How you frame release clauses in settlement agreements can be a source of trouble, as the Appellants in Riley and anor -v- National Westminster Bank Plc [2024] EWCA Civ 833 found out in  this important judgment regarding the construction of settlement agreements in the context of fraud claims. The Court of Appeal unanimously upheld the High Court’s decision to grant the Defendant’s application for strike out/reverse summary judgment against the Claimants, finding that claims in fraud, though not expressly compromised by the settlement deed, were nonetheless caught by the very broad wording of the release clause.

Key background facts

Mr and Mrs Riley, the Appellants/Claimants, had brought a claim against National Westminster Bank (“NatWest”) for fraudulent misrepresentation.

In 2005, NatWest had provided a series of loans to a building development company owned and controlled by the Rileys, Riley (Holdings) Limited (“RHL”); those loans were for a substantial sum (£26.5m). In 2008, the NatWest facilities were replaced by an on-demand loan of £32m and then, in the latter half of 2009, the management of RHL was transferred from mainstream banking to NatWest’s Global Restructuring Group (which dealt with distressed borrowers and has been subject to various FCA investigations which concluded, amongst other things, that the group did not provide the support that customers ought to have expected). The Rileys claimed that, between 2009 and 2012, representatives of NatWest repeatedly made representations that it would restructure RHL’s banking facility and assist in rehabilitating RHL while in fact pursuing a different agenda culminating in NatWest placing RHL into administration and it being struck off.

In 2013, Nabarro LLP wrote a series of letters to NatWest on behalf of the Rileys; those letters included wide ranging accusations as to NatWest’s conduct during the period prior to RHL’s strike off. Some quotes from those letters set out in the judgment included:

• “the inappropriate and cavalier way in which RBS, as agent for [NatWest] has dealt with our clients culminating in the administration of [RHL]”;
• “irrational, precipitous decisions, misstatements, malpractice and poor customer service”;
• “irresponsible, negligent and reckless conduct” [by NatWest in relation to the value of a subsidiary of RHL]; and
• “a thinly disguised ploy by RBS/NatWest to take on its books, an incredibly profitable asset at a cut price.”

In November 2014, a settlement deed was entered into by the Rileys and NatWest (the “Deed”), by which NatWest agreed to accept a heavily reduced sum in relation to the loans in return for the Rileys releasing it from “any and/or all” claims “whether or not presently known”.

Subsequently, in 2016, the FCA published the ‘Promontory Report’ which the Rileys used as the basis for asserting that a fraud had been committed against them by NatWest which they were not previously aware of. The Rileys sought to pursue fresh proceedings against NatWest in light of this new information, notwithstanding the existence of the Deed. 

The release clauses

The Deed stated as follows:

“7.1 The terms of this Deed and payment of the Settlement Sum are in full and final settlement of, and each Borrower hereby releases and forever discharges, any and/or all actions, claims, rights, demands, disputes and set-offs or other matters, whether in this jurisdiction or any other, whether or not presently known to the Parties or the law, and whether in law or equity, that it may have or hereafter can, shall or may have against the Bank or any Connected Party of the Bank arising from, 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 owner or formerly owned by Riley Holdings (collectively the “Released Claims”).

7.2 The Borrowers agree that they will not bring or commence any proceedings whatsoever in any jurisdiction against the Bank or any Connected Party or of the Bank arising out of or in any way connected with the Released Claims save for the purposes of enforcing their rights under this Deed.”

Barred from bringing the claim – the decision of the lower court

In the High Court in 2023, Mr Justice Freedman found in favour of NatWest, striking out the Rileys’ claims. The judgment of the High Court helpfully sets out the principles that apply in construing release clauses:

1. Usual principles of construction are to be applied to deeds of release; there are no special rules.
2. The Court is required to ascertain the intention of the parties from the contract as whole, giving the words “their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction as known to the parties.”
3. The Court must consider the objective meaning of the words used and, depending on the quality of the drafting, give more or less weight to the wider context when considering that objective meaning.
4. It does not matter whether the Court considers the factual background, the rival constructions or the meaning of the language first. The process should be iterative.
5. The “true question” is “whether, on its proper construction, the release applies to claims of the type made in the proceedings”.
6. Lord Bingham’s “cautionary principle” from Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 is not a strict rule of law but should be considered, namely that: “in the absence of express words one will not readily conclude that a reasonable person would understand a release to refer to fraud or dishonesty claims.”

Mr Justice Freedman found that the terms of the Deed as set out above were extremely wide-ranging and drafted in clear and precise terms. He found that deliberate wrongdoing framed the parties’ entrance into the Deed, as is apparent from the abovementioned correspondence sent by Nabarro LLP. Even assuming that certain specific details were not known to the Rileys at the time of agreement, it was clear from the wider circumstances in which the Deed was entered into that it was not intended to be limited to claims for breach of contract and negligence only. It went further than that. 

The Judge also found that the parties had clearly intended to bring the dispute to a final conclusion: NatWest heavily discounted the amounts to be repaid while also incorporating a lengthy timeframe and a non-penal rate of interest. The lack of express wording in respect of fraud claims in the release clauses was not material when examining the circumstances and intention of the parties holistically.

