Release of fraud claims in settlement agreement upheld by Court of Appeal, despite no express reference
In the recent case of Maranello Rosso Limited v Lohomij BV & Others, the Court of Appeal considered the proper construction of a release clause included in a settlement agreement which released "all and any claims".
In upholding the High Court's decision, the Court of Appeal held that the release clause had the effect of compromising claims in fraud, dishonesty and conspiracy brought by Maranello Rosso Limited (MRL), notwithstanding that the release clause did not expressly refer to claims of that nature.
The background to the case concerned a collection of classic cars comprising 33 Ferraris (including a very valuable Ferrari 250 GT) and 38 Arbarths. MRL acquired the cars in May 2014 with the help of a €90m facility agreement provided by the First Defendant, Lohomij, and with the intention to sell the cars at a profit by auction through the Second Defendant, Bonhams – MRL believed that if auctioned separately they would realise as much as €150m.
Subsequently, in April 2015 MRL sent a letter of claim to Bonhams alleging negligence and breach of duty, and seeking losses of in excess of £20m which (MRL said) resulted directly from Bonhams' promotion and conduct of an auction of 10 cars that had taken place in Quail Lodge in California. Although the letter of claim did not make express reference to claims in fraud or conspiracy, it did make numerous broader assertions of duress, bad faith and illegality, and that Bonhams had acted in its own interests rather than that of MRL.
Following negotiations, MRL, Lohomij and Bonhams entered into a settlement agreement in July 2015 by which Lohomij and Bonhams were released from "all and any Claims" (the Settlement Agreement). 'Claims' was broadly defined in the Settlement Agreement, and encompassed all causes of action, whether or not known to the parties. It did not, however, refer to any claims in fraud, dishonesty or conspiracy.
In May 2020, MRL then commenced proceedings against Lohomij and Bonhams (and other associated parties, the Defendants) for alleged unlawful means conspiracy and dishonest assistance. Allegations were made of wrongdoing both before and after the date of the Settlement Agreement. The High Court dismissed all of MRL's principal claims on the basis that they had been released by the Settlement Agreement.
MRL appealed on two key grounds:
- The High Court Judge had adopted too literalist an approach to construing the Settlement Agreement, and had reached the "bald" conclusion that the wording of the release covered fraud, dishonesty and conspiracy. The Judge had failed to adopt the 'cautionary principle', by taking the wording as the starting point and examining whether there was anything in the factual matrix which undermined the literal meaning, rather than starting from the position that parties would not readily agree to settle unknown fraud and dishonesty claims. MRL contended there was nothing in the release or the factual matrix which indicated that the parties had contemplated fraud, dishonesty or conspiracy claims when entering into the Settlement Agreement, and that such unknown claims would only have been released if that was "spelt out" or there was otherwise some specific indication that claims of that nature were included in the settlement (Ground One).
- Even if its claims were covered by the release included in the Settlement Agreement, that release should not be given effect because 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, such that for the Defendants to have sought a release of all claims (including claims in fraud and conspiracy) amounted to 'sharp practice' which was an "affront" to the conscience of the court and should not be given effect (Ground Two).
The Court of Appeal's Decision
The Court of Appeal dismissed MRL's appeal and held that the claims in fraud, dishonesty and conspiracy had been released under the Settlement Agreement.
As to Ground One, the Court of Appeal found that there was no merit in the suggestion that the High Court Judge had been overly-literalist or was otherwise wrong. He had undertaken a detailed and careful consideration of both the wording of the Settlement Agreement and the factual matrix (which included the 2015 letter of claim), had reached the conclusion that both pointed to the release covering all claims, and it did not matter whether he had started with the factual background or the language of the Settlement Agreement. The Judge had also had "full regard to the 'cautionary principle'", which was recognised in his judgment 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 Court of Appeal also noted that the Judge had held (correctly) that the absence of express words referring to fraud in settlement agreements was not determinative and that there was no rule of law that it should be determinative, and that the ordinary principles of contractual construction applied to releases included in settlement agreements. Applying those ordinary principles, the Judge had (again correctly) found that fraud was included in the release.
As to Ground Two, the Court of Appeal held that this was not a case where the Defendants knew that MRL had claims of which it was totally unaware and took advantage of that ignorance by obtaining a release which settled those claims surreptitiously. MRL was fully aware and had alleged that Bonhams had damaged MRL by acting (deliberately) in breach of its duties, but had chosen not to investigate the full background to that alleged wrongdoing. Instead, it had chosen to settle those claims for very valuable consideration. It was not, therefore, arguable by MRL that it was unconscionable for the Defendants to rely on the release as having settled claims in fraud, dishonesty and conspiracy. On the contrary, far from it being unconscionable for the Defendants to rely on the release, the Court of Appeal's view was that "it was obviously 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".
This case is an important reminder of the Court's approach to the construction of settlement agreements, particularly that claims in fraud can be released even in the absence of express wording to that effect. The Court of Appeal's judgment is significant, and makes clear that settlement agreements should properly set out which claims are being released and which claims are not. Ordinary principles apply to the construction of settlement agreements, and it is not necessary to include express reference in release clauses to fraud or dishonesty – if the wording of a settlement agreement and its factual matrix indicate that it is objectively intended to cover claims in fraud and dishonesty, even unknown claims, then the agreement will be given effect. It is crucial, therefore, that great care is taken to ensure that claims that parties wish to pursue in the future are specifically and expressly excluded from settlement agreements, and that such claims are not inadvertently released.