Fraud: Can It Ever Really Be Settled?

Answering this question exposes the tension between the principle that "fraud unravels all" and the strong public policy (and private interest) in the finality of settlement agreements. A series of cases have grappled with these competing considerations with varying outcomes. The balance struck by the Courts on this important issue will be of central interest for any party to proceedings involving allegations of fraud.

The picture is complex and is made all the more so by the different approaches that claimants have taken to undermine settlements. Broadly these might be categorized as: (i) arguments about setting aside the agreement on the basis that it was fraudulently induced; and (ii) arguments about the proper construction of the settlement agreement and specifically that the releases in the agreement do not extend to the claim subsequently being brought.

This article seeks to plot a course through the cases to bring out the general shift in favour of finality. This will give significant comfort to defendants seeking to settle, once and for all, fraud claims brought against them.

• Setting aside fraudulently induced settlements
• Further claims barred by the settlement agreement as a matter of contractual construction
• Abuse of process: the requirement for fresh evidence
• The state of the law – where are we now?

1. Setting aside fraudulently induced settlements

The Supreme Court decision in Hayward v Zurich [2016] UKSC 48 was relevant to the issue of setting aside fraudulently induced settlement agreements. It was a case involving a fraudulent misrepresentation claim in which the claimant sought to have a settlement agreement set aside. The case appeared to provide a route by which claimants could reopen a case on the basis of the very same allegations that were settled.

Hayward v Zurich [2016] UKSC 48

Mr Hayward suffered an injury at work and brought proceedings against his employer. He exaggerated the extent of his injuries in order to achieve a higher settlement award from his employer's insurers, Zurich. When the claim settled, Zurich suspected that Mr Hayward was exaggerating his injuries and it had access to video footage which showed Mr Hayward engaged in heavy lifting which was inconsistent with his condition. It was only later that Zurich obtained further evidence – in the form of a witness account from Mr Hayward's neighbours – that Mr Hayward had exaggerated his injuries. Zurich then sought to rescind the settlement agreement on the basis that it had been induced to enter into the agreement by Mr Hayward's fraudulent misrepresentations as to the extent and seriousness of his injuries.

This case is authority on the issue of inducement in fraudulent misrepresentation: the question before the Court was whether or not it was possible for a party to be induced by a misrepresentation which it knew or believed was not true. The Supreme Court found in favour of Zurich and established that the test for inducement is not whether the claimant believed that the defendant's representations were true at the time of settling but rather whether it was influenced by the representations when entering into the settlement agreement. A claimant may be influenced in the sense that it took into account the risk that the Court hearing the claim would believe the representations and find in favour of the defendant. This distinction between belief and influence rendered the decision extremely claimant friendly – the corollary as stated by Lord Clarke in his judgment is that a suspicion by one party that a claim is fraudulent at the time of settlement (which could be said to undermine a party's belief in any given representation) won't preclude that settlement from being unravelled when fraud is subsequently established, providing that the party can show it was influenced by the representation.

It is easy to see why Zurich was decided as it was on its facts but the decision has been described as a hard case which has distorted the law of misrepresentation. Rescission for misrepresentation has traditionally been justified on the basis that the defendant's misrepresentation induced a mistake in the claimant, causing them to enter into a contract they otherwise would not have. The Supreme Court established in Zurich that a contract could be set aside even if the claimant did not believe the representation and therefore did not make any mistake. The decision caused concern amongst some practitioners and commentators. Indeed, if a claimant can reopen a case on the basis of something they already suspected at the time of settling and which formed the basis of the very allegations that were settled, that potentially leaves defendants in a difficult position.

Nevertheless, there are good arguments that Zurich should be confined in its application. For instance, Zurich was a personal injury case not a fraud case; where the claim being settled is a fraud claim it is likely to be harder for the settling party to subsequently rely on the same fraud as inducing the settlement given that it is exactly that fraud which the parties have agreed to settle. Further, the claim in Zurich was settled by a very simple form of Tomlin Order and said nothing about settling all other claims, known or unknown etc. And, where parties have entered into a more comprehensive form of settlement agreement, it should be harder for one party to find a way around it. All that said, the decision in Zurich cast a long shadow and lingering uncertainty for defendants in particular.

