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This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Setting aside fraudulent settlements
 Briefing 
Date
10 August 2016

Setting aside fraudulent settlements

The Supreme Court has recently ruled on the ability to set aside settlement agreements. Hayward v Zurich Insurance Company plc [2016] UKSC 48, overrules the Court of Appeal, creating new law which allows settlement agreements to be set aside for fraudulent misrepresentation, even in circumstances where it is suspected that the claim is fraudulent before entering into the agreement.

Background

Mr Hayward suffered an injury at work and brought a claim for negligence against his employer. Both the employer and its insurer, Zurich, suspected that Mr Hayward's claim had been exaggerated, but they had no proof. They therefore agreed to settle the claim, and this was funded by the insurer.

It later became clear, through evidence provided by Mr Hayward's neighbours, that his injuries had been exaggerated. The insurers therefore sought to have the Settlement Agreement set aside using the tort of deceit. This is an unusual feature of the claim, in that the insurers were not a party to the original Settlement Agreement.

The claim raised the question of whether a settlement agreement could be set aside when one of the parties to the agreement had thought that the claim could be fraudulent at the time of settling.
Mr Hayward appealed the initial decision, and the Court of Appeal held that the settlement agreement could not be set aside, because the employers and insurers had suspicions of Mr Hayward's exaggerations at the time of settlement, so had not relied upon Mr Hayward's misstatements when they entered the Agreement.

However, this decision was then overturned by the Supreme Court.

Supreme Court Judgment

The Court found unanimously in favour of Zurich. Lord Clarke held that "it is not necessary, as a matter of law, to prove that the representee believed that the representation was true". It therefore did not matter whether Zurich or the employer believed the misstatements or not. All that was important was whether the misstatements were in some way material to them entering into the settlement.

The court found in favour of Zurich's argument that whilst they had suspicions about the injuries, they also had a genuine concern that a court may believe Mr Hayward's claims if the matter had proceeded to trial. This had therefore led them to enter into the Settlement Agreement. Lord Clarke agreed with the first instance judge, HHJ Moloney QC, when he said that "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". Lord Clarke also held that there is no duty upon a defrauded representee to exercise due diligence to determine whether there are reasonable grounds to believe the representations made.

Whilst the court did not go so far as to say that this was a universal rule, they acknowledged that there may be circumstances were misstatements that were not believed to be true, could still cause a party to enter into a settlement agreement.

Lord Clarke further stated that "it is difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established".

Lord Toulson, who was also sitting for the recent Supreme Court decision, Versloot Dredging v HDI Gerling Industrie Versicherung AG [2016] UKSC 45, agreed with Lord Clarke, but felt it necessary to emphasise that inducement was a question of fact. Accordingly, it is necessary to establish causation in all cases, but causation can be established in different ways. Lord Toulson noted the difficulties that insurers face when they suspect a claim to be fraudulent, but have no means to prove that it is false.

Analysis and Impact

This decision therefore shows that it is possible to set aside a settlement agreement for deceit, even if there were suspicions of fraud when the agreement was entered into. The case also shows the importance of always ensuring that you have insurer consent before entering into a settlement agreement, particularly in the event of suspicions of fraud. This is because you will need to work with the insurer to set aside the agreement.

It is interesting to note that this decision comes a few weeks after another Supreme Court decision also concerning fraudulent insurance claims. That decision, Versloot Dredging v HDI Gerling Industrie Versicherung AG, re-defined what constitutes a fraudulent claim. For further information on this case, please see our article.

For more information please contact a member of the Mishcon Insurance Team.