Settlement agreements are designed to remove uncertainty. With this in mind, parties typically prefer to agree broad releases so that the chance of any claim surviving the settlement is slim. However, while a broad release will clearly settle the known claims between the parties, what about the unknown claims?
The Court of Appeal considered this issue in Maranello Rosso Limited v Lohomij BV & Others andheld that an agreement that settled ‘all and any claims’ had the effect of compromising all and any potential claims, including claims of fraud, dishonesty and conspiracy, despite there being no specific wording to this effect.
There is no rule of law that the courts of England and Wales should be reluctant in finding that settlement agreements effectively compromise unknown claims. Settlement agreements, like any other contract, are subject to the normal rules of contractual interpretation. Parties therefore need to pay careful attention to the wording that they deploy.
Maranello Rosso Limited (‘MRL’) purchased a collection of classic cars for €80 million with a view that breaking down the collection into individual pieces for onwards sale at auction could raise as much as €150 million. MRL selected Bonhams, the leading auctioneers in the United Kingdom for the sale of classic cars, to conduct the auction process. Despite achieving a world record sale of a Ferrari 250 GTO for $34.65 million, Bonhams’ initial auction only raised $59.95 million in total. MRL asserted that this realisation was far beneath the assurances that it had been given and it alleged the reason for the shortfall was Bonhams’ misconduct.
MRL sent a letter before action to Bonhams that articulated claims for negligence and breach of contractual and common law duties. It did not make any allegations of fraud or conspiracy at that time. MRL and Bonhams (together with Bonhams & Butterfields Auctioneers, Bonhams’ American affiliate, and Lohomij BV, which provided a loan facility to MRL to enable the purchase of the collection) entered into negotiations to settle the nascent dispute and executed a settlement agreement that included the following wording:
‘The Parties agree (for themselves and on behalf of each of their Affiliates and Agents) that this Agreement shall constitute full and final settlement, and irrevocable and unconditional waiver and release, of all and any Claims.’
MRL subsequently issued proceedings, apparently based on new evidence that had come to its attention, claiming that the defendants were parties to an unlawful means conspiracy to promote the interests of Bonhams at the expense of MRL.
The defendants applied for the claim to be summarily dismissed on the grounds that the settlement agreement had released the parties from all claims, including the new claims of fraud and conspiracy. In response, MRL asserted that the settlement agreement was not capable of releasing claims in dishonesty, fraud and/or conspiracy as they were not ‘spelt out’ (i.e., there was no specific/explicit indication that such claims were included in the scope).
The High Court’s decision
The High Court summarily dismissed MRL’s claim. His Honour Justice Keyser QC stated that it was necessary to consider the ‘natural meaning’ of the ‘clear, precise, wide-ranging and comprehensive’ language that was agreed by the parties. The natural meaning of the language was given particular weight in the circumstances as the settlement agreement had been professionally drafted and given full consideration by the parties.
Importantly, the judge found that ‘there is no rule of law requiring that express words referring to claims based on fraud or dishonesty be used if a release is to extend to them. […] if the normal principles of construction lead to the conclusion that the release does indeed extend to such claims, the conclusion must be respected. Parties are entitled to reach such an agreement if they choose to do so, and it is no business of the court to obstruct their expressed intention.’
MRL appealed the High Court’s judgment on the grounds that: (i) the Court had taken a too literalist approach to interpretation, rather than cautiously examining the factual matrix to see if there was anything that undermined the literal meaning of the language; and/or (ii) it was realistically arguable that the defendants were precluded from relying on the settlement agreement by reason of the ‘sharp practice’ principle.
The Court of Appeal’s decision
The Court of Appeal held that there was no merit to MRL’s argument as to the proper approach to interpretation and upheld the High Court’s decision that the ordinary principles of contractual construction apply to a settlement agreement.
The Court of Appeal re-iterated the cautionary principle articulated by Lord Bingham in Bank of Credit and Commerce SA (In Liquidation) v Ali (No. 1) to the effectthat ‘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’. However, in this case it was clear that the ‘unequivocal and unambiguous’ wording of the release demonstrated a clear intention on behalf of the parties to ‘leave no loopholes’ and there was no requirement as a matter of law to identify express words in order for the release to be effective with regards to claims of fraud.
The Court of Appeal also held that the nature of the dispute being settled could be instructive with regards to any judicial assessment of the construction of a release. It was found, for example, that MRL’s initial letter before action (although framing claims in terms of breach of contract and negligence) made express allegations amounting to a breach of a fiduciary duty by Bonhams (including reference to: (i) deliberate steps taken by Bonham to profit at the expense of MRL; and (ii) a clear connection between Bonhams and Lohomij that had been or could be used to prejudice MRL’s position with regards to the auction). It was therefore found that MRL had, at the time of the settlement agreement, some actual knowledge of the facts that it was now seeking to deploy to support its fraud claim. As a consequence, it appeared that MRL had these sort of claims in mind when agreeing to the broad wording of the release in the settlement agreement.
The Court of Appeal also rejected MRL’s submissions based on the ‘sharp practice’ principle. This principle, articulated in BCCI v Ali, dictates that ‘a person cannot be allowed to rely upon a release in general terms if he knew that the other party had a claim and knew that the other party was not aware that he had a claim’. The Court of Appeal acknowledged the existence of the principle but held that it could not apply in this case where MRL shared some actual knowledge of the objective facts forming the basis of the claim at the time that the settlement agreement was executed.
On the basis of the above, the Court of Appeal found that the examination conducted by the High Court was perfectly adequate and should not be interfered with.
This judgment underlines the importance of parties carefully considering the precise wording of the release that is deployed in settlement agreements. It is now the clear position of the courts that generic wording can effectively release unknown claims, including claims of fraud, dishonesty and/or conspiracy. Potential claimants should seek to carve out such claims from the release as a matter of course.
  EWCA Civ 1667
  1 AC 251