On 27 June 2012, the Supreme Court handed down its judgment in the case of Summers v Fairclough Homes Limited  UKSC 26, which confirmed that courts have the power to strike out fraudulently exaggerated statements of case in their entirety, at any stage in the proceedings.
Fraudulent and fraudulently exaggerated claims are of perennial concern to insurers. Dishonesty is a menace to the insurance industry, and one which affects honest policyholders by way of increased premiums and greater suspicion surrounding genuine claims, and to the courts, through wasted court time.
In Summers, the liability insurer of Fairclough, the defendant, spearheaded the defence against an employee who had exaggerated the extent of his personal injury suffered at work, in order to obtain a precedent to deter fraudulent third party claimants. The insurer appealed all the way to the Supreme Court to secure a decision which would make it easier for a court to strike out an exaggerated claim after it had previously been determined at a trial on liability that the claimant had a right to damages. Although there is a well-established principle of insurance law that an insurer is not liable to pay a fraudulent claim or any lesser part of it which could have been honestly brought (see Manifest Shipping Co v Uni-Polaris Insurance Co (The Star Sea)  1 AC 469), the courts have confirmed that this common law principle is particular to insurance contracts. It will not throw out fraudulently exaggerated claims against the insured in the context of underlying litigation since the fraud is not perpetrated by a party to the policy. Therefore, Fairclough’s insurer set itself the task of persuading the Supreme Court to strengthen courts’ powers to act against fraudulent claimants in underlying litigation.
In 2003, Summers suffered an injury at work, and after a trial in August 2007, Fairclough, Summers’ employer, was found to be liable, with damages to be assessed. Between October 2007 and September 2008, Fairclough subjected Summers to undercover surveillance to seek to establish whether Summers’ assertions that his injury had left him unable to stand for more than 10 to 15 minutes were true. The surveillance clearly demonstrated that Summers had grossly exaggerated the extent of his injury, so when, in December 2008, Summers issued his schedule of loss in the sum of £836,616, Fairclough disclosed its surveillance evidence to Summers. Fairclough refused an offer to settle, and amended its defence, particularising Summers’ dishonesty and calling for the Court to strike out the claim. Summers reduced the value of his claim to £251,481, but maintained his original statements of case. The matter proceeded to the trial on quantum in January 2010.
FIRST INSTANCE AND THE COURT OF APPEAL
In the High Court, Fairclough contended that Summers’ fraud justified the Court exercising its jurisdiction under Rule 3.4(2) of the Civil Procedure Rules (CPR). This rule permits a court to strike out a statement of case if it appears to the court that “the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings”. His Honour Judge Tetlow ruled that Summers had exaggerated a proportion of his claim, but confirmed that, notwithstanding this fraud, Summers had nevertheless suffered a genuine and compensable injury. He observed that he was bound by previous case law, in particular Ul-Haq v Shah  EWCA Civ 542, to conclude that the Court did not have authority to strike out a claim after a trial at which the claimant was found to have a legitimate entitlement to damages. Accordingly, HHJ Tetlow held that Fairclough was liable for £88,716.16, which represented the legitimate proportion of the claim.
The Court of Appeal dismissed Fairclough’s appeal, again in deference to the authorities. Two separate cases on similar facts to Summers had been heard by the Court of Appeal in 2009 and on both occasions the Court had determined that courts did not have the power under Rule 3.4(2) to deprive a claimant of damages to which he was entitled because he had fraudulently exaggerated his claim, except perhaps where, as a consequence of the fraud, a fair trial had become impossible.
In one of these cases, Ul-Haq v Shah, the defendant had emphasised to the Court the prevalence of false and exaggerated claims and their detrimental impact on the insurance industry. The defendant proposed that, for reasons of public policy, courts should strike out such claims to mark their disapproval. Lord Justice Smith, while not deaf to these protestations, judged that the position in law was well-established: she mentioned that in her 40 years’ experience she had never known a judge refuse damages for a genuine injury on the basis of a dishonest exaggeration. She thought that any change in policy needed to come from Parliament. She also held that a court’s power in Rule 3.4(2) was purely for case management; the purpose being to dispose of bad claims or defences expeditiously, thus avoiding wasted trial costs. Smith LJ concluded that to strike out a statement of case after the claimant had already proved its claim at trial would be to invoke the Rule for an illegitimate purpose.
THE SUPREME COURT
Summers represents a departure from the approach taken by the Court of Appeal in Ul-Haq. The Supreme Court found no provision in the CPR, nor any other authority, which restricted a court’s jurisdiction under Rule 3.4(2) to a particular stage in the proceedings. Lord Clarke, who delivered the judgment of the Court, saw no justification for inferring such a restriction and fettering a court’s jurisdiction to exercise its discretion on a case by case basis.
The implications of this broad reading of courts’ powers under the CPR were somewhat narrowed by Lord Clarke’s concession that, in practice, a court should not strike out a statement of case after a trial which had established liability, except in very exceptional circumstances. Any limitation of a claimant’s right to a fair trial, a right enshrined in Article 6(1) of the European Convention of Human Rights and Fundamental Freedoms, must pursue a legitimate aim, and the means of achieving it must be proportionate to that aim (Ashingdane v United Kingdom (1985) 7 EHRR 528). Lord Clarke stated that “The draconian step of striking a claim out is always a last resort, a fortiori where to do so would deprive the claimant of a substantive right to which the court had held that he was entitled after a fair trial. It is very difficult indeed to think of circumstances in which such a conclusion would be proportionate.”
Lord Clarke did not provide an example of circumstances in which such a step could be considered proportionate, except to say that the claimant’s deception would have to be very great in proportion to the size of the genuine claim.
On the facts of Summers, the Court concluded that striking out Summers’ entire claim would not have been proportionate: he had a legitimate entitlement to almost £90,000 in damages; there was no prospect of saving any time or costs; and it was open to the court to penalise Summers and mark its disapproval in ways which did not deprive the claimant of his claim, which it had done through adverse inferences and reduced costs and interest awards.
Summers has not brought any certainty as to the tipping point at which a claimant’s exaggeration justifies striking out his entire claim, after the defendant’s liability has been established. There will, therefore, be increased pressure on defendants to expose the exaggeration before a court has made findings as to liability. Before this point, summary judgment is available, and an application to strike out the claim is more likely to be granted. After a judgment on liability, settlement for the value of the genuine part of the claim may be the defendant’s, and its insurer’s, only remaining cost-effective option. Following Summers, therefore, where the matter has proceeded beyond issues of liability, the insurer should expect to indemnify the insured for at least the value of the third party claimant’s genuine claim.
Fairclough’s insurer pursued this action with the objective of securing a precedent which would deter fraudulent third party claimants. But confirmation of the theoretical power to strike out a statement of case after a judgment on liability will provide little comfort to defendants or their insurers. The challenge for a defendant to show that such a step would be proportionate is likely to be insurmountable in all but the most exceptional cases. The Supreme Court is clearly of the view that, in most cases, courts can adequately express their disapproval for exaggerated claims in ways which do not remove the right to claim damages entirely, and that such measures, coupled with the defendant’s right to bring contempt proceedings, will constitute a sufficient deterrent.