Disbelief in a misrepresentation will not negate inducement - Hayward v Zurich

Can the settlement of a claim be unwound if fraud was always suspected and evidence of it emerged after settlement?

Summary

In Hayward v Zurich, the Supreme Court has decided the vexed question of whether a suspicion of fraud at the time of a settlement can prevent a later action for fraudulent misrepresentation. It was held that a settlement agreement could be set aside where the underlying claim was later shown to be fraudulent, even though the defendant suspected fraud at the time it settled the claim.

Background

In June 1998 Mr Hayward brought a claim against his employer for more than £420,000 for a workplace injury. Zurich contested the quantum as they had obtained video evidence which showed that Mr Hayward appeared to be exaggerating his injuries. Despite Zurich’s evidence, Mr Hayward maintained his position, and the expert instructed by Zurich failed to provide a supplemental report that substantiated the exaggeration of Mr Hayward’s injuries, Zurich was concerned that the court would be convinced by Mr Hayward’s claim. As a result, Zurich settled the matter for £134,973 prior to trial.

Two years after this settlement, Mr Hayward’s neighbours approached Zurich and provided witness evidence that Mr Hayward had entirely recovered from his injuries prior to settlement. Zurich therefore brought a claim in deceit against Mr Hayward asserting that the statements he had made constituted a fraudulent misrepresentation and therefore the settlement agreement should be rescinded.

In 2013 the High Court set the settlement agreement aside and reduced Mr Hayward’s damages to £14,720 and ordered him to repay the difference of his original award back to Zurich.

Mr Hayward subsequently appealed to the Court of Appeal. The court agreed with Mr Hayward’s submissions that, in order to succeed in a claim of misrepresentation, Zurich had to show that it was their belief in the validity of the claim which convinced them to enter into the settlement agreement. It was found that Zurich had implicitly agreed not to reopen the case at a later date because, at settlement, they were aware that the claimant’s factual case might be false. LJ Underhill said: “There is a wider principle at stake, that the parties who settle the claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later.”

Zurich subsequently appealed this finding to the Supreme Court, and on 27 July 2016 the Supreme Court restored the original judgment of the High Court.

The Supreme Court Decision

The Supreme Court ruled that, although Zurich was aware, to a certain extent, that Mr Hayward was exaggerating his injuries, they were not fully cognisant of the extent of the exaggeration until Mr Hayward’s neighbours came forward. In addition, Lord Clarke pointed out that “…the ingredients of the tort of deceit are not in dispute subject to one question, which is whether a claimant alleging deceit must show that he believed this misrepresentation. In my opinion the answer is no.” There could be no doubt, given the judge’s original findings of fact, that had Zurich known the true position they would not have offered Mr Hayward anything like the 2013 settlement sum.

The Supreme Court stated that the question of whether Zurich was induced into entering into the settlement agreement and whether doing so was causative of its loss were questions of fact. The fraudulent statements made by Mr Hayward induced Zurich to enter into the settlement agreement - whether they were believed or not and whether or not there were other factors (such as the weakness of the expert evidence on the question of exaggeration). The inducement was the concern that the court would accept Mr Hayward’s account at trial.

The Supreme Court felt that a failure to unwind the settlement agreement simply because Zurich obtained better evidence at a later stage, particularly evidence that their own investigation was unlikely to reveal, generally put fraudsters in too favourable a position. Lord Clarke, giving the leading judgment, commented that he was not persuaded that the (considerable) importance of encouraging settlement was sufficient to allow Mr Hayward to retain monies which he only obtained by fraud. Clarke LJ felt that it is difficult to envisage any circumstance where a mere suspicion that a claim was fraudulent would preclude unravelling a settlement agreement where fraud is subsequently established.

The Supreme Court therefore restored the original Judgment to rescind the settlement agreement and ordered Mr Hayward to repay £136,110 (which included interest on the original reward).

Commentary

To establish the tort of deceit it must be shown that the representor dishonestly made a material false representation which was intended to, and did, induce the representee to his/her detriment. It does not necessarily matter that the representee did not believe fully in the truth of a representation. Here, Zurich was prompted to settle Mr Hayward’s claim based on its assessment of the litigation risk (itself based on several factors). Its concern that Mr Hayward might be believed and awarded a significant sum at trial was enough to establish inducement.

This case is of particular importance for insurers because insurers may often have grounds for suspicion about a claim, but to pursue an allegation of fraud without strong evidence is risky. This case allows insurers to pursue a claim of deceit, should new evidence come to light following settlement of a claim, showing that the claimant’s recovery was too high. This case also sends a serious message to fraudulent claimants that, simply because a claim has been settled prior to trial, it does not mean that the claim cannot be re-examined and a settlement unwound. Fraudulently obtained litigation proceeds can and will be recouped.

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