Suspicion of fraud does not prevent unravelling a settlement

9 minute read
06 September 2016


Suspecting that an opponent is lying and not just exaggerating a bit is one thing, proving it is another thing entirely. Insurers (and other defendants) will often agree to settle a claim despite suspicions that an opponent is lying rather than incur the risk (in terms of damages payable and legal costs incurred) that the court may believe the opponent at trial.

The Supreme Court in Hayward v Zurich Insurance Company Plc has confirmed that in such circumstances, a settlement can be set aside if evidence later comes to light to prove a fraud has been perpetrated. Suspicion of fraud, without hard evidence to prove it at the time of settlement, will not preclude a defendant from subsequently seeking to set aside a settlement and claim damages for deceit.

The facts

The claimant, Mr Hayward, was injured at work and made a claim for £420,000. His employer's insurers, Zurich, admitted liability, subject to a deduction for contributory negligence, but contended that Hayward was exaggerating the extent of his injuries. Indeed, it obtained undercover surveillance evidence which suggested the same. Nevertheless, Zurich settled the claim for circa £135,000 prior to the trial on quantum. A full and final settlement agreement was entered into.

Two years after the settlement, compelling evidence came to light from Hayward's neighbours that Hayward had been dishonest in his claim and had fully recovered from his injuries a year before the settlement.

Zurich brought a claim to set aside or rescind the settlement agreement, recover the sums paid and seek damages for fraudulent misrepresentation or deceit. It argued Hayward's claim and witness statements referring to the extent of his injury had contained fraudulent misrepresentations.

The elements of fraudulent misrepresentation

For a claim of fraudulent misrepresentation to succeed, four elements need to be established:

  • The defendant made a false representation
  • The defendant knew the representation was false or was reckless as to whether it was true or false
  • The defendant intended that the claimant should rely on that representation
  • The claimant did rely on it and suffered loss as a consequence.

The issue

Throughout this case the issue was whether Zurich's suspicions from the outset that Hayward's case was exaggerated, meant it had not relied upon his representations as to the extent of his injuries when entering into the settlement agreement.

First instance decision

At first instance, the County Court judge found that Hayward had deliberately and dishonestly exaggerated the effects of his injury throughout the court process.

As to the reliance point, the court held that although Zurich's representatives may not have believed the representations to be true, they did believe that they would be put before the court as true. They believed there was a real risk that the court would accept them in whole or part and consequently make a larger award than Zurich thought appropriate. Although Zurich was aware of the real possibility of fraud, Hayward continued his deliberate misrepresentations. Those continuing representations and the belief the court may accept them influenced Zurich into agreeing a higher level of settlement than it would otherwise have done. That was sufficient. 

The settlement agreement was set aside and, following a quantum hearing, Hayward was awarded £14,720 in damages and ordered to repay the difference between that sum and the settlement agreement.

Hayward appealed the order setting aside the settlement agreement but not the quantum order. He argued that for a claim for fraudulent misrepresentation or deceit to succeed, Zurich must have believed in the misrepresentations and been deceived by them. As they had undertaken their own investigations and pleaded exaggeration, it had not relied on his representations.

Court of Appeal

The Court of Appeal allowed the appeal essentially on the basis Zurich was aware of the fraud when the settlement was made. It held Zurich had not been deceived as it did not believe Hayward's representations to be true and, as a result, had not been induced to enter into the settlement in reliance upon their truth.

Supreme Court

The Supreme Court unanimously allowed the appeal confirming the first instance judge's decision and reasoning.

Two issues fell to be dealt with:

  • Issue one - must a defrauded representee prove it was induced into settlement because it believed the misrepresentations were true or was it sufficient if the representee established that the misrepresentation caused it to enter into the settlement?

The Supreme Court held the answer to this issue was no. A claimant alleging deceit does not need to show that he believed the misrepresentation to be true but he must have been induced to act as he did in reliance upon it - there must be a causal connection. The misrepresentation need not have been the sole cause of the representee's actions, but must be a material cause. It must have had an impact on the mind or an influence on the judgment. Belief in the representation's truth, or otherwise, may be a relevant part of the court's consideration when determining whether there was inducement. Whether there was or not is a question of fact.

Where a material misrepresentation has been made there will be a presumption of inducement, particularly where the misrepresentation is fraudulent. For this presumption to be rebutted it must be shown that the misrepresentation played 'no part at all' or did not play a 'determinative part' or a 'real and substantial part' in the representee's considerations. The court found that had Zurich known the true position it would not have offered anything like as much as it did.

There is no duty on the representee to be careful, suspicious or diligent, or make enquiries as to the truth of the representations. Zurich had done as much as it reasonably could to investigate the accuracy and ramifications of Hayward's representations before entering into the settlement. The fact that Zurich did not wholly credit Hayward and carried out its own investigations did not preclude it from having been induced by his representations. Qualified belief or disbelief did not rule out inducement, particularly where those investigations were never going to find out the evidence that subsequently came to light.

However, where a representee knows that the representation is false, he cannot succeed in a claim for deceit as he would be unable to show he had been misled by the misrepresentation.

  • Issue two - under what circumstances, if any does the suspicion of exaggeration for financial gain preclude the unravelling of a settlement when fraud is subsequently established?

Given its judgment on issue one, the court confirmed that it was difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established.

Conclusion

The decision is important both as a matter of law and to all parties to litigation, but particularly for insurers where faced with a claim they view as suspicious.

Fraud continues to unravel all and trumps the public policy argument of finality of settlement agreements. Where one party knows the claim is being settled on fraudulent grounds, it must now also realise that that settlement will not be upheld if the fraud is later discovered.

The Supreme Court decision will encourage insurers to continue to fully investigate claims and properly plead their cases where fraud is suspected, while providing the confidence that if the fraud cannot be proved at the time of settlement, the innocent party will not subsequently be penalised.

The judgment confirms that suspicion, doubt and mistrust are not to be equated with knowledge. Even if a representee knows that the representation is false to some extent, but still acts on it, it may establish inducement where new evidence later comes to light to confirm that the departure from the truth was significantly greater than expected. Clear evidence of the fraud would of course be required.

For personal injury claims it should also be remembered that since 13 April 2015 pursuant to s57 of the Criminal Justice and Courts Act 2015, a court is also required to dismiss the whole of a personal injury claim if it is satisfied, on the balance of probabilities, that the claimant has been fundamentally dishonest in relation to the primary claim or a related claim. No damages would be payable.


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