Recent cases have seen defendants successfully arguing that the claimant's further claim is: (i) barred by the settlement agreement as a matter of proper contractual construction (see Maranello and Riley below); and/or (ii) an abuse of process (see Finzi below). In combination, these cases seem to put settling defendants in a materially better position than Zurich first signaled.

2. Further claims barred by the settlement agreement as a matter of contractual construction

The Court of Appeal in Maranello Rosso v Lohomij [2022] EWCA Civ 1667 addressed the matter of whether claims brought in fraud and conspiracy were released by the terms of an earlier settlement agreement in circumstances where claims of that nature were not expressly mentioned in the agreement. In contrast to Zurich, Maranello was not brought as a claim in fraudulent misrepresentation with a view to rescinding the settlement agreement.

Maranello Rosso v Lohomij [2022] EWCA Civ 1667

Maranello acquired vehicles to sell at auction and engaged Bonhams to act in the sale. Maranello then alleged negligence and breach of contract relating to Bonhams' conduct of the auction which it said had resulted in the cars being sold for less than they should have been. The parties entered into a settlement agreement which included wide releases including "all claims", "whether or not known to the parties at the date of the agreement". Maranello subsequently commenced proceedings against Bonhams in fraud and conspiracy after claiming to have obtained new information indicating that Bonhams had dishonestly colluded and conspired in relation to the auction.

The Court of Appeal held that the broad release of claims in the settlement agreement – which included "all claims", "whether or not known to the parties at the date of the agreement" – covered fraud and conspiracy claims arising out of the same factual matrix even though it did not expressly refer to those types of claim. When construing the release clause, the Court of Appeal had regard to the underlying context and the fact that the settlement agreement was "professionally drafted" and the language "fully considered" and of a "high order". As such, the claimant was not permitted to proceed with its new claims. The decision illustrates that: (i) release clauses in settlement agreements are subject to the ordinary principles of contractual construction; and (ii) express words are not required to release fraud claims. A carefully drafted settlement agreement is capable of settling fraud claims.

The Court of Appeal did recognise that, in some cases, a release might be rendered ineffective where a party has been guilty of "sharp practice" (i.e. by seeking to take advantage of the other party's ignorance of certain claims by not disclosing them but simultaneously obtaining a release in relation to them). That principle was held to have no application in this case as the claimant had elected to settle the very same issue for valuable consideration.

The relationship between this case and Zurich was not addressed by the Court. The cases are different in that, in Zurich, the claim was one of fraudulent misrepresentation with a view to rescinding the settlement agreement whereas, in Maranello, the issue was whether the new fraud claim was caught by the release under the settlement agreement. It left open a question as to whether, if the case in Maranello had been brought as a misrepresentation/rescission claim, the decision would have been different, i.e. if the question before the Court had not been whether on the true construction of the settlement agreement it released fraud claims but rather whether the whole agreement could be set aside, would the Court have felt that it needed to follow Zurich? Another recent Court of Appeal decision – the decision in Riley v NatWest [2024] EWCA Civ 833, which deals with issues of both construction and rescission head on, provides some clarity.

Riley concerned the enforceability of a settlement agreement in the face of allegations of fraudulent misrepresentation. The claim in Riley was for fraudulent misrepresentation (as in Zurich), but it was defended on the basis that it was barred by the settlement agreement (as in Maranello).

Riley v NatWest [2024] EWCA Civ 833

The Rileys founded a building development company which encountered financial difficulties after the financial crisis. The Rileys claimed that Natwest had assured them that it would continue to support and ultimately rehabilitate their company, but Natwest subsequently placed it into administration. In a protracted exchange of pre-action correspondence, the Rileys alleged a series of broadly articulated claims amounting to deliberate wrongdoing committed by the Natwest against them, including the deliberate destruction of the Rileys' company. Natwest denied liability in correspondence, but eventually the parties entered into a widely-drafted settlement agreement. The Rileys claimed that after the settlement agreement was entered into, and thanks to a third party report, they became aware that the rehabilitative representations that Natwest was said to have made were in fact fraudulent. Accordingly, the Rileys sought to rescind the settlement agreement.

The Court of Appeal: (i) applied Maranello and held that a widely drafted release, even one that makes no express reference to fraud, will preclude a party from bringing future connected claims (in fraud or otherwise); and (ii) emphasised the strong policy reasons why settlements should be upheld, commenting that it is no part of the Court's function to frustrate the intentions of contracting parties once those have been objectively ascertained. In other words, if parties enter into wide-ranging settlements, against a background of fraud allegations, they will very likely be held to their bargain, regardless of whether or not a related fraud is subsequently alleged.

