Settling Disputes: Settling “All Claims” Includes Unknown Claims Related To Fraud – Professional Negligence

In a recent judgment, the Court of Appeal ruled that an agreement for the
settlement of “all and any claims” extended to
unknown claims based on dishonesty and fraud. This is despite the
release failing to expressly refer to such claims. In dismissing
the claimant’s appeal, the Court emphasised that the usual
principles of contractual construction apply to settlement
agreements and reiterated that there is no rule of law that express
words are required in order to release claims in fraud. In this
update, we consider the implications of this ruling and the
importance of carefully considering the drafting of such
releases.

Background

In this case, the claimant company (MRL) purchased a collection
of 71 classic cars valued at over €150 million. MRL purchased
the cars with the intention of selling them on for a profit at
auction. MRL financed the deal by borrowing €90 million from
the first defendant. It was agreed that the cars would be sold via
the third and second defendants, Bonhams auction house (Bonhams).
In total, 25 cars remained unsold and €35 million remained
outstanding under the facility agreement.

MRL claimed that the total amount raised was less than the
assurances given by Bonhams and argued wrongdoing in the conduct of
the auction. MRL wrote to Bonhams setting out its claim for in
excess of £20 million for negligence and breach of
contractual and common law duties in relation to the conduct of the
auction. Although the pre-action letter was focused on allegations
of negligence and breach of duty, the letter also made allegations
of duress, bad faith and illegality, and that Bonhams had acted in
its own interest, rather than in the interests of MRL. Following
negotiations, the parties entered into a settlement agreement by
which MRL released the defendants from “all claims, causes of
action, rights or other interests (whether present, actual,
prospective or contingent, whether or not known to the Parties at
the date of [the] Agreement…)”. Crucially, the definition of
‘claims’ did not explicitly refer to claims of fraud or
conspiracy.

The proceedings

MRL subsequently issued proceedings against the defendants,
arguing that new information had come to light which revealed that
the defendants were party to a conspiracy to injure MRL by unlawful
means and that the settlement agreement had not settled any claims
in dishonesty, fraud or conspiracy. The defendants made summary
judgment and strike out applications. At first instance ([2021] EWHC 2452 (Ch)), the High Court (Judge
Keyser QC) dismissed all the principal claims. MRL appealed the
decision to the Court of Appeal, principally arguing that the judge
had failed correctly to apply the “cautionary principle”
that, in the absence of unequivocal language, the court should
hesitate to infer that a party wished to surrender rights of which
it was and could not have been aware.

The Court of Appeal’s decision

Construction and the “cautionary
principle”

In dismissing the appeal, Lord Justice Phillips rejected the
argument that Judge Keyser QC had taken an
“overly-literalist” or “otherwise wrong”
approach to interpreting the construction of the settlement
agreement. The initial decision followed a detailed and careful
consideration of the wording of the relevant release clauses, as
well as the factual matrix, whereby the judge had reached the
correct conclusion that the settlement agreement covered all claims
relating to the subject matter in existence as at its date,
including those now alleged by MRL. In reaching his decision, the
judge had proper regard to the nature and quality of the drafting
and had full regard to the “cautionary principle”. The
judge ruled that the widely worded release of all claims, no matter
the cause of action, arising out of the dispute would include
claims that the defendants’ actions amounted to deliberate and
dishonest breaches of fiduciary duty in combination with
others.

Sharp practice

MRL further argued that the release should not be given effect
as 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. In those circumstances, MRL argued that the
defendants’ ability to have sought release of all claims
amounted to “sharp practice” which was an “affront
to the conscience of the court”. The judge ruled that this was
not a case where the defendants knew that MRL had claims of which
it was unaware and took advantage of that ignorance. MRL had chosen
not exhaustively to investigate the background to the wrongdoing
and had instead decided to settle the claims. On the contrary, it
would be 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.

Where does this leave parties wishing to settle their
disputes?

This ruling reflects the Court’s willingness to give effect
to clearly worded agreements in general – not only in the
sphere of settlement. Parties settling disputes should bear in mind
that wide releases of the type used here (“all claims”
relating to the subject matter of the dispute) can operate to
release unknown claims, even those in fraud, notwithstanding the
absence of express words to that effect. The Court also noted that
the agreement contained an entire agreement clause which excluded
claims in fraudulent misrepresentation. Whilst that clause had no
bearing on the scope of the settlement, the court said that its
inclusion demonstrated that the parties could have used a similar
clause to exclude fraud from the scope of the settlement had that
been their intention.

It is therefore important carefully to consider – and then
clearly document – what is and what is not being released as part
of a settlement, to avoid unintentionally settling valuable claims. To
avoid the need for lengthy and protracted litigation, parties
should consider including express wording in release clauses to
ensure that there is no ambiguity in relation to what claims, if
any, can be brought in the future. This may, for example, involve
the use of clear wording in release clauses which explicitly grants
or denies contracting parties the future right to bring claims on
the basis of either fraud, dishonesty or unlawful means conspiracy
so as to draw a clear line in the sand.

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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.