The ruling of the court of first instance
Hayward involved a fraudulent misrepresentation in the form of an exaggerated employer liability personal injury claim. The settlement agreement in this case had been tainted with deceit. In this particular claim, Hayward sustained an injury at work in June 1998. He claimed against his employer’s indemnity insurance, and Zurich agreed to pay almost £135,000 in full and final settlement in October 2003.
Hayward’s neighbours had lived next door to him since 2002. In 2005, they contacted Hayward’s employer and informed the company that, having seen his conduct and activities, they believed that his claim was fraudulent. They gave witness statements to Zurich and, in February 2009, Zurich sought to recover damages for Hayward’s fraudulent misrepresentation of his injury.
The trial was listed before HHJ Moloney QC in Cambridge County Court in November 2012. During the four-day hearing, Hayward maintained his claim of having severe disabilities despite the overwhelming evidence against him, which included covert surveillance. Hayward was held to have deliberately and dishonestly exaggerated the extent of his injuries, and to have recovered from his injuries in October 1999.
Lord Clarke started from the point that the representee’s state of mind could be relevant to inducement, but this did not mean that the representee must believe the representation to be true
The court awarded Hayward £14,720 in damages for his injury. He was ordered to return the difference, which was £97,780 plus interest of £34,379. He was also ordered to make an adjustment figure payment of £3,951 to the Compensation Recovery Unit.
The problem for Zurich stemmed from the original settlement involving those acting on its behalf (ie, Zurich’s solicitor and claims handler), who did not believe the truth of Hayward’s representations, but decided to settle at a higher amount because, at that time, they did not have sufficient evidence to persuade the court of Hayward’s fraud. This was, to an extent, because Zurich’s medical expert did not fully contradict the evidence available at that time. Thus, Hayward’s version of events could have been accepted, in part or in full, which is why the court and Zurich had to balance that risk against making a higher settlement.
HHJ Moloney QC’s decision was appealed. The Court of Appeal focused on the state of Zurich’s mind at the time of the settlement, and unanimously granted Hayward’s appeal ([ 2015] EWCA Civ 327). Zurich appealed to the Supreme Court and leave was granted. The parties to the appeal agreed that the appeal raised two issues.
In order to set aside a compromise on the basis of fraudulent misrepresentation, to show the requisite in›uence by or reliance on the misrepresentation:
a) must the defrauded representee prove that it was induced into settlement because it believed that the misrepresentations were true; or
b) does it suffice to establish influence that the fact of the misrepresentations was a material cause of the defrauded representee entering into the settlement? (para 17)
The second issue was as follows: ‘Under what circumstances, if any, does the suspicion by the defendant of exaggeration for financial gain on the part of the claimant preclude unravelling the settlement of that disputed claim when fraud is subsequently established?’ (para 17).
Lord Clarke gave, with unanimous agreement, the lead judgment in favour of Zurich (with which Lady Hale and Lords Reed, Neuberger and Toulson agreed), but because of the importance of this area of law Lord Toulson provided a concurring judgment (with whom Lady Hale and Lords Reed and Neuberger agreed).
Lord Clarke started with a conclusion to points (a) and (b) above to which he answered ‘no’ to issue 1 point (a) and ‘yes’ issue 1 to point (b). He then went on to explain how he had reached his decisions. Lord Clarke briefly reviewed the authorities, (see box) and the Court of Appeal’s judgment, of which he was highly critical: Briggs LJ’s judgment did not fare well.
Lord Clarke started from the point that the representee’s state of mind could be relevant to inducement, but this did not mean that the representee must believe the representation to be true. The conclusion must be that inducement and causation are questions of fact rather than law. Lord Clarke referred to six questions that were submitted by Zurich, and gave specific answers which aid any following cases bringing actions in deceit (para 28).
Where the representee could rely on the representation to show inducement, a lack of belief does not indicate a lack of inducement. Lord Clarke reviewed the authorities and concluded that the representee’s mind only needs to be influenced.
He confirmed that belief in any other inducing cause was irrelevant.
Lord Clarke confirmed that inducement was a question of fact and not law.
In relation to rebutting the presumption of inducement where there has been a misrepresentation, Lord Clarke concluded that the authorities were unclear, but considered the correct position to be one as expressed by Lady Hale in Sharland v Sharland [2015] 3 WLR 1070, ie, a fraudster ‘cannot be allowed to deny its (the misrepresentation) materiality or that it actually played a causative part in inducement’ (Hayward, para 37). Therefore, a fraudster will find it extremely difficult to rebut the presumption of inducement.
He held that there was no duty on the representee to be careful, suspicious or diligent in research. Zurich, in this instance, had conducted the best investigation that it could until the new evidence came to light.
Lord Clarke upheld HHJ Moloney QC’s ruling that distinguished between settlement contracts and those where goods are purchased and one can simply walk away, as Zurich did not have all the material facts when it settled, and the company was induced, by this, to make a settlement for an amount grossly in excess of that to which the fraudster was entitled.
In relation to the second issue raised by the appeal, Lord Clarke said: ‘The answer seems to me to follow from the answer to the first question’ (para 48).
By comparison, Lord Toulson’s judgment commenced with the observation that fraud in personal injury cases was not a 21st-century phenomenon and that he realised the importance of this issue. He continued considering the elements necessary for liability:
Lord Toulson considered that only the impact on the representee was at issue before the court. He stated that deceit was one of the torts that required the representee’s mind to be influenced so they act to their detriment. He considered cases such as Redgrave v Hurd (1881) 20 Ch D 1, where Jessel MR stated that there was an inference in law that the representee would be induced where there had been a material misrepresentation. This inducement requirement is needed in every deceit case.
As a result of his observation of the law, Lord Toulson stated that HHJ Moloney QC was correct in his approach to reliance and the requirement that this needed to be considered in the particular circumstances of the case. Hayward’s deceit was calculated to influence Zurich’s mind by tricking the company into a higher settlement value than its honest value: whether or not Zurich believed him was irrelevant.
This is the first time the courts have considered unravelling a settlement agreement in such circumstances. Insurers clearly have the law on their side, which is needed in the fight to stop fraudsters. However, Hayward’s case was before a finding of ‘fundamental dishonesty’ was available under Criminal Justice and Courts Act s57, which may intercept such claims at an earlier stage. It is still a risk for insurers regarding whether they are willing to reopen such issues as these cost time and money.
These concerns aside, Lord Toulson did leave a postscript at paragraph 73. This stated that, if there was to be a settlement agreement, an insurer seeking to set aside the settlement, for fraud, must prove the fraud by evidence which it could not have obtained by due diligence at the time of settlement. This was not at issue in Hayward and the postsript was, therefore, obiter.