When it comes to unsettling settlements, everybody needs good neighbours: Hayward v Zurich Insurance Co [2016] EWCA Civ 327

On 27th July 2016 the Supreme Court handed down their Judgment in the case of Hayward.  The case was concerned with whether or not a Defendant, who had settled a personal injury claim despite pleading that the same was exaggerated, could later seek to set aside that settlement on the basis that new evidence of fraud arose.

Facts

In 1998 Mr. Hayward injured his back in an accident at work.  He sued his employer claiming that the effects of his injury were ongoing, serious and undermined his capacity to work (‘the original claim’).  He sought nearly £420K.  The employer’s insurers, Zurich, conducted the defence.  The parties agreed liability on the basis of an 80/20 split in Mr. Hayward’s favour.  That Mr. Hayward was injured to some extent was not disputed.

 In 1999 Zurich obtained and disclosed surveillance evidence showing Mr. Hayward carrying out heavy work at home which appeared to be contrary to his case.  In 2001 Zurich entered a Defence which referred to the surveillance evidence and pleaded that Mr. Hayward had ‘exaggerated his difficulties in recovery and current physical condition for financial gain’.  I pause here to note that in the Court of Appeal Briggs LJ considered this to amount to a pleading of fraud whereas Lord Clarke, giving the lead Judgment in the Supreme Court, concluded that Briggs LJ’s stance was putting Zurich’s pleaded case ‘too high’.  He said that the pleading showed ‘that Zurich was suspicious of Mr. Hayward but no very clear allegations were, or could be, made’.

Despite that pleading Mr. Hayward maintained that the entirety of his claim was genuine.  Having seen the surveillance evidence Zurich’s medical expert was reluctant to state clearly that he believed Mr. Hayward was shamming.  In 2003, shortly before the issue of quantum was due to be tried, Zurich settled the claim for nearly £135K.  Lord Clarke in the Supreme Court stated that the settlement figure appeared to have been calculated as being ‘about half way between the respective opinions of the (medical) experts’ as at the date of settlement.

 In 2005 Mr. Haywards’ neighbours contacted his former employers and informed them that Mr. Hayward had fully recovered from his injuries a year or more before the case was settled.  They provided witness statements to that effect.  As a result, in 2009 Zurich sued Mr. Hayward in the Tort of Deceit, arguing that misrepresentations made by him during the litigation via pleadings, medico-legal evidence and witness statements were fraudulent misrepresentations (‘the misrepresentations’).  They also sought rescission and/or set aside of the settlement contract (‘Zurich’s claim’).

It was not disputed that in order to succeed Zurich had to show that Mr. Hayward made one or more material misrepresentations which were intended to, and did, induce Zurich to act to its detriment.  An important sub-issue was whether or not it was possible for a party to be induced to act to its detriment by a misrepresentation which that party knew or believed was not true.

First Instance 

At first instance Zurich’s claim was heard before HHJ Moloney Q.C. The Judge found that Mr. Hayward had deliberately and dishonestly exaggerated the effects of his injury throughout the original litigation.  He found that whilst those who had settled the original claim may not have believed that the misrepresentations were true ‘they did believe that they would be put before the court as true, and that there was a real risk that the court would accept them in whole or in part and consequently make a larger award than Zurich would otherwise have considered appropriate’.  Rather than approach the issue of inducement by reference to Zurich’s knowledge or belief or about the truthfulness of the misrepresentations at the point of settlement the Judge stated that the test set out in Clerk and Lindsell was a better approach. That test sets out that a party must show that it was ‘influenced by the misrepresentation’ in order to establish that it had been induced to act to its detriment by the same.   The Judge found that the misrepresentations influenced Zurich such that it settled at a sum higher than it would otherwise have done.  The settlement sum was set aside and Mr. Hayward was ordered to repay the same minus a small amount reflecting the value of his true claim.

