High Court finds settlement agreement released unknown fraud claims despite absence of express words covering fraud

The High Court has interpreted the contractual release in a settlement agreement as extending to unknown claims based on dishonesty and fraud, despite the terms of the release not expressly referring to such claims. The claimant was therefore precluded from pursuing further claims alleging deliberate wrongdoing following the receipt of what it said was new information regarding the defendants’ motivations: Maranello Rosso Ltd v Lohomij BV & Ors [2021] EWHC 2452 (Ch).

The decision considers the often-cited “cautionary principle” that, in the absence of clear language, the court should be very slow to infer that a party intended to surrender rights of which it was unaware and could not have been aware. That principle is not, however, a rule of law. As the present decision illustrates, if the normal principles of construction show that the parties’ (objectively determined) intention was in fact to release unknown claims, even alleging fraud, the court will give effect to that intention notwithstanding the absence of express words to that effect.

In the present case, the court found that there was such an intention, based on the clear and comprehensive language of the release which suggested a desire to “cover all bases” in drawing a line under the parties’ past dealings. That interpretation was reinforced by the factual matrix, which indicated that at the time of the release claims based on deliberate wrongdoing were already within the parties’ contemplation to some extent.

The decision recognises that there may be an equitable principle (the so-called “sharp practice” principle) which could prevent a party relying on a broad release where they knew, at the time of the settlement, that the other party had a potential claim of which it was ignorant. However, any such principle has no application where, as the evidence suggested here, the claimant had in fact suspected that it might have claims of the type it later sought to pursue. For more on the distinction between the treatment of “known unknowns” (where a party knew it lacked the full picture on certain matters) and “unknown unknowns” (where the party had no basis to think there were matters of which it was unaware) in the settlement context, see the discussion here.

As a practical matter, this decision reinforces the need for parties negotiating contractual releases to consider very carefully what potential claims they wish to release, and to ensure that the language covers all and only those claims. Parties may wish to consider including express language to deal with future claims that may emerge based on fraud or deliberate wrongdoing, whether they wish to leave open the ability to pursue such claims or to ensure that they are released.

Background

The claimant company (MRL) acquired a collection of 71 classic luxury vehicles valued at over £150million, with the intention of selling them at a profit at auction. It financed the purchase by borrowing €90million from the first defendant (Lohomij), on terms that it would sell the cars through the second and third defendants, Bonhams auction house, and would not dispose of the cars without Lohomij’s consent.

Bonhams acted in the sale of the cars, under a commercial agreement with MRL. That agreement provided that certain cars would be auctioned without reserve in the US in August 2014 and the remainder auctioned in England in September 2014.

Ten cars were sold without reserve at a US auction in August 2014 and 17 of the remaining 60 cars were sold by auction in England in September 2014. MRL alleged that, in breach of the commercial agreement, the defendants refused to sell the remainder of the collection at that auction. A further 14 cars were sold by the end of March 2015.

MRL’s solicitors wrote to Bonhams foreshadowing a claim against them “for negligence and breach of contractual and common law duties” relating to their promotion and conduct of the US auction (the “Spring Law letter”). MRL asserted that the parties had only ever discussed the cars being sold all together in England, which would achieve the best price, and that the contractual term providing for the US auction had been introduced at the last minute, and effectively forced upon MRL. The letter alleged that Bonham’s conduct regarding the auction had resulted in the cars being sold at a much lower price than they should have been, causing losses to MRL in excess of £20 million.

Following negotiations, a settlement agreement was entered into between MRL, Bonhams and Lohimji. It included widely drafted release provisions (see below) releasing Bonhams, Lohimji and their affiliates from claims relating to the sale of the collection.

MRL subsequently commenced the present proceedings against Lohomji and Bonhams, and individual representatives of those companies. The proceedings were said to have been prompted by new information obtained by MRL indicating that the defendants had never intended that the collection be sold in England and had dishonestly colluded and conspired to force the US auction on MRL, for the purpose of advancing Bonhams’ international profile before a sale of its business to an investor. This was said to have been done in the knowledge that it was contrary to MRL’s interests in obtaining an optimum price for the collection. The causes of action pleaded included unlawful means conspiracy, deliberate breach of fiduciary duty and/or a duty of good faith, and dishonest assistance.

It also alleged that the unlawful means conspiracy continued after the auctions and after the settlement, as Lohomij deliberately interfered in and unreasonably refused to consent to the sale of various cars with the intention of “destroying” MRL and one of its principals, and forcing the sale of cars to associates of the defendants at an undervalue.

The defendants applied for summary judgment and/or strike out, including on the basis that the claims had been released under the settlement agreement (apart from the limited freestanding causes of action based on conduct after the settlement date). MRL contended that the settlement agreement “did not settle any claims in dishonesty, fraud and/or conspiracy which MRL had against the parties”.

Decision

The High Court (Judge Keyser QC) held that the pre-settlement causes of action had been released by the settlement agreement, and the post-settlement causes of action were not reasonably arguable – with the exception of a claim against one of the individual defendants for conversation, which it was accepted should be determined at trial. Subject to that exception, all of MRL’s claims would be struck out or dismissed.

The authorities on contractual releases

The judge undertook a detailed analysis of the authorities regarding the interpretation of contractual releases, including the House of Lords’ seminal decision in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251. In particular, he considered the often-cited “cautionary principle” expressed by Lord Bingham in that case, that “…in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware.”

