Australia: Settlement agreement entered into on basis of fraudulent misrepresentations set aside by UK Supreme Court

Last Updated: 7 December 2016
Article by Damian Clancy and Lachlan Boughton

In brief – Hayward decision consistent with Australian settlement and fraud principles

In Hayward v Zurich Insurance Company plc [2016] UKSC 48 the Supreme Court of the United Kingdom unanimously overturned a decision of the Court of Appeal and determined that an insurer who had settled a claim (while suspecting fraud) was entitled to have the settlement agreement set aside on the subsequent discovery of evidence proving that the claim was in fact fraudulent.

While a decision which very much turns upon its own facts, the Court held that where a party is "influenced by" its opponent's (mis)representations to enter into a settlement agreement, that party will be entitled to have that agreement set aside upon discovery of actual fraud on the party of the opponent, even if fraud was suspected at the time the agreement was entered into.

Zurich influenced into agreeing higher settlement by claimant's misrepresentations, even though fraud suspected

The insured claimant Mr Colin Hayward, brought a proceeding against his employers seeking to recover £419,316.59 for a back injury that he had suffered at work. Liability was not in issue in the proceeding. Shortly before the issue of quantum was due to be tried, Mr Hayward and Zurich (the insurer of Mr Hayward's employer) entered into a settlement agreement in 2003 by which Zurich agreed to pay Mr Hayward £134,973.11 in full and final settlement of Mr Hayward's claim. At that time, Zurich was in possession of some video footage which suggested that Mr Hayward may have been exaggerating the extent of his injuries.

Approximately two years after the settlement agreement had been executed, Mr Hayward's neighbours told his employer that they believed that Mr Hayward's claim for a serious back injury was dishonest and that he had recovered in full at least a year before the settlement had been agreed.

Zurich subsequently commenced proceedings before His Honour Judge Moloney QC for orders that the settlement agreement be set aside and that Mr Hayward repay the £134,973.11. At the trial, the judge found that Mr Hayward had deliberately and dishonestly exaggerated the extent of his injury throughout the court process. Further, His Honour found that although Zurich was aware of a real possibility of fraud at the time of the settlement, Mr Hayward's continuing misrepresentations had influenced Zurich into agreeing a higher level of settlement than it would otherwise have done had it known the true state of affairs. The settlement was therefore set aside.

With the settlement now set aside, it followed that the issue of quantum in the original action remained to be tried. Having found that Mr Hayward had made a full recovery from any continuing disability by October 1999, His Honour awarded Mr Hayward damages in the sum of £14,720 (being approximately 10% of the settlement figure) and an order was made directing Mr Hayward to repay the sum paid under the settlement agreement less that amount.

Mr Hayward successfully appeals decision to set aside settlement

Mr Hayward appealed to the Court of Appeal against the decision that the settlement should be set aside (but did not appeal against the assessment of quantum) and the judge's findings of fact at first instance were not challenged.

Lord Justices Underhill, Briggs and King allowed the appeal on the basis of Zurich's (and the employer's) state of mind when the settlement was made, determining that the settlement could not be set aside because Zurich was aware of the fraud at the time of entering into the settlement agreement (noting that the fact that Zurich had pleaded that the claim was exaggerated for financial gain proved their awareness of the possibility of fraud) and therefore it could not be said that Zurich had given credit to the truth of Mr Hayward's representations.

Zurich appeals to the Supreme Court

The issue on appeal to the Supreme Court was whether the settlement agreement could properly be set aside for fraudulent misrepresentation in circumstances where Zurich was aware of the possibility of fraud when it had initially entered into the settlement. The issues were articulated (at [17]) as follows:

  1. in order to set aside a compromise on the basis of fraudulent misrepresentation, to show the requisite influence by or reliance on the misrepresentation:
    1. must the defrauded representee prove that it was induced into settlement because it believed that the representations were true; or
    2. does it suffice to establish influence that the fact of the misrepresentation was a material cause of the defrauded representee entering into a settlement?
  1. 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?

