Zurich Insurance Company plc v Hayward 27.05.11

In 2001, following an injury at work in 1998, Mr Hayward brought a claim against his employers alleging that he had suffered a spinal injury and was suffering from continuing physical disabilities. Given the results of surveillance evidence, which was disclosed by the Defendant’s solicitors at an early stage, the defence alleged that the Claimant had exaggerated his claim. The medical experts produced a joint statement indicating that the discrepancy between the Claimant’s alleged symptoms and the surveillance needed clarification. Liability was conceded on an agreed 80/20 split in the Claimant’s favour in August 2002.

In June 2003 the Defendant paid £100,000 into court (net of CRU and previous interim payments). The Claimant subsequently agreed to take the money in court late, and a settlement agreement for just under £135,000 was embodied in a Tomlin order in October 2003.

Following the settlement, in 2005 Mr Hayward’s neighbours from June 2002 to October 2005 informed his former employers that they thought there was nothing wrong with him and he was only pretending there was.

In early 2009 Zurich commenced an action against Mr Hayward, alleging that the settlement of the claim had been obtained by false representations as to words and conduct and that these had been made fraudulently. Zurich also claimed to have paid at least £72,000 more in damages than it would otherwise have done, and that costs had been increased.

Mr Hayward applied to strike out the claim, arguing that it was an abuse of process on the basis of estoppel by res judicata (i.e. judicial decisions once made must be accepted as final). In March 2010 Deputy District Judge Bosman held that the claim could proceed if it was recast as an application to set aside the Tomlin order on the grounds of fraud. On appeal, His Honour Judge Yelton struck out the claim, holding that the Tomlin order created an estoppel by res judicata on the basis that fraud had already been raised in the first claim.

Held

The appeal was allowed, enabling Zurich to proceed with its claim, where it will have to prove that Mr Hayward was fraudulent. Lady Justice Smith held that this was a case where the approach taken by Zurich in the original claim was impeccable in every respect. It had done everything by the book. She held that, before an estoppel can arise, (1) there must be clarity as to what was in fact compromised and (2) the two allegations of fraud must be essentially the same.

In her judgment it was not exactly clear what was compromised in the first action, and the allegation of fraud raised in the present action was not the same as the defence of exaggeration pleaded in the first action. In addition, the second action was not an abuse of process as, on the facts of this case, the need to protect the administration of justice from the effects of fraud far outweighed the public interest for the finality of litigation.

Lord Justice Moore-Bick agreed that Zurich’s action could proceed, but on the basis that a Tomlin order could not give rise to an estoppel by res judicata, although a consent order could give rise to an estoppel by record, however that would not assist Hayward in the present case.

Comment

It is important to note the comments made by Smith LJ in relation to the importance of the truthfulness of pre-trial statements. She stated: “In the post CPR world, one aim of the rules is to encourage the parties to reach settlement of their disputes. This means that the statements or representations made at the pre-trial stage have taken on an even greater importance than they had under the old rules, where it was expected that their truthfulness and accuracy would probably be tested at trial.”

On a more practical level, insurers should ensure that the usual form of bland “consent order” is not utilised for settlement agreements, since there is a risk this may create an estoppel by record, which has the same effect as a judgment entered after a trial, thus preventing them from taking an action similar to Zurich’s against a fraudulent claimant. Instead a properly formulated and compliant Tomlin order should be used.

This case can be compared with another recent Court of Appeal decision, Singh v Habib which is also reported in this edition of Liability Brief. That case considered the application of the principles set out in Ladd v Marshall [1954] to the admission of new evidence in an existing claim, as opposed to fresh proceedings in which damages are claimed for fraud.