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13/09/2016

Litigation: High Court finds that settlement agreement covers fraud-based claims

Background

Parties to litigation often choose to settle their disputes to avoid the time, costs and stress that they can encounter by embarking on, or continuing with, court proceedings.  Whether a dispute is settled through mediation or simply by correspondence, when the parties enter into a binding settlement agreement it is very important to know which claims are compromised by the agreement and which, if any, survive for possible later action.  The interpretation of the terms of settlement agreements, as with any contract, hangs on the court’s consideration of the parties’ intentions. 

In Tchenguiz & Others v Grant Thornton UK LLP & Others [2016] EWHC 865 (Comm), one of many reported decisions which have arisen from the winding-up of the Icelandic bank, Kaupthing Bank HF (“Kaupthing”), the High Court considered the effect of a settlement agreement. 

The fifth defendant, a member of Kaupthing’s Winding Up Committee, was alleged to have told the English Serious Fraud Office (“SFO”) during its investigation that the claimants had deceived Kaupthing in connection with a number of loans.  Mr Tchenguiz and other related parties had also brought proceedings against some of the parties involved in Kaupthing.  The SFO investigation was subsequently dropped, and the proceedings were settled by the parties entering into a settlement agreement which released the defendants from various claims (“the Settlement Agreement”). 

However, the claimants later went on to bring further legal proceedings against, amongst others, the fifth defendant, alleging wrongdoing in relation to his role in the SFO investigation and his encouragement of it.  The fifth defendant was not a party to the Settlement Agreement but he was entitled to rely on it. 

Analysis

The issues

The fifth defendant applied for summary judgment on the basis that the Settlement Agreement barred the claimants from bringing the claim.  The claimants considered that the claims in question were not released, and that even if they were wrong about that and the released claims in the Settlement Agreement included the present case, the fifth defendant should not be entitled to rely on the Settlement Agreement as a result of “sharp practice”.  It was alleged that the fifth defendant knew that the claimants had a claim at the time of the Settlement Agreement, whereas the claimants did not. 

The court was therefore tasked with interpreting the terms and scope of the Settlement Agreement.  The releases of claims set out in the Settlement Agreement were wide-ranging, and included:

  •  any claim arising out of or in connection with the dispute (as defined in the Settlement Agreement), whether known or unknown, howsoever and whenever arising, and whether presently existing or arising in the future; and
  •  any claim arising out of or in connection with the Tchenguiz parties’ Icelandic and London claim, investigations carried out by any authorities in relation to the Tchenguiz parties or the affairs of Kaupthing or its counterparties, and the provision of any documents or information to any authority.

The parties to the Settlement Agreement were legally represented at the time that it was entered into. 

The court referred to the guidance in BCCI v Ali & Others [2001] UKHL 8 in which it was held that the parties to a compromise could settle claims which were unknown, and of which they were unaware, provided that the wording of their agreement was sufficiently clear to evidence that intention.  The courts will be very slow to infer an intention to settle such claims in the absence of clear language demonstrating that intention. 

The Decision

Mr Justice Knowles held that the claims were released by the Settlement Agreement, so the fifth defendant was entitled to summary judgment and the claimants could not pursue the claims any further.  He found that there could be no doubt that the express wording of the agreement showed the parties’ intention to compromise matters concerning the SFO investigation.  The Judge also went on to find that although a party to a settlement agreement would not, typically, agree to the release of fraud-based claims if asked, the parties to this Settlement Agreement must have had in mind the release of allegations of misconduct and/or deliberate wrongdoing when they entered into the agreement, as the circumstances of the dispute were such that it was difficult to envisage any other basis of claim against the fifth defendant arising from the SFO investigation.  The parties to the Settlement Agreement had referred to “unknown” claims as well as those within their knowledge, and this wording was wide enough to encompass the claims brought by the claimants in the present case, without the court having to infer a particular meaning. 

In relation to the claimants’ argument that the defendants’ sharp practice prevented them from relying on the strict interpretation of the Settlement Agreement, Mr Justice Knowles considered that the court’s comments on this issue in BCCI v Ali & Others [2001] UKHL 8 only applied to general releases.  In this case, the terms of the Settlement Agreement specifically released the types of claim in question (i.e. those arising from investigations by authorities, and provision of information to authorities), so the alleged sharp practice was immaterial.

Comment

Mr Justice Knowles’ decision is not ground-breaking, and was decided in accordance with established legal principles and relevant authorities.  However, it is unusual for Settlement Agreements to cover fraud-based claims, particularly when it is alleged that one of the parties to the agreement knew of the claims but the other did not.  It is therefore the outcome, rather than the reasoning, of this case which is of interest, and it demonstrates that careful drafting of settlement agreements is key, as the courts will continue to be slow to infer the release of fraud-based claims in the absence of clear wording showing the parties’ intentions. 

If you would like advice on settling a claim, or advice on the meaning of an agreement which has already been entered into, please contact Clare Leverton on clare.leverton@howespercival.com.

© Howes Percival LLP