Compromise settlement not set aside despite fresh evidence of fraud

Judy Dawson, a leading member of the Park Square Barristers civil fraud team, looks at the Court of Appeal judgment in Hayward v Zurich Insurance Co Limited [2015] EWCA 327 in which the Court of Appeal overturned a county court judge who had rescinded a compromise settlement on the grounds that it had been based on a fraudulent misrepresentation.

Is this the end of ‘fresh evidence’ appeals where there has been a settlement?

The facts

1.    This case concerns utilising fresh evidence to overturn a settlement; it has no effect on cases where thecCourt has adjudicated on the evidence. The facts on which the Court of Appeal based its judgment were thus;

a)    H injured his back during an accident at work. Liability was compromised at an early stage (80%/20%).

b)    H claimed that the injury caused him serious and continual back pain, restricting his mobility and his ability to work, as well as a (resultant) depressive illness. His schedule of special damage was in the region of £420,000 with general damages in addition.

c)    It would appear that almost from the outset the defendant insurers were deeply suspicious of the claimant’s credibility and video surveillance was obtained which showed him undertaking heavy manual labour at home, highly suggestive of him exaggerating the consequences of his illness. The defence specifically pleaded;

“After viewing the video surveillance [the defendant’s consultant orthopaedic expert] formed the view that the claimant’s disability was not as great as he had described and he was capable of working full time even if not with heavy lifting. In view of the claimant’s lack of candour in relation to his physical condition it is not possible to accept that his depressive state, as described, has been consistent, is continuing or will continue into the future.

The claimant has exaggerated his difficulties in recovery and current physical condition for financial gain”

d)    The case was settled by the parties by way of an agreement, shortly before the quantum hearing was due to be heard, embodied in a Tomlin order, under which the insurers agreed to pay £134,973 in full and final settlement of his claim.

e)    About two years later, H’s neighbours approached the employers to say that from their observation of his conduct and activities, they believed that H had entirely recovered from his injury at least a year before the settlement was reached. The insurers claimed damages for deceit, asserting that the statements which H had made about the extent of his injury in his particulars of claim and witness statements constituted fraudulent misrepresentation. The settlement agreement was set aside after a trial at which both solicitor representing the insurer and the claims handler gave evidence, as well as the neighbours and H was awarded damages of £14,720 and ordered to repay the settlement sum, less that amount.

Discussion/analysis 

2.    It is important to note that it was not being argued before the Court of Appeal that it was wrong for the judge to have found that the claimant had exaggerated or that his injury was in fact only worth £14,720 (11% of what he had originally been paid) and it is hard not to summarise the case as “claimant obtained 9 times as much as what he was entitled to by lying”.

The law

3.    The defendant insurer originally issued proceedings for tort of deceit for the sum that the claimant had been paid minus the sum which he was properly entitled to (which after the judge’s findings turned out to be in the region of £120,000). The claim was subsequently amended to claim in the alternative rescission of the settlement agreement and return of the sums paid under it. An initial successful challenge to the proceedings by the claimant on the basis that due to the settlement the same was an abuse of process led to a Court of Appeal hearing which restored the claim at which Moore-Bick LJ said;

“If it is to succeed in its action Zurich will have to persuade the court that it was induced to agree to the settlement by fraud on the part of Mr.Hayward, a task that may not prove easy, given the fact that it already knew enough to justify the service of a defence in the terms indicated earlier.”

4.    It was this point that the case has eventually centred upon. In the Cambridge County Court HHJ Maloney QC appeared to be alive to the practical difficulties that defendant lawyers and insurers faced and having heard evidence that the solicitor and insurer did not necessarily believe H’s representations, and indeed were frustrated that the medical expert would not conclude that there had been deliberate exaggeration, but had to be settle the claim as it was clear such representations were going to be put before the court and there was a risk that they would be believed held that the law was as follows:

“Lastly, of course, it is necessary that the employer/Zurich should rely on the representations and suffer loss as a result. Here an interesting (and apparently unresolved) question of principle arises. In the ordinary case, sale of goods for example, reliance by the purchaser is effectively equivalent to his belief in the truth of the statement; if he believes the goods are as represented, he will be relying on the representation (and acting on it by his purchase) and if not, not. In the litigation context the position is different. In such a situation, the party to whom the representation is made is by no means likely to believe it to be true at the pre-trial stage. At the very least, statements made in the course of litigation will be viewed with healthy scepticism and weighed against the other material available. Often the other party will not be sure, even then, whether the statement is in fact true, and will mainly concern himself with how likely it is to be accepted by the court. Sometimes (a staged road traffic “accident” for example) the other party may actually be certain from his own direct knowledge that the statement is a deliberate lie. But even then he and his advisers cannot choose to ignore it; they must still take into account the risk that it will be believed by the judge at trial.”

5.    The judge therefore held that it was not necessary for the defendant insurer to show that it believed the representation was true and adopted a formulation put forward by the editors of Clerk and Lindsell, namely that the party was “influenced” by the representation.  He held that H’s representations had of course influenced the insurer and solicitor in making the settlement as they knew such representations would be put to the court as true and there was a risk that they might be believed.

6.    The Court of Appeal disagreed. It stated (as was not disputed) that later evidence which showed that certain factual elements of the particulars of claim were wrong could not be relied upon to rescind the settlement – otherwise no settlement would ever be final. There is an element of compromise in the majority of settlements because both parties are buying off a risk. The Court of Appeal recognised that different considerations would apply in cases of fraud however and it was put thus “while it may be fair to treat the defendant as having taken the risk of the claimant’s statements in support of his claim being wrong, it will not – absent any indication to the contrary – be fair to treat him as having taken the risk of them being dishonest.”

