Judicial insights on comprehensive release clauses

In-depth analysis

The Court of Appeal has avoided setting "a dangerous precedent" by holding that release clauses containing wide-ranging terms under a settlement deed can cover past and future fraud claims.

Background

Mr and Mrs Riley (the Rileys), directors of Riley Holdings Limited (RHL) and its subsidiary Nottingham Design Agency, brought a claim against National Westminster Bank Plc (NatWest) for fraudulent misrepresentation stemming from a series of loans provided by NatWest to their building development company in 2005. The loans were consolidated into an on-demand loan in 2008 for £32 million, referenced to LIBOR (the Facility).
Between 2009 and 2012, NatWest allegedly made representations about restructuring the Facility to support the Rileys business after transferring the banking connection from mainstream banking to NatWest's Global Restructuring Group. The Rileys asserted that by doing this and classifying RHL as a "Non-Core" customer, NatWest aimed to place RHL into administration.
As a result of the alleged fraudulent misrepresentations, the appellants claimed they did not seek alternative refinancing options and ultimately faced insolvent administration when NatWest demanded repayment in March 2012. The company was later placed into administration in April 2012.
Information around the "fraudulent misrepresentations" surfaced some time after the alleged misrepresentations and the Rileys raised grievances about NatWest’s conduct leading up to the insolvency, centred around the assertion that 'RHL was forced into an insolvency process when it was not insolvent'.
In November 2014, the Rileys and NatWest entered into a settlement deed intended to resolve all disputes.

Decision at first instance

The Judge at first instance found that the terms of the settlement deed were wide-ranging in nature and made reference to:

"any and/or all actions, claims, rights, demands, disputes and set-offs…"
"whether or not presently known to the Parties or the law……."
"that [it] may have or hereafter can, shall or may have against [NatWest] or any "connected party"
"arising out of or in connection with (i) the Facility Agreements, the Personal Guarantee or the Legal Charge; (ii) NDA or (iii) Riley Holdings and all properties owned or formally owned by Riley Holdings" (together the Released Claims).

The deed contained an obligation not to bring "any proceedings whatsoever" in any jurisdiction "arising out of or in any way connected" with the definition of Released Claims as well as an entire agreement clause which excluded claims for non-fraudulent misrepresentation.

The Judge at first instance held that as a result of the nature of the terms of the settlement deed, it was clear that the parties wanted to bring an end to the relationship and by the Rileys paying a greatly reduced sum to NatWest in signing the deed, the benefit of that action could not be dismissed.

Appeal

The Rileys appealed against the reverse summary judgment granted to NatWest in 2023. The focus of the appeal was on whether the broad release clause should prevent claims after the settlement deed was entered into being brought for fraudulent misrepresentation. The Rileys also attempted to invoke the 'equitable sharp practice' doctrine, arguing that NatWest's alleged fraud should prevent reliance on broad release terms where one party was ignorant of potential claims at settlement.

Principles

The Court of Appeal's judgment showed that in considering release clauses within settlement deeds, several principles will be applied by the courts:

principles of contractual construction; no special rules will apply just by the nature of it being a deed of release
the parties' intention from an objective reading of the contract as a whole must be looked at
words used within the contract must be given their ordinary meaning unless the context suggests otherwise
the factual background may be considered alongside rival constructions but the focus will primarily be on the objective language meaning and
per Lord Bingham's 'cautionary principle' in Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, releases are not readily assumed to cover fraud or dishonesty claims without express wording suggesting such coverage.

On the "equitable sharp practice" argument, reference was made to Maranello Rosso Limited v Lohomij BV [2022] EWCA Civ 1667 where it was similarly held that there would be 'no scope' for the appellants to rely on the equitable sharp practice doctrine where unknown claims which extended to fraud were settled before being brought into existence.

Decision

The Court of Appeal dismissed the appeal and upheld the decision that a settlement agreement should encompass all present or future claims if drafted broadly and clearly, whether known or unknown at the time of such agreement, and therefore promoting the end of the dispute. It was found to be clear that both parties intended resolution beyond mere breach of contract or negligence claims and that it was not the court's role to frustrate the intentions of parties. The Court of Appeal agreed with the Judge's conclusion on the "cautionary principle", that on ordinary principles of construction, fraud was included in the release and there was no rule of law that it should therefore be determinative and that the release was framed in terms of subject matter, therefore no express terms were needed to incorporate claims in fraud.

Despite acknowledging potential deceit by NatWest underlining its actions by favouring self-interest at Riley’s expense, the judge determined that entering into such a wide-ranging settlement agreement precluded reopening those issues under new fraud allegations that surfaced later. There were strong policy reasons why settlement agreements should be upheld and allowing the re-opening of issues would set a "dangerous precedent" where significant benefits had already been obtained under the agreed terms. Further, the absence of express reference to fraudulent claims being released, was not determinative.

This is an interesting decision in which the court was required to consider public policy reasons on both sides; on the one side, the fact that a negotiated and agreed settlement agreement should be upheld where the parties intentions in entering into it are objectively ascertained, and that where a party agrees to the release of present or future claims, known or unknown, this may include potential causes of action of which that party is unaware; and on the other side, that where one party was a victim of an unknown fraud, which was in fact concealed from that victim, a broad release such as that in the settlement agreement discussed in this case, should not stop the victim from claiming for that unknown and, prior to entry into the settlement agreement, unascertainable, fraud.

Looking ahead, the Rileys are seeking permission to appeal further to the Supreme Court, but in the meantime and when considering the release of claims following this case, it would seem sensible, where fraud claims are to be excluded from the release, to reserve the right to claim for the same and to expressly carve them out of the release in clear and unambiguous terms.