“Sharp practice”

The Rileys had also postulated that the equitable “sharp practice” doctrine meant that NatWest could not rely on its own wrongdoing, i.e. knowledge of the fraud, to enter into a Deed which released it of all liability, all the while knowing the Rileys were agreeing to settle matters without being aware of the extent of claims available to them.

In the High Court, the Judge relied on the decision of Lord Hoffman in Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 and his comments therein on sharp practice, which laid down the principle that:

1. Where Party One releases Party Two from all claims, whether known or unknown at the time of the settlement agreement, and Party Two knows of a claim available to Party One and Party Two knows Party One is not aware of that claim, it would be unconscionable to allow Party Two to rely upon that release in general terms.
2. However, if the context shows both parties intended a general release for good consideration of rights unknown to both of them, there is nothing unfair in those circumstances.

Accordingly, the Judge found that the sharp practice argument had no real prospect of success; it would be unconscionable to allow the Rileys to escape their agreement to release NatWest given the subject of their complaints was well-known to both parties in the run up to signing the Deed. The factual context restrained the Rileys from relying on the doctrine. 

Other matters of note

Other points drawn out by the High Court which should be noted by any party considering entering into a release include:

• The Rileys attempted to run an alternative argument that they were entitled to rescind the Deed because they had been induced to enter it by fraud. However, the Judge found that this was a circular argument: the parties, as a matter of construction, agreed to settle all claims, including claims they “may” have, whether known or unknown. To seek to revive those claims by asserting that NatWest had said there was no such claim was not a viable route for the Rileys. In any event, there was no actual representation that no deceit had been carried out nor did the Rileys rely on the same in entering into the Deed. The rescission argument was therefore bound to fail.
• Alternatively, NatWest submitted that there was a bar to rescission by the Rileys’ affirmation of the Deed by making the payments required under it. Though it was not at issue given the Judge’s findings elsewhere, he noted obiter that NatWest’s arguments were not appropriate for summary judgment and could not be answered without a full trial.
• The Rileys had also submitted that claims by RHL, which was not a party to the Deed (given it was in administration at the time), were not covered by the Deed. Subsequently, RHL was dissolved. However, in 2022, the Duchy of Lancaster (in which the assets of RHL had vested) assigned the benefit of a claim in misrepresentation and deceit to Mr Riley. Mr Riley argued the claim was brought by RHL, not Mr Riley. The Judge disagreed, finding that the benefit of the claim was now Mr Riley’s and must therefore be covered by the release in the Deed. Therefore, NatWest’s strike out/reverse summary judgment application in relation to this claim also succeeded.
• NatWest was successfully granted summary judgment on its counterclaim.

The Court of Appeal decision

The Rileys appealed on five grounds, namely:

1. The Judge erred in concluding that the Rileys did not have a real prospect of establishing at trial that the sharp practice principle rendered it unconscionable for NatWest to rely on the release in the Deed in relation to the Rileys’ fraud claims against NatWest. 
2. The Judge erred in concluding that application of the sharp practice principle was capable of being summarily determined in NatWest’s favour. The scope of the principle is a developing area of the law and ought not to be determined on a strike out/summary judgment application, based on assumed facts.
3. In addition or in the alternative, the Judge erred in concluding that the Rileys did not have a real prospect of establishing at trial that the release clause in the Deed should have been construed as not including the above mentioned claims. 
4. In addition or in the alternative, the Judge erred in concluding that his conclusions as to the proper construction of the Deed, and/or on the sharp practice principle, precluded a finding that the fraud induced the Deed, since inducement is a question of fact which does not solely depend on the interpretation of the Deed. 
5. Further in any event, the Judge erred in concluding the Rileys did not have a real prospect of establishing at trial that the RHL assigned claims were not released in the Deed.

The Court of Appeal unanimously dismissed the appeal on all grounds and, in essence, relied on the reasons given by Mr Justice Freedman in the High Court, as laid out above. Lord Justice Bean, giving the leading judgment, did agree with counsel for the Rileys, who had submitted that there are strong policy reasons not to preclude an innocent victim of concealed fraud from pursuing that claim, even where there is a broad release clause. However, Lord Justice Bean at the same time held that there are strong policy reasons why settlements should be upheld, and this latter consideration prevailed.

Takeaways

Careful consideration of the release clause in settlement agreements is paramount; a lack of express inclusion of fraud claims will not necessarily stop fraud claims being covered by the clause if it is drafted sufficiently widely, such as in this case. 

For those wanting to exclude fraud claims from the release, it is recommended that the reservation of the same is set out in clear and unambiguous terms. Be careful too of using words like “may” and including claims which are as yet unknown to parties – carefully consider what you are willing to give up and what you are not prepared to give up; carve out each separately. 

In cases where a claim comes to light which may be covered by a settlement agreement, the context will be key when construing the meaning of the release clause – what was known and what was anticipated at the time of entering into the agreement? Including recitals in the settlement agreement can assist with documenting the same.