Fraud will not always unravel a settlement agreement

Zurich admitted liability (subject to a 20% deduction for contributory negligence). Notwithstanding this admission, Zurich contended that Mr Hayward had exaggerated the consequences of his injury. In support of this allegation, Zurich relied on video-surveillance evidence relating to Mr Hayward which appeared to show him undertaking heavy work at home. However, before quantum was decided, Mr Hayward and Zurich agreed a settlement (the Settlement). Zurich paid Mr Hayward GBP 134,973.11 in full and final settlement of his claim.

Two years after the Settlement, Mr Hayward’s neighbours approached Zurich. The neighbours informed Zurich that they believed that Mr Hayward’s claim to have suffered a serious injury to his back was dishonest and that he had entirely recovered from his injury at least a year before the date of the Settlement.

Zurich thereafter sought:

• Damages for deceit on the basis that statements made by Mr Hayward about the extent of his injury and the information he provided to medical professionals constituted fraudulent misrepresentation.
• In the alternative, recession of the Settlement and repayment of the settlement sum

At trial Mr Hayward was found to have dishonestly exaggerated the effects of his back injury. The Settlement was set aside and Mr Hayward’s damages were reduced to GBP 14,720. 

The Court of Appeal allowed Mr Hayward’s appeal. Underhill LJ (who gave the leading judgment) emphasised the well-established principle that settlement of an ill-founded claim is nonetheless binding. However, if one party makes a statement made about a claim (which the other party believes is genuine) but this statement turns out to be fraudulent, that might be sufficient to rescind a settlement agreement. However, in this case Zurich had expressed doubts as to the truthfulness of Mr Hayward’s statements regarding the consequences of his injury and had gathered
video-surveillance evidence of him prior to the Settlement. While Mr Hayward had lied about the consequences of his injury, Zurich had alleged that Mr Hayward was dishonest from the outset. This meant that the Settlement could not be rescinded.

Underhill LJ acknowledged that the decision to allow Mr Hayward’s appeal was unattractive as it meant that Mr Hayward would retain the benefit of a settlement far in excess of the value of his actual loss. However, Underhill LJ emphasised that there was a more wide-reaching principle at stake in this case – namely, that parties who settle cases with their eyes open should not be entitled to rescind a settlement and/or re-open a case when better evidence becomes available at a later date.

COMMENT 

The key practical implications of this decision is that parties who are alleging fraud or dishonesty in proceedings should take into account the impact this will have on their ability to rescind a settlement agreement and/or re-open proceedings at a later date. It is likely to be very difficult for parties to re-open settled proceedings unless it can be shown that there was no knowledge or suspicion of fraud or dishonesty at the time a settlement was reached.

Firms that face settling cases where they suspect fraud or dishonesty on the part of the other party may wish to consider including provisions in their settlement agreements which provide for sums to be repaid in the event that the suspected fraud or dishonesty is later established. For example, a warranty may be included in a settlement agreement that requires the other party to warrant that any representations it has made in connection with the matter prior to settlement have been truthful. Alternatively, provisions could be included in a settlement agreement that allow sums to be paid in instalments over a period of months or years. In the event that the party receiving those sums is proved to have acted fraudulently or dishonestly, any outstanding sums may be withheld.