Personal injury practice update

When considering personal injury claims from a defendant’s point of view, there is perhaps nothing more galling than dealing with a claimant who is suspected of committing fraud but cannot be proved, resulting in the defendant entering a settlement. From the claimant’s point of view, there is nothing worse than entering a full and final settlement, only later to be accused of fraud and have the defendant start litigation again to rescind the settlement based on fraud, which offends the idea of the sanctity of settlement.

The question that has to be asked is: What is the position if hard evidence of fraud is discovered post settlement? The answer can be found in decision of the Court of Appeal in Hayward v Zurich Insurance Company plc, which for some defendants may prove unpalatable.

Facts: In 1998, Hayward worked for David S Smith Packaging Ltd. Zurich provided Smith’s employers’ liability insurance. Hayward brought a claim against Smith for a personal injury, and Zurich defended the claim. It became apparent to Zurich that Hayward may be exaggerating his injuries, so, in October 1999, their agents took Hayward under covert surveillance.

In 2001, Hayward issued proceedings alleging that he suffered a spinal injury. He claimed that he had continuing disabilities, was fit for only light work and suffered from moderate depression. He claimed £420,000 in damages, including for loss of earnings. The defendant disclosed the video footage to the medical experts, and they sought clarification on his symptoms. They concluded that he was only fit for part-time work, which should not include heavy duties.

Liability was compromised with a reduction for contributory negligence at 20%. Zurich’s total offer was around £135,000. This was accepted in full and final settlement, and embodied in a Tomlin order.

Mr and Mrs Cox lived next door to Hayward from June 2002 until October 2005. In 2005, they contacted Smith and Zurich alleging, in later witness statements, that they knew Hayward well and he had been exaggerating his injuries significantly and they contradicted what he had said. This resulted in the overpayment of damage to Hayward of £72,000.

Zurich issued proceedings alleging, among other things, that fraudulent misrepresentations had induced the settlement.* The claim was heard at first instance before HHJ Moloney QC in Cambridge County Court. Zurich claimed for damages, ie, for the difference between the settlement and the true loss. HHJ Moloney QC held that Hayward had dishonestly exaggerated his injuries, which had increased the value of his claim. As a result, Zurich succeeded and the judge rescinded the Tomlin order. Hayward appealed. What is the position if hard evidence of fraud is discovered post settlement? The answer can be found … in Hayward.

Decision: This appeal was not just a simple matter of setting aside a contract. The implications were vast: if Zurich were to be successful, it could undermine a point of public policy, in that the parties had entered freely into a compromise agreement under which they had both agreed to surrender their rights to a final determination at trial. If this claim were allowed, it would open the floodgates. Briggs LJ made this observation: ‘[ It] would be that it would become almost impossible to compromise a whole swathe of litigation if settlements were vulnerable to being set aside in this manner (para 33).

Therefore, this was clearly something that the courts wished to avoid. Considering settlements more generally, Briggs LJ stated: ‘The public policy which encourages settlement of litigation would be gravely undermined if, in effect, dissatisfaction on either side led, with or without later forensic research, to the settlement being impugned on the ground that the opponent’s case contained a misrepresentation which, without being believed, influenced the terms of settlement’ (para 33).

However, and perhaps most importantly, he placed fraud in a different category and, simultaneously, distinguished the current case before the court. In perhaps the most important paragraph of the judgment he stated: ‘I accept that fraud stands in a different category but not if, as here, the settlement compromised an allegation of fraud already on the pleadings’ (para 34).

He clarified that if fraud was not originally pleaded, then a settlement agreement could be set aside for fraud where ‘the traditional requirement of the party seeking rescission [has] to show that he has been misled or defrauded’ (para 34).

Therefore, the Court of Appeal held that as Zurich had originally pleaded fraud, it could not rescind the compromise agreement. Effectively, Zurich had not been induced by any representations: the defendant knew about the fraud. Zurich had clearly assessed the extent of its liability, and had formed a structural position for the purpose of bargaining, essentially deciding whether to settle and for what amount. This included assessing any risk that the courts might uphold the claimant’s version of the facts. Zurich went into this with its eyes wide open.

Underhill LJ dismissed any idea that reliance by Zurich arose in these circumstances. He drew from the approach by Neuberger LJ (as he then was), in Kyle Bay Ltd t/a Astons Nightclub v Underwriters Subscribing under Policy No 019057/08/01 [2007] EWCA Civ 57 at paras 41 and 42, who held that a misrepresentation made by the insured had been treated not as a misrepresentation, but as a contention, ie, the assured’s statements were treated ‘as correct for the time being, without necessarily believing that they were accurate’ (Hayward para 24 quoting Neuberger LJ in Kyle Bay Ltd t/a Astons Nightclub para 42).

Underhill LJ concluded that ‘there is a wider principle at stake, that parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later’ (para 25).

Comment: It can now be seen that fraud will serve as a reason why a settlement can be rescinded, but it is clearly conditional on the fact that, originally, the defendant did not plead fraud. So, if new evidence of fraud came to light, the defendant could be successful provided they can satisfy the inducement requirement and the standard of proof in fraud cases.

It appears that, for the defendant, this is probably going to be a question of strategy, perhaps keeping their tinder dry and not alleging fraud until they have the evidence. A claimant exaggerating the extent of their injury for a greater award for damages may well be caught off guard by video evidence post settlement, whereas pre settlement they may well be guarded.

Finally, however, this precedent has far-reaching consequences outside settlement agreements in personal injury cases. Effectively, it covers all contractual settlements, as Briggs LJ states:

… there would be no easy way of confining this more generous approach to inducement to the rescission of contracts in settlement of litigation. If the mere making of a misstatement rather than belief in its truth is to be a sufficient influencing factor, then there is no telling in what contractual contexts it may be applied, with debilitating effects upon contractual force and certainty (para 35).

* See issues relating to an estoppel argument and whether there was an abuse of process (Zurich Insurance Company plc v Hayward [2011] EWCA Civ 641).