To what extent does settling a claim bring finality? Is it ever possible to “retract” the settlement based upon the discovery of relevant information concealed by the other party? The Court of Appeal in Hayward v Zurich considered when a fraud might – and might not – be a legitimate basis for unravelling a settlement agreement.

Background of the case

Hayward v Zurich concerned the settlement of a workplace injury claim. There was a suspicion that the claimant, Mr Hayward, had exaggerated the effects of his injury; indeed, there was video evidence appearing to show Hayward doing heavy work at home. Nevertheless, the parties reached a full and final settlement before the issue of quantum came to trial.

Two years later, the claimant’s neighbours volunteered witness evidence stating that the claimant had significantly exaggerated his injuries, and had in fact fully recovered long before the settlement had been agreed. Zurich commenced proceedings seeking damages for deceit, arguing that the settlement was founded upon fraudulent misrepresentations.

Res judicata?

Hayward applied to strike out the proceedings, arguing that the full and final settlement previously reached by the parties estopped Zurich from revisiting the issues (“res judicata”). This application was ultimately dismissed by the Court of Appeal, allowing the matter to proceed to a full trial. However, the Court of Appeal made a cautionary observation that in order to succeed in the action for deceit the insurer would “have to persuade the court that it was induced to agree to the settlement by fraud […] a task that may not prove easy, given the fact that it already knew enough to justify the service of a defence”.

The substantive claim

Having defeated the initial application for strike out, the insurer then found success at first instance in its substantive claim for damages. HH Judge Maloney QC found that whilst the insurer did not believe Mr Hayward’s representations, it had feared that the court might do so based on the available evidence, and therefore settled on this basis. Accordingly, the court ordered repayment of approximately 90% of the original settlement sum (having discounted for the amount found to be actually due to Mr Hayward in damages).

Mr Hayward appealed to the Court of Appeal. Lord Justice Underhill, giving the leading judgment, observed that when parties choose to settle a claim, they are choosing to forego their right to a determination at trial. It cannot be open to a party to seek to set aside a settlement on the basis that certain statements are subsequently found to be wrong. Where the statements are not just wrong but also made dishonestly, there may be justification for setting aside the statement. However, not where that dishonesty was central to the allegations which had been settled.

Lord Justice Underhill, giving the leading judgment acknowledged that this decision was unattractive and may “stick in the throat” since it allowed the claimant to retain the reward of his dishonesty. Nevertheless, the Court perceived a wider principle at stake; namely, that finality of settlement should be protected as a matter of public interest, and so parties should not generally be entitled to unwind settlements when better evidence comes along later.

BLP Opinion

Insurance fraud is a significant problem which has a great cost to consumers and industry. The insurance industry, which contributes £25 billion to the national output, estimates that it is facing £1.3 billion of detected fraud, with a further £2.1 billion undetected.

This decision demonstrates the difficulties for insurers in handling claims where there is a clear suspicion of fraud on the part of the claimant. Whilst it may be possible to unwind a settlement where one party subsequently discovers that the statements upon which they relied were made dishonesty, this will not be possible where an allegation of fraud was made from the outset. Finality of settlement is important as a matter of public interest, even at the expense of justice in individual cases.