Fraud: setting aside a compromise influenced by fraudulent misstatements

On 27 July 2016, the Supreme Court handed down judgment in Hayward v Zurich Insurance Company plc. This clarifies the extent to which a party to a litigation settlement needs to have relied on fraudulent representations by the other party to be able to go behind the settlement agreement at a later date.

Background

In 1998, Mr Hayward suffered a workplace accident resulting in injury to his back. He pursued a personal injury claim against his employer whose Employers’ Liability insurer was Zurich. Although Zurich suspected that Mr Hayward was exaggerating the extent of his injuries, it did not have definitive proof, and the claim was settled at £134,973.11 in October 2003.

In 2005, Mr Haywards’ neighbours contacted his employers’ insurers, Zurich, providing evidence that Mr Hayward had exaggerated his injuries from at least 2002.

In 2009, Zurich issued a claim seeking damages for deceit which it later amended to a claim for the compromise to be set aside. Zurich succeeded at first instance with the judge finding that Mr Hayward had deliberately and dishonestly exaggerated the effects of his injury and that this had influenced the decision of Zurich (and his employer) to compromise the claim. After a trial of quantum, Mr Hayward was awarded £14,720 and ordered to repay £97,780 plus interest and an adjustment for CRU to Zurich.

Mr Hayward appealed to the Court of Appeal. On 31 March 2015, the Court of Appeal found that as Zurich had suspicions concerning Mr Haywards’ evidence before entering into the settlement agreement, Zurich could not be said to have relied on Mr Haywards’ fraudulent misstatements and, therefore, the compromise could not be set aside.

Issues

For a claim based on the tort of deceit to succeed, it must be shown that the defendant made a materially false representation which was intended to, and did, induce the representee to act to its detriment. Given the findings of fact at first instance, there was no argument that a materially false representation intended to induce Zurich had been made. The appeal turned on whether Zurich had been induced to enter into the settlement as a consequence of Mr Hayward’s false representations.

As Zurich had suspicions concerning the truthfulness of Mr Hayward’s evidence before the 2003 settlement, it was necessary for the Supreme Court to determine whether it was necessary for a representee to believe that a misrepresentation is true or whether the misrepresentation was simply material to the representee entering into the settlement.

Additionally, it had to determine under what circumstances, if any, the suspicion by a defendant of exaggeration for financial gain on the part of a claimant precludes the unravelling of a settlement of that disputed claim when fraud is subsequently established.

Decision

The Supreme Court was unanimous in setting aside the decision of the Court of Appeal.

Lords Clarke and Toulson each provide detailed analysis of the case law in their respective and complementary judgments. Both judgments emphasised that inducement is a question of fact. Neither judge considered the authorities to support the proposition that a representee must believe the misrepresentation, although qualified belief or disbelief may as a matter of fact affect whether the representee had been induced by a misrepresentation.

The judges found that Zurich had been induced by Mr Hayward’s misrepresentations because, although it may have disbelieved them, it did not have definitive proof of their falsehood at the time of settlement, and it was not unreasonable for Zurich to consider that the misrepresentations might be believed by a judge at trial. Zurich therefore entered into a settlement at a higher level than it would have but for those misrepresentations.

Lord Clarke found it difficult to envisage a situation where mere suspicion of falsehood would preclude the unravelling of a settlement where fraud is subsequently established. However, where a representee is certain that a particular representation is false before entering into a settlement, it is likely that it would be found as a matter of fact that it was not induced by that particular representation.

Comment

This case provides support to insurers seeking to challenge personal injury settlements where evidence of fraud comes to light at a later date. It is helpful that the Supreme Court has found that it is not necessary for a representee actually to believe that a misrepresentation is true because parties to litigation will often have a healthy scepticism regarding their opponent’s position but rarely be in a position to definitively prove them to be false at the time when a settlement is commercially viable.

Further reading: Hayward v Zurich Insurance Co plc [2016] UKSC48