UpdateTo Settle or Not to Settle – That’s No Longer The Question: SC Sets Aside Settlement Where Party Proves Suspected Fraud

1st September 20160
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Summary

The Supreme Court (“SC”) has unanimously held that a party may be entitled to set aside a settlement agreement (“SA”) due to fraudulent misrepresentation even where that party did not fully believe the representations at the time of entering into the SA.

Facts

Following an accident at work in 1998, the Claimant (“C”) brought a claim for personal injury against his employer (“D”) for which liability was accepted. At trial, there was evidence suggesting that C had grossly and dishonestly exaggerated his claim for financial gain. However, in 2003, the parties entered into a SA. Two years later, D’s insurer uncovered evidence showing that C had fully recovered from his injuries at least a year before the SA. The insurer, acting on behalf of D, subsequently brought proceedings against C for damages for deceit on the basis that C had made fraudulent misrepresentations about the extent of his injuries. The insurer also sought to set aside the settlement agreement. At first instance, the judge found that the misrepresentations had influenced the insurer to agree a higher settlement sum than it would otherwise have agreed. As a result, the SA was set aside and C was ordered to re-pay the sum, less the value of his actual claim. C appealed on the basis that the insurer had to show it believed the misrepresentations rather than merely be influenced by them. The Court of Appeal overturned the first instance decision because the insurer had specifically argued that C’s claim had been dishonest before entering into the SA. The insurer appealed to the SC.

Held

The SC unanimously held that the insurer did not have to prove that it believed the misrepresentations at the time it entered into the SA in order to set it aside. This is because belief in the truthfulness of the misrepresentation is not a necessary ingredient of the test for the tort of deceit. What is a more important consideration is whether the insurer thought that the judge would believe the misrepresentations. As a result, simply because the insurer did not give full credit to the fraudster’s claim does not mean that it was not something that induced the insurer to enter into the SA and pay nearly ten times more than the insurer would otherwise have paid. In any event, the insurer did not have full knowledge of the facts because its initial investigations did not reveal the evidence which later proved the dishonesty and so the insurer was unaware of the extent to which the injuries were being exaggerated. The SC further held that it is difficult to envisage any circumstances where a mere suspicion of fraud would preclude the unravelling of a SA where fraud is subsequently established.

Comment

The judgment illustrates that fraud trumps the public policy consideration of finality in the field of settlement agreements. This, in turn, could have a wider impact in the world of contract whereby settlement agreements may be set aside as long as a party can subsequently prove the initial doubts it had about the veracity of the settled claim.

Hayward v Zurich Insurance Company plc [2016] UKSC 48

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