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Entire compromise agreements

Posted on 10th December 2009
Case law

A compromise agreement which includes an 'entire agreement' clause will not necessarily override all pre-existing agreements.

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the drafting of the compromise agreement made it clear that it was limited to the employment aspects of the relationship between the parties

Personnel Hygiene Services Limited v Mitchell [2009]

Background

In this case the parties entered into a compromise agreement dealing with the termination of the employee's employment. Previously, the employee had sold his business to PHS and had entered into a share purchase agreement. Both agreements, in addition to the employee's contract of employment, imposed post employment restrictive covenants on the activities of the employee. The restrictions in the share purchase agreement were more restrictive in time and scope. The employee attempted to argue that the share purchase agreement restrictions were replaced by those contained in the compromise agreement.

The compromise agreement included an entire agreement clause, the effect of which would ordinarily be to prevent reliance on (amongst other things) pre-existing agreements such as contracts or correspondence. The objective being to ensure that all issues are included and resolved in the compromise agreement.

The decision

PHS applied to the Courts for an injunction relying on the terms of the share purchase agreement. On appeal the application was successful. The Court of Appeal in Personnel Hygiene Services Limited v Mitchell [2009] decided, on the facts, that the entire agreement clause in the compromise agreement did not override the restrictions in the share purchase agreement, but they did override the restrictions in the contract of employment. A key deciding issue was that the compromise agreement made no reference to the share sale agreement and the drafting of the compromise agreement made it clear that it was limited to the employment aspects of the relationship between the parties.

In practice

This case could easily have been catastrophic for the employer and is a stark reminder that the utmost care must always be taken when preparing compromise agreements, including making sure that all relevant information is taken into account. When giving instructions to your employment law solicitors it is essential to give details about all aspects of the relationship and to disclose documents such as shareholder agreements, share sale agreements and any other documentation which may exist e.g. loan agreement. The compromise agreement can be drafted to reflect issues which need to be incorporated into, or identified as being separate to, the compromise agreement. 

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