Summary: The Supreme Court has held, in Hayward v Zurich, that where a party is induced to settle a dispute by a misrepresentation, they can subsequently seek to have that settlement set aside (and claim damages for deceit) on the basis of evidence uncovered later. This article considers the court’s reasoning, and compares it with the decision in Versloot which also concerned the recourse available to insurers facing dishonest claims.

Background of the case

Hayward v Zurich concerned a workplace injury claim. Liability had been admitted at an early stage, with a deduction for contributory negligence. The parties reached settlement on the issue of quantum before it was to be tried, in spite of video evidence appearing to show that Mr Hayward had exaggerated the effects of his injury.

Two years after settlement, Mr Hayward’s neighbours volunteered full witness statements as to his conduct, stating that they believed he had fully recovered from his injury at least a year prior to settlement. The employers’ insurers brought proceedings against Mr Hayward, claiming damages for deceit and citing a number of fraudulent misrepresentations which it argued had induced the settlement.

The insurer succeeded in its claim for damages at first instance, HH Judge Moloney QC finding that Mr Hayward had dishonestly exaggerated the effects of his injury. Whilst it was found that Zurich had not believed Mr Hayward’s representations, it had influenced the settlement in that Zurich had considered that the court might believe them on the available evidence.

The court ordered that the settlement be set aside and that 90% of the original settlement sum be repaid, leaving Mr Hayward with the amount found to be actually due to him.

Court of Appeal

As noted in our previous post on the Court of Appeal’s decision, the High Court was overturned on appeal, with the leading judgment given by Lord Justice Underhill. He concluded that where “the misrepresentations on which the claim for rescission is based consist of (some of) the very averments of fact which the claimant made in advancing that claim”, a defendant will not be entitled to set aside the agreement on the basis that he can now show that the factual statements of the case were false. The defendant had chosen to take the risk, in settling, to forego the opportunity to prove its case that the representations were untrue at trial at a later date.

Where the factual statements relied upon by the defendant are not only false but fraudulent, there may be the possibility of setting aside the judgment. The Court of Appeal reasoned, however, that this is not the case where dishonesty was central to the allegations that had been settled. In that instance the defendant would have factored the possibility of the claims being fraudulently advanced (generally or in some particular respect) into its calculation of risk in settling.

The judgment recognised that this decision may be difficult to accept in that it allows the claimant in certain situations to retain the reward of its dishonesty. The court drew attention to the wider principle that “parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later”.

The Supreme Court

Notwithstanding the attraction of the Court of Appeal’s reasoning, its decision has been unanimously overturned on appeal to the Supreme Court.

Lord Clarke, giving the lead judgment, held that a defrauded representee (i.e. in this case Zurich) does not need to prove that it settled because it believed the misrepresentations to be true. A qualified belief in a misrepresentation does not rule out the conclusion that the insurer was induced by it. Lord Toulson, concurring, stated that it must be shown that the false representation caused the insurer to act to its detriment – the inducement being a question of fact. The state of mind of the representee will be relevant to, but not necessarily decisive of, the consideration of inducement into the settlement agreement.

In this case, the representee had not known the representation to be false and relied upon it regardless. Zurich had not known that Mr Hayward was deliberately exaggerating his injuries to the extent that became clear after settlement. Zurich had done all it could to investigate, and Mr Hayward had continued his deliberate misrepresentations after the video footage had come to light.

The question of whether knowledge of the falsity of a representation would always prevent a representee from proving that he was induced by it did not fall to be decided in this case.

BLP Opinion

This decision touches on broadly similar ground to the recent Supreme Court decision in Versloot Dredging v HDI-Gerling, in which it was held that a “collateral lie” (i.e. an immaterial embellishment) will not invalidate a claim. How should the courts approach a dishonest claimant? The obvious difference is in the question of the materiality of the lie.

In Versloot, the embellishment in question had not been material to the recoverability of the claim on the true facts as found by the court, as the case was justified regardless of it. In Hayward the insurer had, in choosing to settle at that amount, been influenced by the representation despite a qualified belief in its truth, as it had considered that there was a risk the court might find in favour of the claimant on the evidence available at that time.

Liability had been admitted by the insurer in Hayward. Embellishment of the extent of the injury was a truly material factor as the remaining dispute (which had been due to be tried before settlement was reached) concerned quantum.

In Versloot, the reckless embellishment complained of was not materially relevant to the legitimacy of the claim and the insured did not stand to gain, nor the insurer to lose, by believing it.

In this way, both findings are consistent with “the fraudulent claims rule” that if the untruth has any material relevance as to recoverability, whether as to the principle or quantum, then it will invalidate the claim.

This decision will no doubt be of some comfort to insurers suspicious of an insured’s claim who, lacking the hard evidence required to bring an allegation of fraud, decide to settle. Proceed with caution however - it may well be difficult to show inducement if it can be proven that the misrepresentation was known to be incorrect at the time. Importantly, this judgment does not reach a decision as to whether insurers may unravel settlements on the basis of a fraudulent misrepresentation, if the representee knows from its own direct knowledge that it was false at the time. Inducement and causation will be questions of fact.