Settlement sum: net or gross?
In the recent case of Michael Barden v Commodities Research Unit & Others  EWHC 1633 the court decided, where a compromise (now, of course, settlement) agreement is silent as to whether the settlement sum should be paid net or gross of tax, the sum stated is a gross figure from which Income Tax should then be deducted.
In this case, the agreement provided that the Defendant “pay £1,350,000”. The Claimant (the CEO at the Defendant) alleged that this meant that the Defendant was obliged to pay the full gross sum of £1.35 million to his solicitors’ bank account, and to pay another sum, amounting to the tax on £1.35 million to HMRC. The Defendant contended that they were obliged to pay only a net sum having deducted PAYE income tax, resulting in a sum of £676,822.84 payable directly to the Claimant.
The decision considered two issues: construction and rectification. It was held that the subjective intentions of the parties were not admissible in considering the construction of the agreement. The construction was based on the legislative background, that is sums paid in connection with employment attract Income Tax. It was decided that any objective observer would, taking into account all the factual matrix available to the parties, but not their subjective intentions or the course of their negotiations, have had no doubt as to what was meant by the agreement. The construction advanced by the Claimant was labelled as a ‘commercial absurdity’.
In order to avoid ambiguity, any settlement figure in a settlement agreement should clearly state what it is intended to include and exclude. In cases similar to Michael Barden v Commodities Research Unit, where an agreement is made in the early hours of the morning or under time pressures, it is tempting to make an agreement without seeking full clarification of the position. Despite the pressures, both parties should ensure they receive proper advice in order to be as certain as possible that the agreement reflects their true intentions.