Insights

Chris Ward

Published 27 February 2023
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The Cautionary Principle of Settlement Agreements

The Court of Appeal has recently provided important guidance on the interpretation of settlement agreements and whether a settlement agreement was intended to, and did in fact, release claims of fraud, conspiracy or other intentional wrongdoing that were not expressly recited in the agreement. The guidance came in the form of a decision in the case of Maranello Rosso Limited v Lohomij BV and others [2022] EWCA Civ 1667.

The facts in Maranello Rosso Limited v Lohomij BV and others

The facts of the case were interesting if complex. Maranello Rosso Limited (MRL) bought a large collection of classic vehicles using finance provided by Lohomij BV. The cars were immediately put up for auction with Bonhams with the expectation a significant profit would be made. In the event, only half the cars were sold and solicitors acting for MRL wrote to Bonhams expressing their intention to bring a claim “for negligence and breach of contractual and common law duties” in respect of the conduct of the sales. This letter did not explicitly allege fraud or conspiracy but did make accusations of ‘coercion’, ‘withholding of information’ and conduct that was ‘unlawful’.

The parties eventually entered into a settlement agreement that released:

“all claims… whether present, actual, prospective or contingent, whether or not known to the Parties… and whether arising in contract, tort, under statute or otherwise… which relate to, arise from, or otherwise connected with… the sale of the Collection… including all claims alleged in Spring Law’s letter.”

However, MRL later commenced fresh proceedings against Lohomij BV and Bonhams on the basis of new evidence it claimed to have in respect of the defendants’ conduct and motivation. The causes of action included unlawful means conspiracy and dishonest assistance.

The Court of Appeal decision

The Court of Appeal held that in this case, the settlement agreement did include claims for unlawful means conspiracy. The Court of Appeal went on to provide that in relation to a settlement agreement the usual principles of contractual construction apply.

The Cautionary Principle

Consideration was also given to the “Cautionary Principle”, namely that, in the absence of express words, it will not be easily concluded that a reasonable person would assume a release referred to fraud or dishonesty claims. The court stressed both that there is no rule of law that express words are required to release claims in fraud, and it also stressed the importance (in determining what is included within the terms of the release) of trying to determine the parties’ intentions by taking into account what it called the “factual matrix” and surrounding circumstances.

In this case, when you looked at the factual matrix behind the claim and in particular the pre-action correspondence from the seller’s solicitor, fraud was included in the release.

Sharp practice

The Court of Appeal also addressed the issue of ‘sharp practice’ by one party to exclude liability, whilst keeping the other party unawares. In so doing, the Court considered whether, at the time of the settlement agreement, the parties had been asked whether MRL would subsequently be able to bring claims for matters already referred to in the correspondence, the answer would be no. Based on what was known, MRL was fully aware and had already alleged that Bonhams had acted deliberately in breach of its duties as agent, but chose to settle those claims for valuable consideration. Therefore, the court concluded it was “unconscionable” for MRL to try and avoid the release.

Comment

The judgment is not only an important reminder of the care required when drafting release clauses in a settlement agreement but also of the importance of the wider factual context and the intentions behind the parties’ actions. Please get in touch if you would like to discuss any of the issues raised by this decision.

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