Catherine Atkinson on 'Settlement set aside for misrepresentation. Certainty lost?'
There is now Supreme Court authority that personal injury settlements can be set aside where it is later discovered that the settlement was made on the basis of fraud. This is the case even where fraud was originally suspected.
Lord Toulson remarks on the importance of this appeal at the start of his judgment in Hayward v Zurich Insurance Co Plc  UKSC 48 both as a matter of law and for its practical consequences for insurers and dishonest claimants. While bogus or fraudulently inflated personal injury claims are not new they present a serious problem.
Mr Hayward originally claimed £419,316.59 having suffered an injury at work. His employer, through its insurer Zurich, settled the claim for £134,973.11 (which included future earnings loss) despite suspecting that the claim was exaggerated and having served surveillance footage. After settlement the neighbours of Mr Hayward came forward to give evidence that in fact Mr Hayward had fully recovered a year before settlement was reached. The insurers brought a claim for misrepresentation against Mr Hayward.
After a 4 day trial, at which Mr Hayward maintained that he was a seriously disabled individual, HHJ Maloney QC found that Mr Hayward's original claim had been grossly and dishonestly exaggerated. Mr Hayward's injury and losses were assessed in the modest sum of £14,720, about 10% of the settlement figure. The settlement was set aside and Mr Hayward was ordered to repay it, less the assessed amount. Mr Hayward appealed against the decision that the settlement should be set aside but didn't challenge the findings of fact or the assessment of quantum.
The Court of Appeal allowed the appeal because of the state of mind of the employer/insurer at the time of settlement. The equitable remedy of rescission was found to answer where the misrepresentation or fraud is discovered after the contract was entered into but it was not considered applicable where a party knows or perceives the truth but enters into the contract anyway. This was overturned by the Supreme Court who upheld the first instance decision.
The judgment of Lord Toulson (para. 58) set out that to establish the tort of deceit the Insurer had to establish that Mr Hayward had dishonestly made a material false representation which was intended to, and did induce it to act to its detriment. To establish this it needed to prove:
- (a) the making of the materially false representation (the defendant's conduct element);
- (b) the defendant's accompanying state of mind (the fault element);
- (c) the impact on the representee (the causation element);
and where liability is established:
- (d) the amount of any resulting loss (the quantum element).
There were no issues as to (a), (b) or (d) which had not been challenged on appeal. The issue was with the causation element, more specifically whether there could be misrepresentation where the insurer did not believe the representations were true.
The issues for the Supreme Court in relation to (c) were:
- (A) Must the defrauded representee prove that it was induced into settlement because it believed that the misrepresentations were true; or
- (B) Does it suffice to establish influence that the fact of the misrepresentations was a material cause of the defrauded representee entering into the settlement.
Ultimately the Supreme Court answered 'no' to (A) and 'yes' to (B).
The primary judgment was given by Lord Clarke (with whom Lord Toulson, Lord Neuberger, Lady Hale and Lord Reed agreed) and specifically considered six arguments presented on behalf of the insurer:
- The Insurer argued that inducement is concerned with causation and does not required belief in the misrepresentation itself. Lord Clarke agreed finding that belief as to the whether the misrepresentation is true cannot be a necessary ingredient of the test because the representee may well settle on the basis that he thinks the representation will be believed by the judge.
- The insurer argued that belief in other inducing causes is irrelevant. Lord Clarke agreed that the text books strongly support the proposition that it is sufficient for the misrepresentation to be an inducing cause and that it is not necessary for it to be the sole cause;
- Where there is an intention to induce by means of fraud there is a 'presumption of inducement' but this was not a presumption of law but an inference of fact.
- The authorities were not entirely consistent as to what is required to rebut this presumption. However, whether it must be proved that the misrepresentation played 'no part at all, or did not play a 'determinative part', or did not play a 'real and substantial part', was not an issue in this case because the presumption was not rebutted on the facts of this case. There was no doubt that had the insurer known the true position it would not have offered as much as it did. The authorities supported the position that it is very difficult to rebut the presumption. That presumption should not be rebutted because there was scepticism as to the truth of the representation;
- Lord Clarke also accepted that there is no duty on behalf of the defrauded part to be careful, suspicious or diligent in research as to there are reasonable grounds to believe the representations. Carrying out its own investigation does not preclude a party from having been induced by those representations. Qualified belief or disbelief does not rule out inducement.
- The insurer conceded that where the representee knows that the representations are false, he cannot succeed in arguing misrepresentation. As it couldn't fairly be said that the insurer in this case had full knowledge of the facts in this case it wasn't necessary for the Supreme Court to consider the issue. Lord Clarke did, however, comment 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.
The Supreme Court further considered '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?' Lord Clarke concluded that it is difficult to envisage any circumstances in which mere suspicious would preclude it.
One of the concerns of Underhill LJ in his Court of Appeal judgment was that it was contrary to the public interest in the settlement of disputes for them to be allowed to be set aside. It may be that the facts are so specific in this case that there are very few cases to which it will apply.
Whether or not you consider the extent of fraudulently exaggerated claims to be greatly overstated the corrosive impact of examples like that of Mr Hayward is clear. Will this judgment make claimants less likely to exaggerate? Or will it just undermine the incentive to settle and the certainty provided by settlement? Time will tell.