7.    Unfortunately for the defendant insurers and lawyers however (and in my view, unfortunately for the interests of justice), the most important phrase in that sentence was taken to be “absent any indication to the contrary”. LJ Underhill went on to hold that;

“The reason for treating fraud differently is that the court will not normally accept that a defendant has taken the risk that the claimant’s case is not just ill-founded but dishonest. But what risk the defendant is to be treated as having accepted must depend on the circumstances of the particular case. If it is in any case sufficiently apparent that the defendant intended to settle notwithstanding the possibility that the claim was fraudulently advanced, either generally or in some particular respect – the paradigm being where he has previously so asserted – there can be no reason in principle why he should not be held to his agreement even if the fraud subsequently becomes demonstrable”.

“It cannot be right that a defendant who has made an allegation of fraud against the claimant but decided in the end not to have it tested in the court should be allowed, whenever he chooses, to revive that allegation as a basis for setting aside the settlement. It may stick in the throat that the claimant can retain the reward of his dishonesty, but the defendant will have made the deal with his eyes open to the possibility of fraud, and there is an important public interest in the finality of settlements.”

8.    In the circumstances therefore, the court held that the settlement could not be rescinded.

9.    Some optimism for the future can be gleamed from the (supporting) judgment of Lord Briggs who whilst he reached the same conclusion did state;

“30. I readily acknowledge that the representee may not need to have had blind faith in the truth of the representation. He may only have been prepared to give the representor the benefit of considerable doubt. If by doing so he was influenced into making the contract, then he may succeed. But in this case Zurich did not merely disbelieve the Appellant’s assertions about the continuing effect of his injury. It went so far as to plead (under a statement of truth) that they were fraudulent. Again I acknowledge that the subsequent discovery by the representee that a statement which he had thought genuine but mistaken was in fact fraudulent might be sufficient for rescission because, in principle at least, fraud unravels all. But in this case there can be no such unravelling. Zurich alleged that the statement was fraudulent from the outset. All that happened thereafter was that better evidence of the fraud came to light than was available when the settlement contract was made.”

Summary & opinion

10.  The Court of Appeal having appointed itself the arbitrator of what constitutes “the public interest” effectively decided that the public interest in the finality of settlements (and the end to costly litigation) is more important than the public interest in preventing fraudulent claims. I disagree that that is a stance that members of the public would adopt; reflected one would feel by our criminal justice system.  Reopening litigation may be inconvenient, even stressful, and undoubtedly costly but it has never been suggested that it should be marked by the prison sentences which should greet the convicted fraudster.  It is rather odd that despite H being found to have deliberately and dishonestly attempted to mislead the court he is being rewarded by an extra £120,000 rather than a prison sentence.

11.  The judgment will be of some considerable concern to counsel, solicitors and insurers who have to deal in a world where some people see the claims system as a source of gain rather than compensation. I suspect that it is rare that those who have settled a particular claim are surprised when additional evidence shows the same to be fraudulent (either in extent or in whole). Good defendant lawyers and insurers have developed an experienced instinct as to when a claim is likely to be fraudulent or exaggerated. It is wholly different from having the evidence to prove it at trial (and commercial sense prevents a solicitor with an instinct but without evidence from forcing a claimant to prove it at trial – particularly in cases where the penalties for losing such a bet would be a 100% costs uplift). The very fact that the insurer and solicitor commissioned video surveillance in the first place shows that their experience and instinct alerted them to concerns about the claim. This judgment seems to reward the less experienced and conscientious insurer and lawyer who would not have raised doubts about the claim and thus would have been able to rely on the fraudulent misrepresentation.

12.  It may be that the terms of the Criminal Injuries and Courts Act 2015 (see Richard Paige’s article on the same on our website) enable defendant insurers and solicitors who have significant concerns about a claim to take the risk of the costs penalty of the court finding such representations are true given that there will be the added financial benefit of having to pay out no monies if a significant part of the claim is found to be dishonest.  It is incongruous that the law appears to be that at the very time when Parliament has decided that a dishonest claimant should be penalised for dishonesty by not even recovering his legitimate damages, a dishonest claimant who has gained a windfall by persuading (persuasion with a stiff costs penalty hanging over the defendant insurer) an insurance company to settle his dishonest claim is allowed to keep his damages.

13.  I note that as with the Supreme Court Fairclough judgment, the Court of Appeal appeared to suggest that the dishonest claimant may in fact not benefit at the end of the day as he will be penalised in costs, and I can see a strong argument that Mr Hayward should be richly penalised and have to pay all the costs of those proceedings necessitated by his fraudulent actions and the resultant claims and appeals (including the last Court of Appeal hearing, even though technically he won). I do not know the outcomes of the costs hearings; it would be nice to think that Mr Hayward walked away with nothing as a result of his dishonesty although I am not sure that our law should require the machinations of costs orders to achieve a just result.

Judy Dawson

Judy is a leading member of the Park Square Barristers civil fraud team in Leeds and has been advising the insurance industry on strategies and tactics to deal with fraudulent claims for the last 10 years. She works exclusively in the field of civil fraud and is recommended in the Legal 500; in 2013 she was described as having “a national following amongst insurance industry players and in the 2014 edition as having “a market-leading technical and strategic skill-set”. Read Judy’s profile.