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Fraud claims not covered by standstill agreement

02 February 2016

A standstill agreement that postponed claims that a party "has or may have against the other" did not cover fraud claims.  The old epithet "fraud unravels all", although too general and inexact a phrase to be taken simply at face value, applied.  The standstill agreement, between joint defendants (Hyundai Marine & Fire Insurance & anr v Houlder Insurance Services & anr[2015] EWHC 378 (Comm), 27 January 2015), was reached against a known background of negligence.  The second defendant’s fraud was not known to the first defendant.  The fraud claim was allowed to proceed. 

The claimants brought negligence claims against the defendant brokers for the placing of reinsurance which turned out to be invalid. The defendants signed a standstill agreement, agreeing not to sue each other pending the conclusion of the proceedings brought by the claimants. When the standstill agreement was signed, the first defendant was not aware of an apparent fraud by the second defendant. The fraud involved falsifying documents in order to deceive the reinsured and reinsurer about the terms that each were prepared to agree. This fraud allowed the second defendant to benefit from a larger commission. Having discovered the apparent fraud, the first defendant sought to bring a claim against the second defendant. The issue was whether this should be permitted in light of the terms of the standstill agreement.

Standstill agreement terms – wide definition of “claims”
 
Under the terms of the standstill agreement, the defendants each agreed not to bring claims against the other pending the completion of the litigation brought against them by the claimants. “Claims” was defined as any alleged claims, rights or causes of actions that either party has or may have against the other either now existing or accruing before the date of termination of the standstill period. This wording, the judge, Cooke J, considered was undoubtedly wide.

The standstill agreement prevented the parties from raising any limitation defences in respect of any dispute between them. The terminology used for this differed, and applied to any such defences “whether known or unknown” (as opposed to claims that a party “has or may have”). One issue that arose for consideration was whether the different wording had any bearing on the analysis.

The standstill agreement incorporated an “entire agreement” clause which precluded the parties from any rights or remedies other than as expressly set out in the agreement. That clause was expressed as not limiting or excluding any liability for fraud. It was accepted that the effect of this clause was to render the standstill agreement voidable in the event of fraud. Whether it had in fact been voided was in dispute.

Approach to construction

In deciding whether claims for unknown fraud were covered by the standstill agreement, Cooke J noted that it was clear from all the authorities that the court must approach the agreement with caution. Was the type of claim the first defendant sought to bring covered by the wide definition of claims?

The court rejected an argument that the absence of the wording “known or unknown” from the definition of claims meant that only known claims were covered. This interpretation would exclude unknown claims, including unknown fraud claims, from the type of claims covered by the standstill agreement. However, Cooke J considered that the definition of an existing claim that a party “may have” could encompass unknown claims as well as known ones.

Cooke J thought it was clear that, if the parties had been asked whether fraud claims could fall within the terms of the standstill agreement, then neither party would have said yes. On its proper construction, therefore, the agreement had no application to fraud claims. The old epithet, “fraud unravels all” is too general and inexact a phrase to be taken simply at face value. However it was of application in construing an agreement where at the time of entering into it, the parties had in mind the negligence claims being brought against them, not claims of fraud by one broker on another, or by one broker on the reinsured or the reinsurer. Another relevant factor was that, as the standstill agreement was expressly stated to be voidable if induced by fraud, it was highly unlikely that it was intended to encompass fraud claims.

Although the question of whether the standstill agreement was valid was not a matter before the court, it was relevant that its validity was in dispute. This factor appears to have impacted on the court’s approach in terms of the considerations to be taken into account in deciding whether or not to give permission to bring an additional claim. These were the same questions of discretion that the court would take into account if one party had been seeking an injunction or specific performance. Such questions included: what justice required, whether damages were an adequate remedy, and whether, in the context of any injunction sought to restrain a claim brought against it, the second defendant had clean hands.

The court found that justice and proper case management required all claims to be heard together, as between the claimants and between the two defendants. This would limit costs, avoid extra litigation, and avoid the possibility of inconsistent judgments. On the other hand, there would be no prejudice to the first defendant if the second defendant’s claim against it was pursued sooner rather than later.

COMMENT

It has long been established that, in the absence of clear language, the court will be slow to infer that a party intended to surrender rights and claims of which it was unaware and could not have been aware. The same principle has, more recently, been confirmed to apply to fraud-based claims in the context of settlement agreements (Satyam Computer Services Ltd v Upaid Systems Ltd [2008] EWCA Civ 487).

In this case it was not a matter of settling or compromising a claim, merely postponing its pursuit under the terms of a standstill agreement. Cooke J, following the approach in Satyam, took as his starting point the question of whether the type of claim that it was proposed to bring was one that fell within the wide definition of claims in the settlement agreement. The resulting determination, that neither party would have intended the agreement to extend to unknown fraud claims, is perhaps no surprise. In reaching that conclusion, two key factors were taken into consideration: the fact that the backdrop to the standstill agreement was the negligence claims being brought against the co-defendant brokers which did not include any suggestion of fraud; and the fact that the standstill agreement itself was voidable if induced by fraud.

Perhaps more contentious is the finding that, even if the allegations of fraud against the first defendant were not correct, the first defendant would suffer no prejudice if the second defendant were allowed to pursue its claim against it prior to the expiry of the agreed standstill period. It might be argued that allowing one defendant to pursue a claim against the other would in fact cause prejudice in that it would serve to undermine the united front against the claimants that the standstill agreement was intended to create, particularly if that claim was not ultimately substantiated.
 
Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.