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Court of Appeal reviews authorities on the interpretation of settlement agreements

On 21 December 2022, the Court of Appeal handed down a judgment reviewing the leading authorities on the interpretation of settlement agreements, in particular as regards the release of claims in fraud, dishonesty or conspiracy.

In Maranello Rosso Ltd v Lohomij BV & Ors [2022] EWCA Civ 1667, the Claimant (MRL) brought a £70 million conspiracy claim relating to the purchase and sale of a world-renowned collection of classic Ferraris.

MRL acquired the collection in 2014, using financing provided by the First Defendant (Lohomij), and subsequently entered into agreements with the Second and Third Defendants (Bonhams) to sell the cars at auction. Bonhams sold cars from the collection at various venues and dates. MRL was disappointed with the sales, and failed to make repayments to Lohomij. MRL then made various allegations about the conduct of Bonhams and Lohomij in relation to the purchase and sale of the collection. In July 2015, Bonhams, Lohomij and MRL entered into a settlement agreement in respect of MRL’s complaints.

In May 2020, MRL issued proceedings making a serious and wide-ranging allegation of conspiracy against Lohomij, Bonhams, and their agents which spanned the period before and after the settlement agreement. MRL alleged that the Defendants had set out to injure it in relation to the purchase and sale of the collection, and had conspired to use a large number of unlawful means including breach of contract, breach of fiduciary duty, and procurement of breach of contract. MRL also relied on each of the alleged unlawful means as a free-standing cause of action.

The Defendants applied to strike out the proceedings and/or for summary judgment, on the basis that the claims had been compromised and released by the settlement agreement and/or were incoherent on their face and/or had no real prospect of success in view of the contemporaneous documents.

His Honour Judge Keyser QC, sitting as a Judge of the High Court, held that, as a matter of construction of the settlement agreement, the claim in conspiracy, and all of the alleged free-standing causes of action relating to the period before the settlement agreement, had been compromised and released by the agreement. The Court further held that all of the alleged free-standing causes of action relied on by MRL in the periods both before and after the settlement agreement were incoherent and/or had no real prospect of success in the light of MRL’s own pleaded case and evidence served for the application, and the contemporaneous documents. The Court therefore struck out all the claims  ([2021] EWHC 2452 (Ch)).

Following a 3-day hearing, the Court of Appeal upheld that decision. Phillips LJ (giving the leading judgment) held (in summary) that the usual principles of contractual construction apply to settlement agreements and there is no rule of law that express words are required to release claims in fraud (see [35]-[45]). The Court rejected MRL’s assertion that the first instance Judge had adopted an overly literalist approach to construction.

Phillips LJ also addressed the authorities concerning the ‘sharp practice’ principle, which may prevent a party from relying on a settlement agreement if it has sought, by way of sharp practice, to exclude liability for a claim which it knew about but which was unknown to the other party (see [61]-[67]). At paragraph 67, obiter, Phillips LJ observed that a finding that a settlement agreement on its true construction covered unknown claims in fraud would seem to preclude a finding that a party was guilty of sharp practice in relation to the existence of such claims.

The Court also addressed and rejected MRL’s argument that, in respect of post-settlement agreement causes of action, the first instance judge had inappropriately undertaken a “mini-trial”. The judgment in this regard helpfully illustrates the boundary between a legitimate summary judgment decision, and an impermissible “mini-trial”. The first instance judge had reached a conclusion that MRL’s case, in respect of a particular allegation, was “internally inconsistent, factually incorrect, fanciful and developed subsequent to its amended case in order to salvage an untenable position”: [76]. The judge below was “fully entitled, for the reasons he gave” to reach this conclusion; this was a factual assertion “which was capable of being rejected on a summary basis” and the Judge was “not bound to abandon his critical faculties”: [77].

The Court therefore dismissed the appeal. The judgment is available here.

Simon Colton KC acted for Lohomij and the Fourth Respondent, instructed by Morrison & Foerster (UK) LLP.

Orlando Gledhill KC and Oliver Butler acted for Bonhams and the Sixth Respondent, instructed by RPC.