Court of Appeal finds settlement agreement released unknown fraud claims despite lack of express words to that effect

The Court of Appeal has upheld the High Court’s decision that a release clause in a settlement agreement included unknown claims based on dishonesty and fraud, despite the terms of the release not expressly referring to such claims: Maranello Rosso Ltd v Lohomij BV [2022] EWCA Civ 1667.

The Court of Appeal endorsed the judge’s approach to the construction of the settlement agreement. It was necessary to take into account the “cautionary principle” that, in the absence of express words, the court will not readily conclude that a reasonable person would understand a release to encompass claims for fraud or dishonesty. However, there is no rule of law requiring express words in order to release such claims. Accordingly, where the court concludes that on ordinary principles of contractual construction fraud is included in the release, the court will give effect to that intention.

The court recognised that, in some cases, the courts have recognised a possibility that a release might be rendered ineffective where a party has been guilty of “sharp practice” – namely by taking advantage of the other party’s ignorance of certain claims by obtaining a broad release which surreptitiously settled those claims. However, the court expressed some scepticism as to whether the “sharp practice” principle could have any application where the court had construed a release as covering unknown claims in fraud.

More generally, this case serves as a reminder to settling parties that they need to consider carefully what claims or potential claims they wish to release. Although it may be difficult to negotiate in practice, parties may wish to consider including express language to deal with claims for fraud or dishonesty, making it clear whether these fall within or outside the scope of the release clause. Continue reading

Knowing receipt: Court of Appeal clarifies the necessary elements

The Court of Appeal has dismissed a knowing receipt claim against a bank for receipt of shares transferred to it in breach of trust, on the basis that the claimant did not have a continuing proprietary interest in the shares: Byers & Ors v The Saudi National Bank [2022] EWCA Civ 43.

The decision provides helpful clarification as to the elements required to make good a claim in knowing receipt. It confirms that liability for knowing receipt arises from the recipient’s knowledge of the fact that it has received trust property that has been transferred in breach of trust. This includes where a recipient has received the property without knowing that it was transferred in breach of trust and only later discovers the fact. Once the recipient acquires such knowledge, it makes it unconscionable for the recipient to retain the property and imposes a duty on the recipient to treat the property as if they are a trustee of it and to restore it to the trust. This contrasts with liability for dishonest assistance, where liability is fault-based and arises from the recipient’s dishonesty in assisting a trustee to commit a breach of trust (or assisting a fiduciary to commit a breach of fiduciary duty).

A key battleground in the present case was whether a continuing proprietary interest in the relevant property is required for a claim in knowing receipt claim. In the view of the Court of Appeal, a defendant cannot be liable for knowing receipt if it takes the property free of any interest of the claimant. In this case, given the claimant had failed to prove at trial that its beneficial interest in the shares continued under local law following transfer to the bank, the claim in knowing receipt failed.

We previously reported on the High Court decision in this case here.

For more on the Court of Appeal decision, see this post on our Banking Litigation Notes blog.

 

Court of Appeal confirms that the Quincecare duty does not extend to protect creditors

The Court of Appeal has struck out Quincecare duty and dishonest assistance claims brought by the liquidators of a company running a Ponzi scheme against a correspondent bank that operated various accounts for the company. In doing so, the Court of Appeal confirmed that the scope of the Quincecare duty is limited to protecting customers of the financial institution, and does not extend to protect the customer’s creditors: Stanford International Bank Ltd v HSBC Bank plc [2021] EWCA Civ 535.

The Court of Appeal found that the company had no claim in damages because it suffered no loss. The way the Ponzi scheme operated, payments made by the bank to genuine investors reduced the company’s assets, but equally discharged the company’s liabilities to those investors by the same amount. The net asset position therefore remained the same in the period between: (a) when the liquidators said the bank should have recognised the “red flags” and stopped processing its customers’ payments, thereby exposing the fraud; and (b) the date upon which the accounts were eventually frozen by the bank.

The Court of Appeal upheld the High Court’s decision to strike out the dishonest assistance claim, emphasising that dishonesty and blind-eye knowledge allegations against corporations (large or small) must still be evidenced by the dishonesty of one or more natural persons.

For more information see this post on our Banking Litigation Notes blog.

High Court considers distinction between dishonest assistance and knowing receipt

The High Court has dismissed a claim brought by the liquidators of an investment company against a bank for knowing receipt, in circumstances where the investment company’s shares were transferred by a trustee (in breach of trust) to the bank, and used by the bank to discharge part of a debt owed by the trustee to the bank: Byers & Ors v Samba Financial Group [2021] EWHC 60 (Ch).

The court found that a claim in knowing receipt where dishonest assistance is not alleged, will fail if, at the moment of receipt, the beneficiary’s equitable proprietary interest is destroyed or overridden so that the recipient holds the property as beneficial owner of it.

The judgment is noteworthy for its analysis of the distinction between liability for dishonest assistance and knowing receipt, which historically has been blurred. The decision provides the following helpful clarification:

  1. Dishonest assistance is truly fault-based. It arises from the dishonesty of the defendant in assisting a trustee to commit a breach of trust (or assisting a fiduciary to commit a breach of fiduciary duty). It is important to note that such liability, if established, may result in vicarious liability for the employer of the individual defendant.
  2. Knowing receipt unconnected with dishonesty is different, at least at the moment of receipt. The recipient is not liable in such a claim for wrongly agreeing to receive the property. The knowing recipient’s liability depends on their knowledge that the property they receive is trust property and is to be dealt in that way. The principal duty of a knowing recipient is to deal with the property once received as if they are a trustee of it and to restore it to the trust.

For more information see this post on our Banking Litigation Notes blog.

Permission for expert evidence of financial market practice refused in relation to allegations of dishonesty

In a recent decision, the High Court refused  the defendant financial advisers and agents permission to call expert evidence of financial market practices in relation to an allegation that they had acted dishonestly: Carr v Formation Group Plc [2018] EWHC 3116.

The court noted that the standard of honesty is an objective one, and it is the court, not the market, that determines what should be regarded as objectively dishonest. Accordingly, evidence of market practice was not admissible in relation to any argument as to the appropriate standard, nor as to whether the defendant has failed to comply with that standard.

The evidence was, however, admissible to defend an allegation of conspiracy to injure by unlawful means and also in relation to an argument based on deliberate concealment under the Limitation Act 1980.

Julia Bihary, an associate in our disputes team, considers the decision further below. Continue reading

Supreme Court finds trustee fraud exception under Limitation Act does not apply to claims for dishonest assistance / knowing receipt

Often, a substantial time may have passed before a beneficiary becomes aware of a fraudulent breach of trust. Even when the fraud has been discovered, there may be a number of reasons why the beneficiary decides to delay in commencing proceedings. When considering claims against third parties to a fraudulent breach of trust, however, beneficiaries will have to pay close attention to the limitation period in light of the Supreme Court’s decision in Williams v Central Bank of Nigeria [2014] UKSC 10.  

The Supreme Court held that the exception under section 21(1)(a) of the Limitation Act 1980 for “any fraud or fraudulent breach of trust to which the trustee was party or privy” does not apply to actions against third parties based on dishonest assistance or knowing receipt. Such claims are therefore subject to the statutory six-year limitation period. The decision reverses the Court of Appeal on the point, and marks a significant limitation on claims based on ancillary liability for fraudulent breach of trust. Beneficiaries may however still benefit from section 32 of the Act, which suspends the limitation period in cases of fraud or deliberate concealment until the claimant has (or could with reasonable diligence have) discovered the fraud or concealment.  Continue reading