Court of Appeal finds settlement agreement released unknown fraud claims despite lack of express words to that effect

The Court of Appeal has upheld the High Court's decision that a release clause in a settlement agreement included unknown claims based on dishonesty and fraud, despite the terms of the release not expressly referring to such claims: Maranello Rosso Ltd v Lohomij BV [2022] EWCA Civ 1667.

The Court of Appeal endorsed the judge's approach to the construction of the settlement agreement. It was necessary to take into account the "cautionary principle" that, in the absence of express words, the court will not readily conclude that a reasonable person would understand a release to encompass claims for fraud or dishonesty. However, there is no rule of law requiring express words in order to release such claims. Accordingly, where the court concludes that on ordinary principles of contractual construction fraud is included in the release, the court will give effect to that intention.

The court recognised that, in some cases, the courts have recognised a possibility that a release might be rendered ineffective where a party has been guilty of "sharp practice" – namely by taking advantage of the other party's ignorance of certain claims by obtaining a broad release which surreptitiously settled those claims. However, the court expressed some scepticism as to whether the "sharp practice" principle could have any application where the court had construed a release as covering unknown claims in fraud.

More generally, this case serves as a reminder to settling parties that they need to consider carefully what claims or potential claims they wish to release. Although it may be difficult to negotiate in practice, parties may wish to consider including express language to deal with claims for fraud or dishonesty, making it clear whether these fall within or outside the scope of the release clause.

Background

The background facts are set out more fully in our blog post on the first instance decision here.

In brief, MRL acquired a collection of classic vehicles to sell at a profit at auction. It financed the purchase by borrowing €90 million from Lohomij. Bonhams acted in the sale of the cars, under an agreement with MRL. That agreement provided that certain cars would be auctioned without reserve in the US and the remainder auctioned in England. Bonhams only sold just over half of the collection.

MRL’s solicitors wrote to Bonhams setting out their intention to bring a claim “for negligence and breach of contractual and common law duties” relating to their promotion and conduct of the US auction. The letter alleged that Bonhams’ 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 Lohomij. It included widely drafted provisions releasing Bonhams, Lohomij and their affiliates.

MRL subsequently commenced proceedings against Lohomij and Bonhams, claiming to have obtained new information indicating that they had dishonestly colluded and conspired to force the US auction on MRL. The causes of action included unlawful means conspiracy and dishonest assistance.

The High Court struck out the claims, largely on the basis that they had been released under the settlement agreement.

MRL appealed on several grounds, the key grounds for present purposes being as follows:

1. On a proper construction, the settlement agreement did not release claims for unlawful means conspiracy. MRL argued that the judge had adopted too literalist an approach to construing the settlement agreement, in that he took the wording as the starting point and examined whether there was anything in the factual matrix which undermined the literal meaning. He should instead have started from the position that parties would not readily agree to settle unknown fraud and dishonesty claims, and looked to see whether there was a clear objective basis for finding that they had nonetheless done so in this case.
2. It was realistically arguable that the respondents were precluded from relying on any such compromise by reason of the "sharp practice" principle referred to in BCCI v Ali [2002] 1 AC 251. They must be taken to have been aware that they had conspired to injure MRL by unlawful means and that MRL was unaware of the conspiracy. In those circumstances, seeking to rely on a broad release in respect of such claims amounted to sharp practice which should not be given effect.

Decision

The Court of Appeal (Lady Justice Asplin, Lord Justice Arnold and Lord Justice Phillips) dismissed the appeal and held that the claims in fraud, dishonesty and conspiracy had been released under the settlement agreement. Lord Justice Phillips gave the leading judgment.

Ground 1. Was the release effective?

The Court of Appeal held that there was no merit in the suggestion that the judge's approach to construction of the settlement agreement was overly literalist or otherwise wrong: he had considered carefully both the wording of the relevant clauses and the factual matrix, applying the approach set out in the leading Supreme Court decision of Wood v Capita Insurance Service Ltd [2017] AC 1181, and concluded that both factors pointed to the release covering all claims. In the course of that exercise, the judge had rightly placed weight on the fact that the drafting of the settlement agreement was formal and high quality. He had also had full regard to the "cautionary principle" referred to by Lord Bingham in BCCI v Ali – namely that, in the absence of express words, one will not readily conclude that a reasonable person would understand a release to refer to fraud or dishonesty claims.

The judge had held that the absence of express reference to fraud in the settlement agreement was not determinative, given that he had already concluded that, on ordinary principles of construction, fraud was included in the release. The Court of Appeal agreed with this approach, observing that MRL had in correspondence prior to the settlement agreement put forward accusations of illegality, duress and breach of fiduciary duty. In that context, the widely worded release of all claims would naturally and obviously include claims that Bonhams’ actions amounted to deliberate and dishonest breaches of fiduciary duty in combination with others, including in particular Lohomij.

Applying the test set out in Satyam Computer Systems Ltd v Upaid Systems Ltd [2008] EWCA Civ 487, if the parties at the time of entering the settlement agreement had been asked whether MRL could subsequently bring claims for matters referred to in that correspondence, but reformulated to be part of an unlawful means conspiracy, the answer would be no.

Finally, the fact that the entire agreement clause in the settlement agreement expressly excluded claims in fraudulent misrepresentation from its scope demonstrated that the parties could perfectly well have excluded fraud from the scope of other provisions had they intended to do so.

Ground 2. Was this a case of sharp practice that should render the release ineffective?

The Court of Appeal rejected the second ground of appeal referred to above, namely that even if the release did exclude such claims, it should not be given effect because the respondents were guilty of sharp practice.

Contrary to the hypothetical scenario that the Supreme Court had envisaged in BCCI v Ali, this was not a case where one party sought to exclude liability for a claim it knew about but was unknown to the other party. On the assumed facts, MRL was fully aware, and had alleged, that Bonhams had damaged MRL by acting (deliberately) in breach of its duties as agent, but chose to settle those claims for valuable consideration.

The Court of Appeal went on to say that, far from it being unconscionable for the respondents to rely on the release, it was unconscionable for MRL to seek to avoid the release by reasserting the very same factual contentions, but reformulated as a conspiracy claim.

Finally, the court noted that where a release is construed as covering unknown claims in fraud relating to a defined subject matter, that entails a finding that the parties mutually intended to settle such claims. Accordingly, the court commented, there would seem to be little scope for a finding that one of them was guilty of sharp practice in relation to the existence of such a claim.