The earlier judgments in this case were reported in Weekly Updates 20/11 and 13/15. To establish the tort of deceit, it must be shown that the defendant dishonestly made a material false representation which was intended to, and did, induce the representee to act to its detriment. The necessity of inducement was of issue in this case.
Insurers had suspected that a personal injury claim brought by an employee against the insured employer was exaggerated but they entered into a settlement agreement with the employee. Several years later, evidence came to light that the employee had been dishonest and the insurers applied to court to recover the sums paid. The trial judge held that the settlement should be repaid, and the insurers only had to show that they had been influenced by the fraud, rather than that they believed it. However, the Court of Appeal overturned that decision, finding that the insurers had not merely disbelieved the claimant's assertions about his injuries, they had also pleaded that they were fraudulent, and so they could not now rescind the settlement agreement when proof of the fraud was obtained.
The Supreme Court has now allowed the appeal from that decision. It has held that, in order to set aside a settlement agreement based on fraudulent misrepresentation, to show the requisite influence by, or reliance on, the misrepresentation, it was not necessary to show that the representee (here, the insurer) had believed that the misrepresentations were true (as Lord Clarke acknowledged, there might be other reasons for settling eg because of a belief that the representation will be believed by a judge). Instead, it sufficed that the fact of the misrepresentations was "a material cause" of the representee entering into the settlement. As Lord Clarke also put it: "Logically, the representee is more likely to settle for a different reason other than the representation, if his reasonable belief is that it is false. One of the extraneous factors in this case, for example, was the fact that the insurers’ expert … had failed to produce, in their view, a report which set out the extent of the misrepresentations with sufficient clarity". As Lord Toulson put it too, the deceitful conduct "was intended to influence the mind of the insurers, not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than it was worth if the true facts had been disclosed, because the value of a claim for insurers’ purposes is that which the court is likely to put on it".
Lord Clarke said that he could not envisage any circumstances where earlier suspicion of exaggeration precluded unravelling the settlement when fraud is subsequently established.
COMMENT: The Court of Appeal's earlier judgment in this case caused practical problems for insurers who raise suspicions of fraud prior to a settlement (and then go on to discover proof of fraud). Although it would have been possible to address this issue by careful drafting of the settlement agreement, we would suggest that the Supreme Court has adopted a practical, common-sense approach to this issue. A comparison might also be drawn between last week's Supreme Court decision in Versloot, in which the Supreme Court restricted the definition of a fraudulent claim, with this decision, which demonstrates that the Supreme Court is nonetheless prepared to adopt a stringent approach towards fraudulent conduct, where found.