contended for, he would, in the light of the mediation negotiations (the court had made a consent order disclosure of the notes of the mediation) have ruled that the settlement agreement should have been rectified for common mistake and so would have arrived at the same result that way.
The obvious lesson to be drawn from the case is that the tax treatment of monies to be paid over should always be spelled out in the settlement agreement.
Perhaps another conclusion to be drawn is that if a mediation reaches fruition in the small hours of the morning when, as the Judge stated “the parties have been sufficiently worn down by the day’s combat finally to show their hands”, they should break off and agree to sign a formal agreement recording the agreed terms the following day (although the parties often come to the mediation with a pre-prepared agreement with the payment clauses left blank).
*Michael Kieran Barden –v- Commodities Research Unit International (Holdings) Limited and Others  EWHC1633 [Ch]