Releasing all claims means… releasing all claims (Maranello Rosso v Lohomij BV)

Key takeaways

• The rules for interpreting a settlement agreement or a release clause are the same as for interpreting any contract.
• The rules of contractual interpretation were summarised in Wood v Capita Insurance Service Ltd [2017] AC 1181; [2017] UKSC 24. The Court's aim is to identify the objective meaning of the contractual language by:
  1. identifying what the reasonable person, with the knowledge available to the parties at the time, would have understood the contract to mean;
  2. considering the contract as a whole, giving appropriate weight to its constituent elements depending on the nature, formality and quality of its drafting; and
  3. checking each suggested interpretation against the provisions of the contract and investigating its implications and consequences.

It is does not matter in what order the Court undertakes this analysis.

• The Court will be cautious in concluding that a settlement releases unknown claims for fraud and dishonesty in the absence of express words to this effect (the 'cautionary principle'). However, this is not a determinative rule of law. Where a letter before claim alleges fraud or dishonesty (in whatever form), it is likely that a subsequent widely worded release of all claims (known or unknown) will be construed as releasing unknown claims for fraud and dishonesty unless they are specifically excluded. This is the case whether or not allegations of fraud or dishonesty ultimately form part of a party's pleaded case.
• Where a release clause is construed by the Court as including unknown claims for fraud and dishonesty, this means the Court has concluded such claims were contemplated by the parties. It is therefore unlikely that a party will be found guilty of 'sharp practice' (the principle established inBCCI v Ali² that a release might not be given effect if a party tries, through 'sharp practice', to exclude liability for a claim they knew about, but which was unknown to the other party at the time at which a settlement agreement was entered into).

Background

The claimant, Maranello Rosso Limited ("Maranello Rosso"), purchased a company which owned a valuable collection of classic cars with a view to subsequently selling the cars at auction for a substantial profit. Maranello Rosso obtained finance for the purchase of these cars from the First Defendant, Lohomij BV ("Lohomij"), on terms that Maranello Rosso was obliged to sell the cars at auction through the Second and Third Defendants respectively, entities affiliated with Bonhams Auction House ("Bonhams").

A term of the finance agreement was that Maranello Rosso would not sell the cars without Lohomij's consent. The sale at auction did not generate the profit that Maranello Rosso expected, and it was dissatisfied with the way in which the auction was conducted. Accordingly, solicitors for Maranello Rosso asserted, in a letter before claim addressed to Bonhams, claims for negligence and breach of duty and also referred to allegations of duress, bad faith, illegality, and a conflict of interest in relation to  its dealings with Lohomij (with whom it alleged Bonhams had a financial connection) (the "Spring Law Letter").

Following negotiations, the parties (including Bonhams and Lohomij) entered into a settlement agreement (the "Settlement Agreement") in which all parties agreed to release:

"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."

Subsequently, Maranello Rosso issued these proceedings alleging that, since the Settlement Agreement had been entered into, information had come to light showing that Bonhams, Lohomij and a number of their representatives were party to a conspiracy to injure Maranello Rosso it by unlawful means.

The Court's decision

At first instance, HHJ Keyser KC granted summary judgment for the Defendants and dismissed the Maranello Rosso's claims finding that the unlawful means conspiracy had been compromised by the Settlement Agreement. The Court of Appeal agreed. It rejected the suggestion that HHJ Keyser KC had adopted an 'overly-literalist' approach in his analysis. The approach to construction of the settlement agreement had been correct, and it was irrelevant whether HHJ Keyser KC had, in applying Wood started with the language of the contract and moved on to consider the factual background or vice versa. The Court of Appeal also agreed that no special rules of construction applied when construing release clauses to determine whether they resulted in fraud, dishonesty or conspiracy claims being released.

In relation to 'sharp practice', the Court of Appeal also upheld the HHJ Keyser KC's findings. The principle exists to prevent an offence to the 'conscience of the Court'³. Here, HHJ Keyser KC concluded that it was not unconscionable for the Defendants to rely on the release clause as having settled claims in fraud and conspiracy. The Court of Appeal saw no reason to overturn that finding, particularly in circumstances where the Spring Law Letter had, in fact, alleged that the Defendants had acted in bad faith. Indeed, it was, in fact, unconscionable for Maranello Rosso to seek to avoid the effect of the release clause in circumstances where it had received valuable consideration from the Defendants pursuant to the Settlement Agreement.

Comment

Parties need to ensure, when agreeing settlements, that they document precisely the types of claims they intend to compromise. If they do not want to compromise unknown claims arising from fraud or dishonesty, this must be expressly stated. The Court of Appeal's decision has also somewhat narrowed the 'sharp practice' exception, confirming that if a release clause is construed as releasing unknown claims for fraud, it is highly doubtful whether the 'sharp practice' principle could ever apply.