It is worth noting that the competing principle of "fraud unravels all" was not relegated to the back burner entirely: the Court of Appeal laid down a marker that where a party is "an innocent victim of a concealed fraud, which was not reasonably capable of being discovered before a settlement agreement was reached, a generally worded release may not preclude the innocent victim from pursuing the claim in fraud". An appropriate balance will need to be struck on a case-by-case basis.

The interaction with Zurich was expressly considered in Riley (unlike in Maranello). The Court of Appeal endorsed the High Court's judgment, which specifically considered and sought to confine the application of Zurich, on the basis that: (i) the ratio in Zurich sets the test for inducement but does not establish a new principle in respect of issues of contractual construction; (ii) the release in Zurich was narrower and did not purport to settle all claims known or unknown (simply the claim as then constituted); and (iii) per the proposition established in an earlier High Court decision in Bank of Scotland v Hoskins [2021] EWHC 3038 (Ch)), "it is not possible to rely on claims which are being given up by a particular settlement agreement as a basis for rescinding that settlement agreement".

3. Abuse of process: the requirement for fresh evidence

In Finzi v Jamaican Redevelopment Foundation [2023] UKPC 29, the Privy Council reviewed the relevant principles for setting aside a judgment or settlement agreement on the basis that it had been obtained by fraud, and the extent to which "fresh evidence" of fraud is required. This followed the more claimant-friendly decision on the same topic in Takhar v Gracefield Developments [2019] UKSC 13.

Finzi v Jamaican Redevelopment Foundation [2023] UKPC 29

Mr Finzi sought a declaration that a series of judgments and settlements which had been reached as a result of extensive litigation involving him and the Jamaican Redevelopment Foundation had been obtained fraudulently. The Supreme Court of Jamaica had granted summary judgment in favour of the Jamaican Redevelopment Foundation on the basis that Mr Finzi's claim was an abuse of process as his allegations of fraud could and should have been raised in the earlier proceedings. The Court had concluded that an action which seeks to set aside a judgment or settlement on the ground that it was procured by fraud will be an abuse of process unless there is fresh evidence of fraud and that evidence could not have been discovered with reasonable diligence in advance of the judgment or settlement (the "reasonable diligence condition").

The reasonable diligence condition was subsequently overturned by the UK Supreme Court in the more claimant-friendly decision of Takhar v Gracefield Developments [2019] UKSC 13. The Supreme Court established that a claimant does not need to demonstrate that the fraud could not have been discovered at an earlier stage by the exercise of reasonable due diligence. Mr Finzi embraced this development and appealed to the Privy Council.

Takhar v Gracefield Developments [2019] UKSC 13

The defendants in the original action had relied at trial on a written agreement which they said Mrs Takhar had signed. She could not remember signing the agreement and suspected that her signature might have been forged, but had no evidence that would justify pleading fraud. The trial judge found that the signature was hers and relied heavily on the agreement in finding for the defendants. Mrs Takhar subsequently obtained evidence from a handwriting expert that her signature had been fraudulently transposed and brought a new action seeking to have the judgment set aside. The defendants applied to have this claim struck out as an abuse of process. The trial judge concluded that Mrs Takhar had a real prospect of satisfying the requirements for setting aside a judgment on the basis of her new evidence and that accordingly her new claim was not an abuse of process. The defendants had unsuccessfully sought to argue that Mrs Takhar was obliged to show that the new evidence could not with reasonable diligence have been discovered in time to adduce it at the original trial. The decision of the trial judge was endorsed by the Supreme Court. It held that there is no "reasonable diligence" requirement because "fraud unravels all" and the law does not expect people to arrange their affairs on the basis that others may commit fraud.

In dismissing Mr Finzi's claim as an abuse of process, the Privy Council took the opportunity to clarify the relevant principles (though it referred only in passing to the "problematic" decision in Zurich; and it made no reference to the parallel line of cases dealing with the closely related issue of contractual construction). It clarified that, where a claimant relies on evidence not adduced in the original proceedings to allege that a judgment or settlement has been obtained by fraud, the burden is on the claimant to establish: (i) that the evidence is new and was obtained following the original judgment or settlement; or (ii) if the evidence is not new, reasons why the evidence was not deployed in the original proceedings. Where the evidence is not shown to be new, the claim is likely to be regarded as abusive unless the claimant is able to show that there was a good reason which significantly impeded the use of the evidence in the original proceedings.

