New Zealand: Can a settlement agreement ever be set aside?

Can a settlement agreement ever be set aside?

The UK Supreme Court has now clarified an uncertain area of law regarding deceit and misrepresentation in the context of settlement agreements, where fraud is suspected: Hayward v Zurich Insurance Company plc [2016] UKSC 48.

Background

Mr Hayward injured his back during an accident at work in 1998, and claimed he had suffered serious lumbar pain, restricted mobility and consequential depression. His employer's insurer, Zurich, disputed the seriousness of his injury based on a video showing Mr Hayward lifting heavy objects at home in 1999.

After Mr Hayward issued proceedings claiming £420,000, the parties reached an agreement in 2003, under which Zurich agreed to pay £134,973 in full and final settlement of Mr Hayward's claims. Two years later, Mr Hayward's neighbours informed the employer that his conduct and activities had led them to believe that he had recovered from his injury at least a year before settlement was reached.

Zurich then issued proceedings to set the settlement agreement aside on the grounds that Mr Hayward's fraudulent misrepresentations had induced it to enter into the settlement agreement.

The primary issue considered by the County Court, Court of Appeal and Supreme Court was whether the defrauded party's belief in the representation was a necessary ingredient for setting the agreement aside.

County Court

The County Court distinguished misrepresentation in the settlement context from other contexts using the following analogy:

In the ordinary case, reliance by the purchaser is effectively equivalent to his belief in the truth. If he believes the goods are as represented, he will be relying on the representation and acting on it by his purchase...This situation is quite different from a proposed purchase, where if in doubt one can simply walk away.

The Court emphasised that an insurer cannot walk away from a claim. The settlement agreement was set aside on the basis that while Zurich (as 'representee') may not have believed Mr Hayward's representations to be true, it 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. Relying on that belief, Zurich made a larger settlement payment than it would otherwise have considered necessary to settle the claim.

The Court ordered Mr Hayward to repay the amount paid to him under the settlement agreement, less £14,720 (the amount he should have been paid for his injury).

Court of Appeal

The Court of Appeal disagreed with the County Court and held that while a party need not have blind faith in the truth of a representation in order to establish reliance, it must have given some credit to its truth and been induced into entering the agreement by a perception that it was true rather than false. It overturned the County Court's decision, stressing the finality of settlement agreements which would be seriously undermined and public policy favouring the encouragement of settlements.

Supreme Court

In agreement with the County Court, the Supreme Court unanimously held that the representee's state of mind is relevant to, but will not necessarily determine, the court's consideration of inducement to enter into a settlement agreement. The Court accepted that the situation is different in the settlement context, in which the insurer does not have the option of simply walking away if it does not believe the claimant's statements. The question is not what view the party itself takes, but what view a court may take in due course.

The Supreme Court also considered whether the fact that Zurich had already carried out its own investigations affected its claim that Mr Hayward had made misrepresentations that induced it to enter into the settlement agreement. It ultimately found that even if Zurich had a qualified belief in, or disbelieved, Mr Hayward's claims as a result of its own investigations, Zurich could still be induced to enter into the settlement agreement, particularly where Zurich's investigations were never going to uncover the evidence that subsequently came to light.

In order to establish whether there had been any loss, the Court considered what the position would have been if the full extent of the fraud had been known at the time of settlement. The Court held that as a matter of law, where the innocent party knows that a representation is false, it cannot succeed. However, it doubted whether this operated as a blanket rule. The Court used the example of a traffic accident, where the innocent party might know for a fact that a claim is fraudulent but still have to take into account the risk that a court will believe the lie. In such a case, as in this one, the claimant may well establish inducement on the facts.

The Court restored the order of the County Court, allowing Mr Hayward to keep the £14,720 that he should have been paid for his injury.

Comment

The implications of the UK Supreme Court's decision are significant. An insurer can now seek to reopen a settlement agreement if fraud can later be proven, even if it had done all it reasonably could do to investigate the claim before entering into the settlement agreement.

We anticipate that this decision will be welcomed by insurers in New Zealand as a persuasive authority for claims of misrepresentation in the insurance settlement context. We consider this will be of particular relevance in the health and life insurance sector, where claims are often based on self-reported symptoms.

We await with interest the decision of our own Supreme Court in Prattley Enterprises Ltd v Vero, considering whether an agreement to settle claims under a material damage policy can be set aside for mistake. We consider this will again come down to a balancing act between the public interest in protecting the finality of settlement agreements, and the parties' presumed intentions in achieving settlement. Where there have been fraudulent misrepresentations, the moral hazard would outweigh any interest in protecting the finality of a settlement agreement, and Hayward should remain persuasive authority in New Zealand for that proposition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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