Court Of Appeal Finds Settlement Agreement Released Unknown Fraud Claims Despite Lack Of Express Words To That Effect

• Published date: 17 January 2023
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Herbert Smith Freehills
• Author: Ms Anna Pertoldi, Maura McIntosh and Caroline Tuckwell

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...