Suspicion of fraud will not preclude the unravelling of a settlement agreement if the fraud is subsequently established

In the recent case of Hayward v Zurich Insurance Company plc [2016] UKSC 48, the Supreme Court unanimously held that a settlement agreement should be set aside for fraudulent misrepresentation, even though Zurich suspected that the claim was fraudulent at the time it entered into the agreement.

Background

The claimant brought a claim against his employer for a back injury suffered at work. The employer's insurer, Zurich, suspected that the claimant had exaggerated his injuries to increase the value of his claim, but still settled the claim due to the risk that at trial the Judge would believe the claimant. It was only after the settlement that further witness evidence came to light showing definitively that the claimant had been dishonest. Zurich therefore commenced proceedings for fraudulent misrepresentation to set aside the settlement agreement and claim damages for deceit.

The decision

To establish fraudulent misrepresentation, it must be shown that the representor (the claimant) made a false representation which was intended to, and did, induce the representee (Zurich) to act to its detriment. The Supreme Court considered whether, in order to prove that it acted in reliance on the representation, Zurich needed to prove that it believed the claimant's representations to be true.

The Court ruled that this was not necessary. Lord Clarke noted that, usually, it would be difficult for a representee to prove it had relied on a statement when it knew or suspected that statement to be false. For example, in the context of negotiating a contract, if one party knows or suspects that a statement made by the other party is false, it can simply walk away from the contract or negotiate more advantageous terms. However, Lord Clarke recognised that in the context of litigation, a representee may suspect that a representation made by the other party is untrue, but may well still act in reliance on it, as it will be aware that there is a risk the representation will be believed by the Judge at trial. Therefore, belief in the representation is not a necessary component to establish reliance, and Lord Clarke held that it was "difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established".

Indeed, Lord Clarke went so far as to speculate that, even if Zurich had known (rather than merely suspected) the representations to be false, it may still have been able to unravel the settlement agreement, as there would still have been a risk that a Judge at trial would have believed the claimant.

In practice

This decision gives insurers the option of re-opening a settlement if it can later prove a suspected fraud, and provides a clear warning to all claimants that fraud will not be tolerated.