Hayward v Zurich Insurance Company plc [31.03.15]

Court of Appeal refuses to set aside a settlement where better evidence of suspected fraud was obtained after the claim was concluded.

Implications 

The problem faced by the insurers in this case was that there was no new allegation of fraud against the Claimant, only additional evidence of an allegation of dishonesty that had already been made prior to settlement.  

The judgment effectively restates the existing law: to set aside a contract as a result of fraud, the party wishing to set aside must show that they would not have entered into the contract had they known that information presented by the other party was dishonest. In this case, fraud had already been alleged before the settlement was reached. The insurers could not have a second bite at the same cherry.  

Lord Justice Underhill recognised the unsatisfactory outcome of leaving the Claimant significantly overcompensated for his injury. However, he also stated that there was a wider principle at stake here – the importance of certainty in settlements.

The subsequent decision in Takhar v Gracefield Developments Ltd and others [2015] should also be noted. In Takhar, evidence of fraud existed prior to judgment but the Defendants were not aware of it. Mr Justice Newey held that the evidence could be used to apply to set aside the judgment. This was the case even though due diligence could have identified the fraud. It was necessary to show that the party in question had been deliberately dishonest and that dishonesty was material to the judgment.

The significance of both decisions will be in ‘cold case reviews’ where evidence is found after the conclusion of a case. A defendant will be in a position to set aside a judgment where they can show that:

  • The fraud was not known to them prior to the adverse judgment.
  • The claimant was deliberately dishonest.
  • The dishonesty was relevant to the judgment.

However, Hayward would prevent such an approach where the dishonesty was known or suspected prior to the judgment; the test is previously unknown dishonesty.

Background 

The Claimant brought a claim against his employers arising from an injury at work in 1998. Proceedings were commenced in 2001. The special damages claimed were just under £420,000. 

Video surveillance evidence of the Claimant in 1999 suggested that he was exaggerating the extent of his injuries. The defence alleged that the Claimant was exaggerating his injuries for financial gain. 

In 2003, just before trial, the insurers settled the claim for £134,973.11 by way of a Tomlin order. Two years later the Claimant’s neighbours gave statements confirming their belief that he had recovered from his injuries a year before the settlement. 

In 2009, the insurers brought an action against the Claimant in deceit. 

Decision 

In his leading judgment, Underhill LJ held that the settlement stood, for the following reasons:

  • The principle of misrepresentation (as distinct from fraudulent misrepresentation) means that a defendant is not entitled to set aside a settlement just because he can subsequently show that a statement made by a claimant was false. It is a symptom of litigation that a defendant does not necessarily accept that the claimant’s allegations are correct. In making a settlement, the defendant takes the risk that they may be untrue but weighs up the evidence and the likely outcome at trial.
  • He distinguished fraudulent misrepresentation. A defendant cannot be expected to take the risk that a claimant has made dishonest (rather than just ill-founded) statements.
  • However, if a defendant intends to settle a claim despite being aware of the possibility of fraud then he cannot seek to set aside a settlement by claiming reliance on a statement he knew or suspected to be untrue simply because he obtained better evidence of the “identical dishonesty”.
  • The defence pleading exaggeration of injury for financial gain was a pleading of fraud. By pleading fraud the insurers had shown that they believed that the Claimant’s statements of case were untrue. They had chosen not to have that tested at trial. It therefore followed that they had settled the claim at a reduced level with their “eyes wide open”.