Lessons on Release Clauses in Settlement Deeds

Background

In 2018, Sanmik Food Pty Ltd and an associated purchaser entered into a contract with Alfa Laval Australia Pty Ltd to purchase two coconut-milk production plants. The agreement stipulated that title to the equipment would only pass upon full payment.

Alfa Laval delivered a homogeniser and an aseptic filler (collectively the “Delivered Components”) to Sanmik’s warehouse in 2019. However, Sanmik paid only a portion of the contract price. Disputes arose over the balance, and in 2021 Alfa Laval initiated proceedings for breach of contract.

The parties eventually reached a 2023 settlement (“Settlement Deed”) that replaced the original contract with a “New Supply” agreement for replacement plants. The Settlement Deed included a broad release clause stating that the parties released “all claims and actions … arising from or in connection with” the initial contract and had “no further obligations” under it.

Crucially, the Settlement Deed did not explicitly address the fate of the Delivered Components already in Sanmik’s possession.

The Legal Dispute

After the settlement, Sanmik argued that the release clause extinguished Alfa Laval’s title to the Delivered Components, preventing the supplier from reclaiming or reusing them under the new supply arrangement.

Alfa Laval contended that its entitlement to the Delivered Components persisted because title had never passed under the original contract. Therefore, the broad release of claims and obligations in the Settlement Deed did not affect this underlying property right.

Court’s Analysis and Decision

The Supreme Court of New South Wales initially sided with Alfa Laval, holding that the release clause did not extinguish ownership of the Delivered Components. On appeal, the New South Wales Court of Appeal affirmed this decision.

The Court’s reasoning focused on several key principles:

1. Restrictive Interpretation of Release Clauses: General release language is interpreted narrowly, covering only obligations and claims the parties actually contemplated. A release does not automatically extinguish property rights unless explicitly stated.
2. Survival of Title: Because title to the Delivered Components never passed under the initial contract (as full payment was never made), Alfa Laval retained ownership despite the Settlement Deed’s release.
3. Separation of Claims and Property Rights: The Court distinguished between contractual claims extinguished by the settlement and the supplier’s underlying entitlement to property. The release clause did not operate as a blanket transfer of ownership or elimination of title.

The result was that Alfa Laval could legitimately reuse the Delivered Components in fulfilling the new supply arrangement.

Practical Implications

This case carries important lessons for commercial contracting and dispute resolution:

• Draft Settlement and Release Clauses Precisely: Parties should clearly specify the treatment of delivered but unpaid or partially-paid components when replacing contracts. Ambiguous language may lead to litigation.
• Understand the Limits of Release Clauses: Broad release clauses do not necessarily eliminate underlying property rights or title. Courts are likely to interpret such clauses restrictively.
• Protect Title in Sales Contracts: When transferring equipment, components, or goods, ensuring clarity on when title passes can prevent disputes if payments are incomplete or contracts are renegotiated.
• Separate Contractual Claims from Ownership Rights: Parties must distinguish between claims for breach of contract and rights to property, particularly in complex commercial arrangements with staged deliveries or settlements.

Conclusion

Sanmik Food v Alfa Laval reinforces the importance of precision in drafting settlement agreements and demonstrates that general release clauses do not automatically extinguish property rights. Commercial practitioners, directors, and in-house counsel should carefully consider how releases are framed, especially when contracts involve partial payments, staged deliveries, or replacement arrangements.

The decision serves as a reminder that in Australian contract law, clarity and specificity in both obligations and property rights are paramount to avoid protracted disputes and unintended consequences.

Contact our Litigation team if you require assistance with any aspect of settlement deeds, including drafting or interpreting release clauses. Email us here.