The Court of Appeal recently handed down its judgment in this important case, which considered whether a settlement agreement can be rescinded on the basis of fraudulent misrepresentations regarding the underlying claim. The implication of the decision is that it will be difficult to set aside a settlement agreement unless there was no knowledge of fraud at the time the compromise was entered into.

Hayward had some years earlier been injured at work and had claimed damages from his employer. Liability was admitted but quantum was disputed on the basis that Hayward had exaggerated the extent of his injuries. However, before the quantum trial the matter was compromised by a settlement agreement embodied in a Tomlin Order. Some years later, Zurich discovered through a neighbour of Hayward that he had fully recovered from his injuries at least a year before the claim was compromised. Zurich brought a claim against Hayward claiming damages in deceit based on fraudulent misrepresentation, alternatively that the settlement agreement should be set aside.

At first instance, HH Judge Moloney QC found that Hayward had dishonestly exaggerated his injuries and on that basis the settlement agreement should be set aside. Hayward did not challenge the judge’s finding that he had dishonestly exaggerated his injuries, however, he appealed against the decision to set aside the settlement agreement.

Reluctantly the Court of Appeal unanimously upheld Hayward’s appeal.

In giving the lead judgment, Underhill LJ said that it “is inherent in the antagonistic relationship of claimant and defendant that in deciding whether to settle he has to form an independent judgment about whether the disputed statements made as part of the claim are (to the extent that they are material to the outcome) likely to be accepted by the Court. I do not believe that a relationship of reliance arises in that context”. He went on to say that a defendant who has made an allegation of fraud against the claimant but decided in the end not to have it tested in the court should not be allowed to revive that allegation as a basis for setting aside the settlement.

While it may “stick in the throat” that the claimant can retain the reward of his dishonesty, the defendant will have made the deal with his eyes open to the possibility of fraud, and there is an important public interest in the finality of settlements.

This is a good example of a case being made in the interests of wider public policy, in that parties who enter into a settlement with their eyes wide open to the possibility of a fraudulent underlying claim (having in this case expressly alleged it) should not be entitled to revive their grounds for disputing liability only because better evidence becomes available at a later date.