The judge distilled the following points from BCCI v Ali:

• Contractual releases are to be interpreted by applying the normal principles of contractual construction. There are no special rules in this context.
• Lord Bingham’s “cautionary principle” was not a rule of law. Rather, it ought to be seen as a useful distillation of judicial wisdom.
• The “cautionary principle” could be paraphrased as a warning that, if the plain meaning of a release would appear to indicate that a party was agreeing to give up rights of action of which they could not reasonably have been aware, the court ought to pause, ask itself whether that is really what the release means, and carefully examine the context to see whether the words more appropriately bear some more restricted meaning. However, in doing so, the court will apply normal principles of contractual construction, not specially restrictive ones.
• As there are no special principles of construction applicable to a release, the private knowledge held by one party but not by the others is irrelevant to its interpretation.
• It is arguable (based on obiter comments by Lord Nicholls and Lord Hoffmann) that there is an equitable principle which could in some cases prevent a party from unconscionably relying on a release in general terms if they knew when obtaining the release that the other party had a potential claim of which it was unaware (the “sharp practice principle”).

Having reviewed a number of subsequent authorities regarding contractual releases of unknown claims and fraud claims, the judge concluded that the subsequent case law was not inconsistent with the above points and that the relevant law had not changed since BCCI v Ali.

That review included Satyam Computer Systems Ltd v Upaid Systems Ltd [2008] EWCA Civ 487, in which the Court of Appeal found that a claimant’s new claims arose out of a different contract to that covered by a release and therefore were not caught by the release. Lawrence Collins LJ (with whom Waller and Rimer LJJ agreed) went on to consider, obiter, whether the release would have applied to unknown claims involving allegations of fraud. He referred to Lord Bingham’s cautionary principle regarding unknown claims and thought it clear that the same principle must apply to fraud-based claims. He stated (obiter) that the release in that case would not have covered certain fraud-related claims, as “…express words would be necessary for such a release”.

In the present case, MRL sought to rely on this in support of its position that a release of fraud-based claims required express words.

However, the judge in the present case rejected the submission that Lawrence Collins LJ was stating any general principle of law to that effect. Rather, he was simply applying the normal principles of construction and concluding that, on the facts in the Satyam case, express words would have been needed to release the particular claims in question.

Application to the present facts

The judge first considered the natural meaning of the language used. In doing so, he noted the established principle that the natural meaning of contractual terms is especially worthy of respect where, as here, they are contained in a carefully drafted agreement reached by commercial parties with equal bargaining positions and legal representation.

The judge regarded the language as clear, precise, wide-ranging and comprehensive. In particular, the “Claims” covered by the release were defined very widely to include “…all claims, causes of action, rights or other interests (whether present, actual, prospective or contingent, whether or not known to the Parties at the date of this Agreement, and whether arising in contract, tort, under statute or otherwise) in any jurisdiction”. They were defined by reference to subject matter, encompassing (in summary) all claims connected with the parties’ dealings around the car collection and which “relate to the existence or occurrence of facts, matters or circumstances at or prior to the date of this Agreement”.

The judge observed that such wording tended to show that “the draftsman and, therefore, the parties ‘meant business'” (to echo Lord Hoffmann’s words in BCCI v Ali) and sought to draw a line under the parties’ relevant dealings.

He concluded that the claims MRL now sought to advance (apart from the freestanding claims) clearly all fell within the scope of the release according to the plain meaning of the words used.

In accordance with the normal approach to contractual construction, the judge also considered the factual matrix surrounding the settlement agreement (being the facts or circumstances at the time the contract was made which were known or reasonably available to the parties). He concluded that the factual matrix reinforced the above interpretation reached from considering the language used.

In particular, he noted that the matters MRL complained of prior to entering into the settlement were not limited to incompetence or negligence. They included complaints suggestive of deliberate wrongdoing. For example, while the causes of action foreshadowed in the Spring Law letter were negligence and breach of contract, the factual matters detailed in that letter clearly included suggestions of deliberate wrongdoing, such as duress and coercion and the prioritising of Bonhams’ interests over MRL’s.

Further, the fact that Lohomij was a party to the settlement agreement, even though it was not involved in the US auction and no allegation of wrongdoing had been formally made against it in the Spring Law letter, tended to suggest that MRL’s complaints extended to Lohomij being involved in Bonham’s wrongdoing in some respect.

Allegations that the relevant conduct was not merely negligent but deliberate wrongdoing “were precisely the sort of allegation which, viewed objectively, the parties would be looking to prevent”. In agreeing to the releases in the terms it did, MRL took the risk that the element of bad faith might be worse than it then believed.

The “sharp practice principle”

Having concluded that the releases did apply to the claims now being pursued, the judge considered MRL’s fallback argument that the “sharp practice principle” referred to in BCCI v Ali should apply here to prevent the defendants from relying on the release.

The judge commented that, if such an equitable principle exists, he could see no reason why it would be limited to cases where there was “a general release”, as stated in the relevant BCCI v Ali judgments, as distinct from more specific releases.

However, in any event, he did not need to rule on whether such a principle exists. Any such rule could have no application where the claimant did at the time of settlement suspect that it might have claims of the type in question. Here, the judge had found, at the time it gave the release, MRL did already believe there had been some element of dishonesty and collusion by the defendants, but proceeded to give the release without exploring the potential for further claims of that sort. In such circumstances, it could not be unconscionable for the defendants to rely on the releases.