Ferraris, frauds and settlement agreements
In two recent judgments, Maranello Rosso Ltd v Lohomij BV & Ors [2022] EWCA Civ 1667 and ED & F Man Capital Markets Limited v Come Harvest Limited [2022] EWCA Civ 1704, the Court of Appeal has provided significant guidance on the principles applicable to the interpretation of settlement agreements.
Maranello
Background
The claim was brought in relation to the auction of an extremely valuable collection of cars including vintage Ferraris. The sale did not generate the returns expected and the claimant brought a claim including for negligence and breach of duty against the auction house. The parties entered into a settlement agreement which included a clause that released the defendants from “all and any Claims”. “Claims” was very widely defined under the agreement but did not specifically refer to claims in fraud or dishonesty. The claimant subsequently issued new proceedings against the defendants alleging unlawful means conspiracy and wrongdoing before and after the settlement. The case turned on whether the settlement agreement compromised the claimant’s new claims.
Decision
The Court of Appeal upheld the decision of the High Court. The “cautionary principle” means that, in the absence of express words, a court will not readily conclude that a reasonable person would understand a release to refer to fraud or dishonesty claims. However, the usual principles of contractual construction applied to settlement agreements and there is no set requirement for express wording to release claims in fraud or dishonesty. The object of the Court is to give effect to what the parties intended and here the parties could have easily excluded fraud from the scope of the provisions in the agreement had they intended to do so.
The Court took into account the commercial and factual context in which the dispute had been settled which included the allegations and accusations already made by the claimant. It applied the test referred to in Satyam Computer Services v Upaid Systems Limited [2008] EWCA (Civ) 487 that if the parties, on entering the settlement agreement, had been asked whether the claimant could thereafter bring claims including as part of an unlawful means conspiracy claim, the answer would surely have been that they could not.
ED & F
Background
The claim related to forged warehouse receipts for nickel, purchased by the claimant from two Hong Kong companies (D1 and D2) for a total of US $284m. The claimant, unknowingly, then sold the forged receipts on to ANZ Bank (the sub-sales) for US $291m. On discovery of the forgery, the claimant reached a settlement agreement with ANZ for a sum which was less than the total value of the sub-sales. The claimant subsequently brought several claims (including for deceit and conspiracy to injure) against the defendants. The parties disagreed on the measure of loss with the claimant asserting that its total loss suffered (discounting its US $7m profit) was the amount which it had paid to the defendants (US $284 million). The defendants held that the true measure of MCM's loss consisted of its liability to ANZ, which the claimant had succeeded in reducing under the settlement agreement with ANZ. The key issue before the Court of Appeal was whether the settlement agreement between the claimant and ANZ could be taken into account when assessing the claimant’s loss. The claimant argued that the settlement agreement was res inter alios acta (or, as the Court translated, “none of your business”), and that it was entitled to recover the amount it had paid for the forgeries.
Decision
The Court of Appeal dismissed the defendants’ appeal and upheld the first instance decision on quantum, but for alternative reasons.
The Court held that it should follow a two-stage approach:
- identify the relevant transaction which has caused the claimant to acquire the property in question; and
- identify the benefits received as a result of that transaction.
As to (i), the Court of Appeal found that: (1) the claimant’s transaction with the defendants, (2) the claimant’s transaction with ANZ and (3) the settlement agreement were together one “single transaction, in effect a package deal”.
As to (ii), the Court held that the transaction taken as a whole left the claimant “with a liability to ANZ of c. US $291 million” against which the claimant’s profit would be offset.
The Court held that while the settlement agreement was, in principle, relevant, it did not, in the event, avoid or reduce the claimant’s loss and was not a collateral benefit to the claimant. Rather, applying Mobil North Sea Ltd v PJ Pipe & Valve Co [2001] EWCA Civ 741, it represented a “reorganisation of the terms upon which the parties to the agreement were going to conduct litigation against the fraudsters.” The settlement agreement did not serve to mitigate the losses suffered by the claimant, rather it sought to define the terms on which the claimant would seek redress against the defendants.
What are the key takeaways from the two decisions?
- Maranello provides guidance to practitioners on the interpretation of settlement agreements and specifically on whether a settlement agreement will release claims in fraud, dishonesty or other wrongdoing where it does not specifically refer to these claims.Parties should consider when drafting a settlement agreement if they wish to expressly provide that future claims arising out of fraud, dishonesty or conspiracy are released under the terms of that agreement. Where the parties do not expressly agree terms to that effect, conducting the unitary exercise of construing the settlement agreement may still lead to the conclusion that claims in fraud and dishonesty are also released.
- ED & F considered the Court’s assessment of quantum for unlawful means conspiracy in circumstances where the claimant has settled its liability with a third party and then sought to recover its losses from a defendant. Parties are reminded that a settlement agreement concluded with a third party is, in principle, relevant to the assessment of a claimant’s loss, but will not necessarily serve to “avoid” the claimant’s loss and thus reduce the defendant’s liabilities to the claimant. The courts will consider any collateral benefits received by the claimant as well as the purpose of a settlement agreement in deciding whether the settlement mitigates the claimant’s loss or whether it serves an alternative purpose. Parties are encouraged to carefully consider the circumstances in which a settlement is agreed with a third party to ensure that it does not preclude or limit any future recovery of liabilities from a defendant.
With thanks to Mike Gledhill for his assistance in preparing this post.