Zurich settled Mr Colin Hayward’s personal injury claim for £134,973.11 while suspecting that he had exaggerated his back injury, but without knowing the full extent of the exaggeration. After neighbours later gave evidence of fraud, the Supreme Court held that the settlement could be set aside even though Zurich had not believed his account. His continuing lies were enough if they influenced Zurich to pay more because a court might accept them.
The injury and the settlement
On 9 June 1998 Mr Colin Hayward was injured at work. His employer admitted liability for 80 per cent of the claim, and he accepted that he was 20 per cent to blame. He claimed £419,316.59, exclusive of promotion prospects but discounted for loss of an ill-health pension. The employer’s liability insurer, Zurich Insurance Company plc, conducted the defence.
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The parties settled shortly before the damages trial. The agreement was incorporated in a Tomlin order.
Zurich had surveillance material and disputed the extent of the injury. Its concern was that the court might nevertheless accept Hayward’s account.
Fresh evidence and the claim to reopen the compromise
After the settlement, neighbours offered evidence that Hayward had recovered before it was agreed.
In February 2009 Zurich sued for deceit. It said that statements made by or for Mr Hayward, his statements of case, and the accounts he gave the medical experts were fraudulent misrepresentations. It claimed the difference between the settlement and the damages which should have been awarded if he had told the truth, and later added an alternative claim for rescission and repayment. No point was taken on Zurich suing in its own name rather than the employer’s.
An earlier appeal had allowed the fraud claim to proceed despite the compromise of the personal-injury action.
The county court findings
After hearing the evidence the trial judge found that Hayward had deliberately exaggerated the effects of his injury.
The judge accepted that Zurich’s solicitor and claims manager did not believe the representations. They knew of the 1999 video and of the real possibility of fraud, and they were frustrated that Mr Sharp would not produce a clear report saying that Mr Hayward had been shamming. The judge held that belief in the truth of the statements was not required if the statements influenced the settlement. He found that they did. Zurich believed that the statements would be placed before the court as true, and that there was a real risk the court would accept them, in whole or in part, and award more than Zurich considered appropriate. Those continuing misrepresentations led Zurich to agree a higher settlement than it otherwise would have done. The judge therefore set the compromise aside.
Quantum was tried on 6 September 2013. The judge found that Mr Hayward had made a full recovery from any continuing physical disability by October 1999 and awarded £14,720, about 10 per cent of the settlement figure. In the later action he directed repayment of the sum paid under the settlement less that amount, namely £97,780, interest of £34,379.45 and a £3,951 adjustment for CRU. Mr Hayward did not challenge the findings of fact, the assessment of quantum, or the repayment order if the settlement was properly set aside.
The Court of Appeal
Underhill, Briggs and King LJJ allowed Mr Hayward’s appeal against the setting aside. Their reasons were similar but not identical. Briggs LJ held that rescission requires the representee to have given some credit to the truth of the statement and to have contracted because he perceived it to be true. A person who already knows or perceives the truth elects to proceed by entering the contract, and cannot later rescind merely because better evidence appears. Underhill LJ emphasised the public interest in settlement. A settlor normally accepts the risk that a claim is ill-founded, but not that it is dishonest. If it is sufficiently apparent that he intended to settle notwithstanding possible fraud, he is held to the bargain. Zurich’s pleaded allegation of exaggeration showed that awareness. To avoid a direct conflict with the 2011 decision, he also held that there was no relevant relationship of reliance: Zurich had made its own judgment of whether the claim was likely to succeed.
Inducement without belief
Lord Clarke, with whom Lord Neuberger, Lady Hale and Lord Reed agreed, allowed Zurich’s appeal. The other ingredients of deceit were not in dispute. There had to be a materially false representation, intended to induce the representee to act to its detriment, which did so induce it. It was not a separate legal requirement that Zurich believed the representation to be true. Its state of mind could still matter. Someone who does not believe a statement may struggle to prove inducement or loss, but lack of belief does not automatically defeat the claim.
Lord Clarke treated the litigation context as different from an ordinary purchase, where a doubtful buyer can walk away. An insurer must consider not only its own suspicions, but the risk that the trial judge will believe the claimant and assess damages accordingly. Inducement and causation are questions of fact. The misrepresentation must have influenced the decision, but it need not have been the only cause. On the judge’s findings, Zurich was influenced: had it known the true position, it would not have offered anything like the sum agreed in October 2003. The desirability of settlement was not a reason to let Mr Hayward keep money obtained only by fraud.
Mere suspicion did not bar relief. Lord Clarke found it difficult to envisage circumstances in which suspicion of exaggeration would prevent a settlement being unravelled once fraud was established. Full knowledge of falsity is different. Zurich accepted that a representee who knows a representation is false cannot succeed, and the authorities treat that knowledge as a defence because the representee was not misled. Zurich did not have full knowledge here. Lord Clarke did not finally decide whether knowledge of falsity must always defeat a claim. He recognised that there might be a case, such as a staged road accident, where one party knows from direct knowledge that the other is lying but must still allow for the risk that the judge will believe the lie. The judge had not found Zurich to be certain, from its own knowledge, that Mr Hayward was lying.
Lord Toulson, with whom Lord Neuberger, Lady Hale and Lord Reed also agreed, reached the same result. He considered that the Court of Appeal had drawn the wrong conclusion from earlier cases, which were mostly concerned with the ordinary situation in which a lie works because it is believed. A dishonest claimant can also cause loss without being believed, by making an insurer value the claim at what a court is likely to award rather than at its true worth. Mr Hayward intended that result and achieved it, inducing Zurich to pay almost ten times what it would otherwise have paid. He could not answer the claim by saying that Zurich should have fought the trial. Justice and public policy did not require the insurer to be left worse off than if the action had been decided on the medical evidence as it then stood. Lord Toulson also confirmed that fraud can unravel a settlement, so the action was neither res judicata nor an abuse of process. Although Underhill LJ had doubted the 2011 decision, Mr Hayward could not attack it directly on this appeal.
Verdict: The Supreme Court unanimously allowed Zurich’s appeal and restored the trial judge’s order setting aside the settlement. The reduced damages award of £14,720 stood. The amount was not in dispute in the Supreme Court.
Source: Hayward v Zurich Insurance Company plc [2016] UKSC 48