More generally, the Privy Council emphasised the long-established principle of English law first articulated in Henderson v Henderson [1843] which "precludes a party from raising in subsequent proceedings matters which were not, but which could and should have been, raised in earlier proceedings" in line with the public interest in the finality of litigation. The Privy Council noted: "There are sayings, mentioned in Takhar, that fraud "is a thing apart" and that fraud "unravels all". But allegations of fraud are not to be regarded as some kind of open sesame which have only to be uttered to enable a party to engage in a new round of litigation of disputes that have been compromised or decided".

Nevertheless, like the Court of Appeal in Riley, the Privy Council did not elevate the principle of finality to such an extent as to leave no room for the competing principle. Finzi indicated that fresh allegations of fraud would be heard by a Court when it is appropriate to do so and highlighted the need for a flexible approach to strike the right balance on a case-by-case basis. It commented that it may be appropriate to take account of the "apparent strength of the case" and that, "if the pleaded case in fraud is conspicuously strong or conspicuously weak... this potentially affects the justice or otherwise of allowing the new claim to proceed to trial".

The Privy Council went on to say that determining whether a matter which could have been raised in earlier proceedings should have been raised in those proceedings – i.e. whether a claim is an abuse of process – depends on a "broad" judgment and assessment which "takes account of all the public and private interests involved and focuses on...the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before".

4. The state of the law – where are we now?

So, where does this leave us? Maranello and Riley show that a carefully and comprehensively drafted settlement agreement should be capable of barring future attempts by claimants to reopen proceedings, brought on the basis that the defendant lied about the very facts that were settled, and induced the claimant to settle. Finzi demonstrates a willingness to strike out as abusive claims that revisit matters – without compelling fresh evidence – which have already been resolved in a settlement (or judgment).

These cases provide important guidance on when claimants will and will not be able to advance subsequent claims in fraud following a settlement. Overall, they signal a more defendant-friendly landscape focused on encouraging and upholding settlements. A defendant is likely to have strong grounds on which to resist attempts to reopen claims following a settlement. And summary judgment and strike-out mechanisms give them a path to the early resolution and dismissal of those claims.

Some drafting tips when acting for a settling defendant:

1. Ensure a widely drafted release clause which refers to both the issues in play but also more generally to any and all claims, whether known or unknown and whether existing or arising in the future.
2. A set of clear recitals outlining the commercial background will further assist in putting beyond doubt the parties' intentions to draw a definitive line under the issues in dispute and settle all claims including those based in fraud.
3. Finally, if you are facing a vexatious litigant and have concerns that they may in future seek to reopen the case, you might consider including some more creative contractual tools such as: (i) an indemnity requiring the claimant to compensate the defendant for all losses caused by their breach of the covenant not to sue; and/or (ii) a provision requiring the claimant to return the benefits flowing to them pursuant to the settlement if they breach the covenant not to sue (to discourage them from using the settlement as a ratchet, i.e. litigating from the comfort of the settlement agreement).

This shift, towards upholding the finality of settlements, will be welcomed by defendants. Settlements are a form of commercial risk management and compromise; a settling claimant in a fraud claim is taking into account the risk that the defendant is dishonest but is choosing to forego the opportunity to challenge that. Parties who settle fraud claims with their eyes open, and receive valuable consideration in return, should not then be entitled to revive them because better evidence of what they already suspected comes along later. Nor should settlement agreements be allowed to be used as a ratchet whereby a claimant can bank some of the value of a claim and then come back for more, litigating from the comfort of a settlement agreement. Finality deserves appropriate weight, to enable disputes to be definitively resolved and to protect parties and the Court from wasteful and potentially oppressive duplicative litigation. That said, it would not be right to strip claimants of their remedies in all instances of fraud. Finzi and Riley indicate a shared sentiment that, if it is right to do so, having regard to the fresh evidence of fraud, a claimant will still be heard. Balancing the two competing principles, in light of the specific facts and the need to do justice on a case-by-case basis, will inevitably mean that there remains some lingering uncertainty in this complex area.

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.