High Court provides guidance on setting aside compromise agreements

February 4, 2020

The High Court has given important guidance on the court’s approach to claims to set aside compromise agreements for mistake, particularly mistake of law, in the case of Elston v. King [2020] EWHC 55 (Ch).

Mr Elston entered into an income payments agreement with his trustees in bankruptcy in respect of his undrawn pension entitlement. That agreement was made in light of the case of Raithatha v Williamson [2012] 1 WLR 3559 in which the High Court held that in some circumstances it had jurisdiction to make an income payments order in respect of undrawn pension rights. After the agreement the Raithatha case was disapproved (Horton v Henry [2017] 1 WLR 391) and Mr Elston sought to recover the monies he had paid on the ground that the agreement should be set aside for common mistake.

In the view of Marcus Smith J.:

  1. The law in relation to common mistake applies in full to compromise agreements (agreements by which a pre-existing dispute between the parties is settled), but the factual background to a compromise agreement is different to other contracts in that in a compromise the parties alight on a common position in relation to a matter on which, at heart, they disagree; the parties frequently reach a view not on what the facts are or law is but on how the court is likely to determine certain factual or legal questions.
  2. In considering whether a compromise agreement can be set aside the first step is to construe the agreement and ask whether its terms, express or implied, provide for one party to bear the risk of a change in the law. If the contract apportions such a risk that apportionment should be adhered to.
  3. If the contract does not provide an answer one must consider whether the change in the law demonstrates the parties were acting under a mistake at all or had made a misprediction as to the court’s view. This distinction – particularly where the alleged mistake co-exists with an element of doubt as to the true position – can be extremely difficult and very fact-sensitive. But the distinction is important because only mistake permits restitution. It is possible that a change in the law may demonstrate the parties were acting under a mistake but decisions making new law are susceptible to appeal or future contrary decisions and the parties must be taken to know that the law may develop; a finding of misprediction rather than mistake is more likely in a developing area of law.

James Malam acted for Mr Elston and was instructed by Nexus Solicitors on the appeal.