The finality of settlement agreements and the interplay with allegations of fraud

Speed read

A settlement agreement was found to have released all claims between the parties, including unknown claims extending to fraud, and claims derived from a non-party to the settlement by way of assignment.

Key takeaways

1. Normal rules of contractual interpretation apply to settlements and release of claims.
2. There is no rule of law that express words are always, or even generally, required to release a claim in fraud – the factual and commercial context will be of significant importance.
3. The nature of a settlement agreement which covers all present or future claims, known or unknown, is that a party may be giving up a potential cause of action of which they are not aware.
4. When entering into a settlement agreement, careful thought should be given to the words used and the full extent of the potential claims being released, known and unknown, and between which entities.

Background

In 2005, the National Westminster Bank Plc (‘the Bank’) had made a series of loans to a company (RHL) controlled by Mr and Mrs Riley (R) to fund a residential development. In 2008, the Bank facilities were replaced by an on-demand loan referenced to LIBOR and, in 2009, RHL was transferred from mainstream banking to the Bank's global restructuring group. R stated that, between 2009 and 2012, the Bank repeatedly represented that it intended to restructure the 2008 facility and to return RHL to mainstream banking. In 2012, the Bank demanded repayment of the loan and then placed RHL into administration.

R set out their complaint against the Bank, via solicitors, alleging that the Bank engaged in "irrational, precipitous decisions, misstatements, malpractice and poor customer service", and “negligent and reckless conduct”. 

In November 2014, the total debt owed by R to the Bank under the facility agreement and personal guarantee was circa £2.7m. In return for reduced liability to the Bank, R entered into a Settlement Deed in “full and final settlement” of all "claims ... whether or not presently known to the Parties or the law [that they] may have or hereafter can, shall or may have ... against the Bank" ….”arising from, out of or in connection with” the various agreements, legal charges, personal guarantees, or RHL. R also agreed not to commence any proceedings “arising out of or in any way connected with” those settled claims.

The Settlement Deed also included an “entire agreement” clause which stated: "The Parties expressly agree that they will not have any right of action in relation to any statement or representations made by or on behalf of any other Party in the course of any negotiations which preceded the execution of this deed, unless such statements or representations were made fraudulently".

RHL, which was at this point still in administration, was not a party to the Settlement Deed. 

In 2016, RHL was dissolved and R was assigned the benefit of any claim that RHL had in misrepresentation and deceit against the Bank, as trustee for the purpose of applying any proceeds for the benefit of the creditors of RHL. R commenced proceedings against the Bank, who in turn applied for reverse summary judgment. The High Court held the claims against the Bank had been compromised and released by the Settlement Deed.

R appealed, asserting in summary, that:

1. It was unconscionable for the Bank to rely on the release in the Settlement Deed in relation to the fraud claims (referring to the ‘sharp practice principle’);
2. The ‘sharp practice principle’ is a developing area of the law and ought not to be determined on a strike out/summary judgment application on assumed facts – instead the argument should proceed to trial;
3. The release clause in the Settlement Deed should have been construed as not including the claims in the proceedings;
4. The Bank’s alleged fraud induced the Settlement Deed - inducement is a question of fact which does not solely depend on the interpretation of the Settlement Deed; and
5. The RHL assigned claims were not released in the Settlement Deed, RHL not being a party to it.

Decision of the Court of Appeal

The claimants appeal was dismissed and reverse summary judgment was granted in favour of the Bank.

Reliance on Settlement Deed

The judge concluded that allegations of deliberate wrongdoing formed the backdrop to the Settlement Deed and as such the claimants were aware, at the time of entering the agreement, of the possibility that they were releasing claims in fraud, the full extent of which were unknown.

There were strong policy reasons why, where one party was an innocent victim of a concealed fraud, which was not reasonably capable of being discovered before a settlement agreement was reached, a generally worded release might not preclude the innocent victim from pursuing the claim in fraud. However, there were also strong policy reasons why settlements should be upheld. It was the nature of a settlement agreement which covered all present or future claims, known or unknown, that a party might be giving up a potential cause of action of which they were not aware[1].

Application of sharp practice principle

It was not unconscionable for the Bank to rely on the release as having settled claims in fraud. Where a release was construed as covering unknown claims in fraud relating to a defined subject matter, such construction entailed a finding that the parties mutually intended to settle such claims. The judge at first instance was right to find that R had chosen not to investigate the full background of the claims but had chosen to settle all claims for valuable consideration. Having settled unknown claims which extended to fraud, there was no scope to find that the Bank was guilty of sharp practice in relation to the existence of such a claim and/or the entering into the Settlement Deed, Maranello Rosso Ltd v Lohomij BV and Ors [2022] EWCA Civ 1667 followed.

RHL assigned claims

The terms of the Settlement Deed barred any claims which R “may have or hereafter can, shall or may have against the Bank”. This wording clearly included claims that were assigned from RHL to R after the date of the Settlement Deed. This was reinforced by RHL being expressly referred to in the settlement provisions and by R’s agreement not to commence any proceedings “arising out of or in any way connected with” the settled claims. The point of the Settlement Deed was that R would pay a significantly reduced sum, over an extended period, in full and final settlement of their personal liability to the Bank, and would not and could not reverse or in any way undermine the finality of that arrangement by bringing subsequent proceedings against the Bank in relation to RHL.

Commentary

When drafting settlement agreements, it is important to be mindful of the potential impact of terms stating that future unknown claims are being settled and the impact that the sharp practice doctrine may have on such terms. The case is a useful reminder of the importance of the context of a settlement agreement, when it comes to its interpretation.

This is also a useful example of when summary judgment can be appropriate, even where a developing area of law is involved and there may be arguments about the extent to which factual matters need to be analysed in order for the matter to be determined.

The decision also provides helpful discussion on the threshold for pleading fraud, as set out in the Code of Conduct of the Bar of England and Wales at paragraphs [71] and [85] to [88] of the judgment.

[1] Maranello Rosso Ltd v Lohomij BV [2022] EWCA Civ 1667, [2022] 12 WLUK 328 and Bank of Credit and Commerce International SA (In Liquidation) v Ali (No.1) [2001] UKHL 8, [2002] 1 A.C. 251, [2001] 3 WLUK 39 followed.