"Oh what a tangled web we weave when first we practice to deceive"1
Last year the United Kingdom's Supreme Court upheld an appeal brought by an insurer, enabling it to set aside a settlement of an injured worker's personal injuries claim, concluded some years previously on account of the belated discovery of the injured worker's fraud.
In this alert, partner Robert Tidbury discusses the case of Hayward v Zurich Insurance Company plc 2 – undoubtedly one of the most interesting decisions on the effect of fraudulent misrepresentation in a personal injuries claim handed down by the Courts in recent years.
Points of interest
- The Courts in Australia have long recognised deceit as an independent and general cause of action which enables a defrauded party to seek rescission of an agreement induced by fraudulent misrepresentation 3. That remedy's application in Australia extends to settlements reached in personal injuries matters 4.
- To maintain a cause of action of deceit, it must be shown that the other party to the agreement dishonestly made a material false representation which was intended to, and did, induce the defrauded party to act to its detriment.
- In the context of a personal injuries matter, the fact that the insurer may have been aware at the time of the settlement of the real possibility of fraud does not disentitle the insurer from seeking redress.
- In proceedings for deceit, it is no defence that the defrauded party was negligent or tardy in relying upon the misrepresentation or failing to pursue opportunities for verifying it. Therefore, an insurer may still be able to have a settlement set aside even though it resolved to settle the claim early without undertaking extensive investigations.
Mr Hayward, a resident of the United Kingdom, was injured in a work accident on 9 June 1998. As a result he brought proceedings against his employer, alleging negligence in the Cambridge County Court. The proceedings were defended by the employer's liability insurer, Zurich Insurance Company plc (Zurich). The matter proceeded to trial in October 2003 in circumstances where Zurich had admitted liability for 80% whilst Mr Hayward accepted that he was contributory negligent in the order of 20%. Before quantum was resolved by the Court, a settlement was entered into by the parties whereby Zurich agreed to pay Mr Hayward the sum of Ł134,973.00. Upon the settlement being reached, consent orders were issued by the Court which provided for all further proceedings to be stayed and that upon payment of the settlement proceeds, the employer be discharged from further liability to the claimant in relation to the claim.
In 2005, Mr Hayward's neighbours contacted the employer and reported his fraudulent behaviour, asserting that Mr Hayward had recovered completely from his back injury at least a year prior to the settlement. These neighbours then signed statements to that effect for Zurich.
Some four years later, in 2009, Zurich commenced proceedings against Mr Hayward claiming damages for deceit, alleging that the information contained in Mr Hayward's particulars of claim and the schedule of loss delivered in the original proceedings as to the extent of his injuries constituted fraudulent misrepresentations. Damages were claimed by Zurich equal to the difference between the amount of the settlement and the damages that would have been awarded if Mr Hayward had told the truth. Zurich subsequently amended its claim to claim in the alternative rescission of the settlement agreement and repayment of the settlement monies.
Mr Hayward contested the proceedings, asserting that the orders of the Court made after the settlement created an estoppel and, in the alternative, Zurich's actions were an abuse of process because the issue of fraud had been compromised by the settlement.
Relevant to Mr Hayward's defence of the proceedings was the fact that some years prior to the settlement being effected, Zurich had disclosed surveillance evidence of Mr Hayward and in the original proceedings brought by Mr Hayward, Zurich had alleged in the pleadings that Mr Hayward was exaggerating the consequences of his alleged injuries for financial gain.
Therefore a central issue in dispute in the proceedings for deceit brought by Zurich was whether or not Zurich's actions in alleging deliberate exaggeration prior to the settlement precluded it from subsequently relying upon Mr Hayward's fraud as a ground for rescission of the settlement.
Decision of the Court in first instance and Mr Hayward's subsequent appeal
In first instance, Zurich was successful. The trial judge found that Mr Hayward deliberately and dishonestly exaggerated the extent of his injuries in the earlier Court process in circumstances where, although Zurich was aware at the time of the settlement of the real possibility of fraud, Mr Hayward continued his deliberate misrepresentations even after the disclosure of the surveillance video. Those continuing misrepresentations influenced Zurich into agreeing to a much larger settlement than it otherwise would have done. Therefore the trial judge set aside the settlement, awarded Mr Hayward damages equivalent to 10% of the settlement proceeds and ordered him to repay the balance of the settlement proceeds to Zurich plus interest.
Mr Hayward appealed to the United Kingdom's Court of Appeal against the decision that the settlement should be set aside. The Court of Appeal agreed that the appeal should be allowed. As a result, Zurich appealed that appellate court's decision to the United Kingdom's Supreme Court.
Supreme Court's decision
Zurich was successful in its appeal, with the Supreme Court restoring the decision of the trial judge. In arriving at its decision, the Supreme Court observed that in order for a compromise to be set aside it is not necessary for the plaintiff (Zurich) to show that it was induced into the settlement because it believed that the misrepresentations were true. Instead, it will suffice for the defrauded party to show that the fact of the misrepresentations was a material cause of the defrauded party's decision to enter into the settlement. Whilst the misrepresentation must be an inducing cause, it is not necessary for it to be the sole cause.
This finding was relevant in the context of Zurich having made it clear in the earlier proceedings via disclosure of the surveillance video that it had doubt as to the veracity of the plaintiff's allegations. In contemplating this issue, the Court observed that a person in the position of the employer or its insurer may have suspicions as to whether an injured person's representation is true. However, the question in a personal injuries' case is not what view the employer or its insurer takes but what view the Court may arrive at. Therefore, it is a valid consideration for the employer and its insurer to take into account the possibility the insured person will be believed by the trial judge when it comes to arriving at a decision to settle a claim.
The Court also held that it was difficult to envisage any circumstances in which a mere suspicion that a claim was fraudulent would prevent unravelling a settlement when fraud is subsequently established.
In finding for Zurich, the Supreme Court accepted Zurich's submission that the defrauded party was under no duty to be careful, suspicious or diligent in its research, noting that in this case Zurich did as much as it reasonably could to investigate the accuracy of Mr Hayward's representations before reaching the settlement.
1 Quote from the play "Marmion" by Sir Walter Scott, published in 1808.
2 Hayward v Zurich Insurance Company plc (2016) UKSC 48.
3 See Gipps v Gipps (1978) 1 NSWLR 454, Gould v Vaggelas (1984) 157 CLR 215 and Toubia v Schwenke (2002) NSWCA 34
4 The Law of Torts, Ninth Edition, John G Fleming, p695.
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