Mr. Hayward appealed the decision to set aside the settlement.  Mr. Hayward argued that in order to succeed in Zurich’s claim it had to show that it believed the misrepresentations at the time of the settlement rather than merely be influenced by the same.  He did not seek to challenge HHJ Maloney Q.C.’s findings of fact regarding his dishonest conduct or of the effect that his misrepresentations had had on Zurich.   The Court of Appeal overturned the decision at first instance on the basis that Zurich had agreed the settlement despite overtly arguing that Mr. Hayward’s claim was dishonest within the original claim.  The Court of Appeal concluded that in order for a party to successfully argue that it had been the victim of fraudulent misrepresentation it had to show that it had originally ‘given some credit to its (the misrepresentation’s) truth, and been induced into making the (settlement) by a perception that it was true rather than false’.

The Supreme Court 

Zurich appealed the Court of Appeal’s decision.  In the Supreme Court the central question before the court was this.  Must Zurich prove that it was induced in to settlement because it believed that the misrepresentations were untrue or is it enough to prove that the misrepresentations were a material cause of it settling?

 The Supreme Court unanimously found that Zurich did not have to prove that it believed the misrepresentations at the time of the settlement in order to seek to set the same aside and allowed the appeal.  The Supreme Court largely followed the reasoning set out in HHJ Maloney Q.C.’s ‘admirable judgment’.

It seems to me that the following points can be derived from this case:

•  Whether or not a party was induced to act to its detriment by a misrepresentation is a matter of fact in each case.
•  In the context of litigation settlements mere belief by a party, at the time of settlement, that a representation is false is not a bar to that party later relying on the same as a misrepresentation which induced it to act to its detriment.  In his Judgment Lord Clarke stated as follows:
  •  ‘belief is not required as an independent ingredient of the tort (of deceit).  It may however be relevant as part of the court’s consideration of the questions whether there was inducement and, if so, whether causation has been established’ (paragraph 25)
  •  ‘the representee’s (in this case Zurich’s) reasonable belief as to whether the misrepresentation is true cannot be a necessary ingredient of the test, because the representee may well settle on the basis that, at any rate in a context such as the present, he thinks that the representation will be believed by the judge.  But it is centrally relevant to the question of inducement and causation’ (paragraph 32)
  • ‘qualified belief or disbelief does not rule out inducement’ (paragraph 40).  Lord Clarke expressed the view that that was the case particularly where the evidence founding such beliefs becomes stronger following the inducement.
• In the context of litigation settlements actual knowledge by a party, at the time of settlement, that a representation is false may not be a bar to that party later relying on the same as a misrepresentation which induced it to act to its detriment.  In this case it was stated that Zurich did not know the full extent of Mr. Hayward’s misrepresentations and so the court was not required to determine the issue of what, if any, difference actual knowledge would have made to the outcome of the case.  However, that did not stop various observations being made on that issue.
• Lord Clarke found that where a representee (Zurich in the current case) does not believe representations which are the foundation of a settlement ‘he might have serious difficulty in establishing that he had been induced to enter into the (settlement) or that he had suffered loss as a result’.
•  At paragraph 44 of his Judgment Lord Clarke stated ‘it seems to me that there may be circumstances in which a representee may know that the representation is false but nevertheless may be held to rely upon the misrepresentation as a matter of fact’.  Lord Clarke then cited the example given by HHJ Moloney Q.C. of a staged road traffic collision giving rise a claim where the defendant insurer ‘may actually be certain from his own direct knowledge that the statement (presumably that any actual collision was genuine rather than staged and in turn that genuine injuries and loss flowed from the same) is a deliberate lie.  But even then he and his advisors cannot choose to ignore it; they must still take into account the risk that it will be believed by the judge at trial’.

Whilst there was, no doubt, argument to the effect that certainty is required in the context of settlements Lord Clarke stated ‘I am not persuaded that the importance of encouraging settlement, which I entirely agree is considerable, is sufficient to allow Mr. Hayward to retain moneys which he only obtained by fraud’.  He might well have said that the importance of discouraging fraud is far greater than the importance of encouraging settlement.