Supreme Court finds in favour of Zurich, notes presumption of inducement rebuttal requirements unclear

In finding in favour of Zurich and allowing the appeal, Clarke LJ (with whom Lord Neuberger, Lady Hale and Lord Reed agreed) determined that Zurich need not prove that it was induced into settlement because it believed the representations were true. Instead, if Zurich could establish that the misrepresentations were a material cause of its entry into the settlement agreement, that fact would stand as proof that Zurich was influenced by the misrepresentations (at [47]).

Although noting that the authorities were not entirely clear as to what was required to rebut the presumption of inducement in a fraudulent misrepresentation case, Clarke LJ accepted Zurich's submission that the presumption was not rebutted on the facts as found in this case and that, had Zurich known the true position in relation to Mr Hayward's state of recovery, it would not have offered anything like what was in fact offered in the executed settlement (at [36]).

Zurich's suspicions of fraud do not preclude Court from finding Zurich had been induced by representations

Clark LJ accepted Mr Hayward's submission that Zurich did not wholly credit Mr Hayward's representations and carried out its own investigations into his condition, but found that conduct did not preclude the Court from finding that Zurich had been induced by those representations (at [40]). Critically, His Honour held:

It seems to me that there may be circumstances in which a representee may know that the representation is false but nevertheless may be held to rely upon the misrepresentation as a matter of fact... (at [44]).
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. (at [48]).

Importantly, Clarke LJ was not persuaded that the importance of encouraging settlement was sufficient to allow Mr Hayward to retain moneys which he only obtained by fraud (at [22]).

Toulson LJ (with whom with whom Lord Neuberger Lady Hale and Lord Reed also agreed) provided a separate judgment the substance of which accorded with the judgment of Clarke LJ. Toulson LJ noted that:

Mr Hayward's deceitful conduct was intended to influence the mind of the insurers not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than it was worth if the true facts had been disclosed, because the value of the claim for insurer's purposes is that which the court is likely to put on it. He achieved his dishonest purpose and thereby induced them to act to their detriment by paying almost ten times more than they would have paid but for his dishonesty... it would not accord with justice or public policy for the law to put insurers in a worse position as regards setting aside the settlement than they would have been in, if the case had proceeded to trial and had been decided in accordance with the corrupted medical evidence as it then was (at [71]).

Australian principles in relation to settlement and fraud

The United Kingdom decision in Hayward is consistent with the principles in Australia, confirming that a settlement agreement can be vitiated for fraud notwithstanding that a party may have held suspicions of fraud prior to entering into the settlement.

In Taheri v Vitek [2014] NSWCA 209, the New South Wales Court of Appeal accepted that a representation in litigation can induce settlement irrespective of the recipient's belief in the representation's truth because the representation contributes to a party's assessment of litigation risk. Therefore, the fact that a settlement was entered into in circumstances where a party suspected fraud will not necessarily preclude the settlement from being set aside (at [90]). It is sufficient that the fraudulent representation "plays some part even if only a minor part in contributing to the formation of the contract" for the requisite causal connection for rescission of a settlement to be established (at [73]).

In Toubia v Schwenke (2002) 54 NSWLR 46, the New South Wales Court of Appeal determined that a representee had no duty to make enquiries to ascertain the truth of a representation and that, in an action for fraud, a plaintiff must prove that he was deceived, but need not prove that he was diligent in investigating fraud prior to entering into the relevant settlement (at [22] and [38]).

Hayward decision reflects Australian position and is positive for insurers

This practical approach to fraudulent settlements in Hayward supports the existing position in Australia. The decision in Hayward provides insurers with further confidence that Australian courts will generally give serious consideration to setting aside a settlement agreement once fraud is proven.

Damian Clancy
Insurance and reinsurance
Colin Biggers & Paisley

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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