In a recent judgment, the Court of Appeal ruled that an agreement for the settlement of "all and any claims" extended to unknown claims based on dishonesty and fraud. This is despite the release failing to expressly refer to such claims. In dismissing the claimant's appeal, the Court emphasised that the usual principles of contractual construction apply to settlement agreements and reiterated that there is no rule of law that express words are required in order to release claims in fraud. In this update, we consider the implications of this ruling and the importance of carefully considering the drafting of such releases.
Background
In this case, the claimant company (MRL) purchased a collection of 71 classic cars valued at over €150 million. MRL purchased the cars with the intention of selling them on for a profit at auction. MRL financed the deal by borrowing €90 million from the first defendant. It was agreed that the cars would be sold via the third and second defendants, Bonhams auction house (Bonhams). In total, 25 cars remained unsold and €35 million remained outstanding under the facility agreement.
MRL claimed that the total amount raised was less than the assurances given by Bonhams and argued wrongdoing in the conduct of the auction. MRL wrote to Bonhams setting out its claim for in excess of £20 million for negligence and breach of contractual and common law duties in relation to the conduct of the auction. Although the pre-action letter was focused on allegations of negligence and breach of duty, the letter also made allegations of duress, bad faith and illegality, and that Bonhams had acted in its own interest, rather than in the interests of MRL. Following negotiations, the parties entered into a settlement agreement by which MRL released the defendants from "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 [the] Agreement…)". Crucially, the definition of 'claims' did not explicitly refer to claims of fraud or conspiracy.
The proceedings
MRL subsequently issued proceedings against the defendants, arguing that new information had come to light which revealed that the defendants were party to a conspiracy to injure MRL by unlawful means and that the settlement agreement had not settled any claims in dishonesty, fraud or conspiracy. The defendants made summary judgment and strike out applications. At first instance ([2021] EWHC 2452 (Ch)), the High Court (Judge Keyser QC) dismissed all the principal claims. MRL appealed the decision to the Court of Appeal, principally arguing that the judge had failed correctly to apply the "cautionary principle" that, in the absence of unequivocal language, the court should hesitate to infer that a party wished to surrender rights of which it was and could not have been aware.
The Court of Appeal's decision
Construction and the "cautionary principle"
In dismissing the appeal, Lord Justice Phillips rejected the argument that Judge Keyser QC had taken an "overly-literalist" or "otherwise wrong" approach to interpreting the construction of the settlement agreement. The initial decision followed a detailed and careful consideration of the wording of the relevant release clauses, as well as the factual matrix, whereby the judge had reached the correct conclusion that the settlement agreement covered all claims relating to the subject matter in existence as at its date, including those now alleged by MRL. In reaching his decision, the judge had proper regard to the nature and quality of the drafting and had full regard to the "cautionary principle". The judge ruled that the widely worded release of all claims, no matter the cause of action, arising out of the dispute would include claims that the defendants' actions amounted to deliberate and dishonest breaches of fiduciary duty in combination with others.
Sharp practice
MRL further argued that the release should not be given effect as the defendants must be taken to have been aware that they had conspired to injure MRL by unlawful means and that MRL was unaware of that conspiracy. In those circumstances, MRL argued that the defendants' ability to have sought release of all claims amounted to "sharp practice" which was an "affront to the conscience of the court". The judge ruled that this was not a case where the defendants knew that MRL had claims of which it was unaware and took advantage of that ignorance. MRL had chosen not exhaustively to investigate the background to the wrongdoing and had instead decided to settle the claims. On the contrary, it would be unconscionable for MRL to seek to avoid the release by re-asserting the very same factual contentions but arguing that they were unlawful acts pursuant to a conspiracy.
Where does this leave parties wishing to settle their disputes?
This ruling reflects the Court's willingness to give effect to clearly worded agreements in general – not only in the sphere of settlement. Parties settling disputes should bear in mind that wide releases of the type used here ("all claims" relating to the subject matter of the dispute) can operate to release unknown claims, even those in fraud, notwithstanding the absence of express words to that effect. The Court also noted that the agreement contained an entire agreement clause which excluded claims in fraudulent misrepresentation. Whilst that clause had no bearing on the scope of the settlement, the court said that its inclusion demonstrated that the parties could have used a similar clause to exclude fraud from the scope of the settlement had that been their intention.
It is therefore important carefully to consider - and then clearly document - what is and what is not being released as part of a settlement, to avoid unintentionally settling valuable claims. To avoid the need for lengthy and protracted litigation, parties should consider including express wording in release clauses to ensure that there is no ambiguity in relation to what claims, if any, can be brought in the future. This may, for example, involve the use of clear wording in release clauses which explicitly grants or denies contracting parties the future right to bring claims on the basis of either fraud, dishonesty or unlawful means conspiracy so as to draw a clear line in the sand.
If you have any questions about this article, please get in touch.