The Supreme Court’s decision to unravel a settlement agreement influenced by misrepresentation means that there is now little comfort in the finality and certainty of settlement.

Facts

Mr Hayward suffered an injury at work, but exaggerated his injuries when claiming compensation from his employer. The employer’s insurer, Zurich, suspected that Mr Hayward was misrepresenting the extent of his injuries, but nevertheless considered that there was a real risk that a court would believe Mr Hayward at trial and award him significant damages and costs. On that basis, Zurich agreed to settle Mr Hayward’s claim for a little under £135,000. Later, however, further evidence of Mr Hayward’s deceit came to light and Zurich sought to recover damages on the grounds of fraudulent misrepresentation.

The Supreme Court held that the settlement agreement should be set aside and Mr Hayward should be awarded a much reduced sum of £14,720 to reflect the actual extent of his injuries.

Analysis

The Supreme Court held that it was not necessary for Zurich to have believed the truth of Mr Hayward’s story in order to prove reliance for the purposes of misrepresentation. Rather, it was sufficient that Mr Hayward’s story induced Zurich to enter into the settlement agreement. Here, Zurich believed Mr Hayward was lying about the extent of his injuries, but feared that a Court might not take the same view and therefore settled the claim so as to mitigate the risk that Mr Hayward's story might be believed at trial. Zurich had thus relied on Mr Hayward's story to its detriment.

Application

Zurich was unsuccessful in the Court of Appeal, which essentially found that the insurer had taken the risk that the claim was fraudulent, and had to live with the consequences of its bad bargain. The Supreme Court, however, was not prepared to allow Mr Hayward to profit from his fraud at the expense of the insurer, notwithstanding the commerciality of the insurer’s settlement decision. This pragmatic approach can also be seen in other recent decisions touching on fraud and illegality issues: Versloot Dredging BV and Anor v HDI Gerling Industrie Versicherung AG & ORS [2016] UKSC 45 and Patel v Mirza [2016] UKSC 42.

This decision is of obvious relevance to insurers, who are facing an ever increasing volume of fraudulent claims, but potentially has wider application for any party contracting on the basis of a suspected misrepresentation. It is not unknown for parties to contract notwithstanding concerns or doubts as to the veracity of all they have been told. Now, if an initial suspicion proves true with time, the deceived party may have a route to unravelling their contract on misrepresentation grounds. For those who "gild the lily” so as to improve their position or recover something to which they are not entitled, the Supreme Court has sent out a clear warning: the law can always catch up with you.

If you have any queries regarding this briefing, please contact Kari McCormick.

Hayward v Zurich Insurance Company plc [2016] UKSC 48