The Court of Appeal has ruled that a settlement deed compromises any further claims, including potential claims in fraudulent misrepresentation.
The leading judgment was given by Lord Justice Bean in Kevin Ralph William Riley & Anor v National Westminster Bank Plc (NatWest) [2024] EWCA Civ 833.
Background Facts
The Rileys were directors of Riley (Holdings) Limited (RHL), and Nottingham Design Agency (NDA), a subsidiary of RHL.
In 2005 NatWest made a series of loans to RHL, which totalled £26.5 million. On 9 December 2008, the bank facilities were replaced by an on-demand loan of £32m referenced to LIBOR (the 2008 facility).
RHL became insolvent and the Rileys allege that the insolvency came about as a result of fraudulent misrepresentations made by the bank. They say that the loans were made under false representations that the bank was trying to help their business, but in reality the bank was planning to get out of the investment and acquire the assets. Instead of helping RHL return from its Global Restructuring Group, NatWest had already classified RHL as a ‘Non Core’ customer which indicated that they had already determined to run down the business and end the relationship.
At first instance, NatWest was awarded reverse summary judgment on the Rileys’ claim against it for fraudulent misrepresentation. The judge decided that the claims against the bank had been compromised and released by a Settlement Deed of 12 November 2014.
The Settlement Deed
The terms of the settlement agreement were in very wide-ranging terms, which indicated that the parties wanted to draw a line under the relationship.
In addition, the Rileys paid a significantly reduced sum to the bank, by signing the agreement, and that benefit could not be ignored.
The Assignment of the Settlement Deed
When RHL became insolvent, it passed to the Duchy of Lancaster because the business became ‘ownerless property’, which by law passes to the Crown.
In October 2022, by a deed of assignment, the benefit of a claim in misrepresentation and deceit was assigned from the crown to Mr Riley.
The Riley’s argument was that the signatures to the settlement deed were Mr and Mrs Riley, and RHL was not a party to the deed. The current claim was brought on behalf of RHL and so RHL is not bound by the settlement deed.
However, the appeal judge said that the whole point of the settlement deed was that the Rileys would pay a reduced sum in final settlement of their personal liability to the bank. They cannot undermine the finality of at arrangement, and the judge held that they sought to do that by bringing the claim on behalf of RHL.
The Contractual Release of Fraud Claims
The Rileys said that the ‘equitable sharp practice’ doctrine prevented the bank from relying on its own wrongdoing. They said that the bank had committed a fraud on them, of which the Rileys had no knowledge. Their argument was that it was ‘sharp practice’ for the Bank, having knowledge of the fraud, to sit by while the Rileys entered into an agreement discharging the liability of the Bank.
At first instance it was held that the Rileys settled unknown claims which extended to fraud, so there was no scope to find that the bank was guilty of sharp practice in relation to the existence of such a claim.
On appeal, the Rileys argued that a generally worded release in the agreement should not preclude the victim from being able to pursue their claim in fraud where facts are subsequently identified which enable such a claim to be brought.
The appeal judge considered recent authority on the contractual release of fraud claims, which was analysed in Maranello Rosso Limited v Lohomij BV [2022] EWCA Civ 1667.
That judgment held that “where a release is construed as covering unknown claims in fraud, dishonesty and conspiracy relating to a defined subject matter, such construction entails a finding that the parties mutually intended to settle such claims.”
It is not necessary for the word ‘fraud’ to be used specifically.
Decision
Mr Justice Bean said that Freedman J (the judge at first instance) put the case in a nutshell when he said that allegations of deliberate wrongdoing formed the backdrop to the settlement deed. In essence, the Rileys had been making allegations of dishonest conduct against the bank for years. They willingly settled ‘unknown’ claims in the context of that background.
Mr Justice Bean did accept the submission on behalf of the Rileys that there are strong policy reasons why a generally worded release may not preclude the innocent victim of fraud from pursuing the claim. That is particularly the case because a fraud is typically concealed, and it may not be reasonably capable of being discovered before the settlement agreement was reached.
However, he balanced that position with the view that there are also strong policy reasons why settlements should be upheld. It is of the nature of a settlement agreement which covers all present or future claims, known or unknown, that a party may be giving up a potential cause of action of which he is not aware.
The judge pointed out that the Rileys believed that they had been deceived by the bank, and that the bank had engaged in a “thinly disguised ploy” to further its own interests at its customer’s expense. Nevertheless, they freely entered into a settlement agreement which extended to unknown claims. Lord Justice Bean said that only “dangerous precedent” would be set in allowing them to re-open that bargain.
The appeal was dismissed, but lawyers for the Rileys are instructed to seek permission to appeal to the Supreme Court.
