Hayward v Zurich Insurance Company plc [2016] UKSC 48

Mr Hayward dishonestly exaggerated a workplace injury claim, which Zurich settled for £134,973 despite suspicions of fraud. After new evidence emerged, Zurich sued to set aside the settlement. The Supreme Court held the settlement could be rescinded for fraudulent misrepresentation.

Facts

Mr Colin Hayward suffered a workplace injury in June 1998. Liability was admitted at 80%, with the claimant accepting 20% contributory negligence. He claimed over £400,000, asserting serious ongoing back injury and disability. Zurich, the employer’s liability insurer, harboured suspicions of exaggeration, having obtained surveillance video in 1999 and pleaded in its defence that Mr Hayward had exaggerated his difficulties for financial gain. Shortly before the quantum trial, the parties settled in October 2003 for £134,973.11, embodied in a Tomlin Order.

In 2005, Mr Hayward’s neighbours, Mr and Mrs Cox, approached the employer stating they believed his claim was dishonest, having observed that he had recovered fully at least a year before the settlement. Zurich commenced deceit proceedings in February 2009, seeking rescission of the settlement and repayment.

At trial, His Honour Judge Moloney QC found that Mr Hayward had deliberately and dishonestly exaggerated his injuries throughout, set aside the compromise, and ultimately awarded damages of only £14,720 (around 10% of the settlement). The Court of Appeal allowed Mr Hayward’s appeal, holding that Zurich could not have relied upon representations it did not believe to be true. Zurich appealed to the Supreme Court.

Issues

The appeal raised two issues:

(1) To set aside a compromise for fraudulent misrepresentation, must the defrauded representee prove it was induced into settlement because it believed the misrepresentations were true, or does it suffice to establish that the misrepresentations were a material cause of entering into the settlement?

(2) In what circumstances, if any, does the defendant’s suspicion of exaggeration preclude unravelling a settlement when fraud is subsequently established?

Arguments

Zurich’s submissions

Inducement concerns causation, not credulity. Belief in the misrepresentation is not a separate ingredient; the question is whether there is a causal connection between the misrepresentation and the decision. A presumption of inducement arises, especially in fraud cases, and is not rebutted by scepticism. The representee has no duty to investigate or be diligent. Only actual knowledge of falsity (or blind-eye knowledge) defeats the claim.

Mr Hayward’s submissions

For rescission, the claimant must have given some credit to the truth of the representation and been induced by a perception that it was true. Where insurers had already alleged exaggeration and pleaded fraud, they took the risk of the claim being fraudulent in settling. The public interest in finality of settlements should preclude reopening on later-acquired evidence.

Judgment

The Supreme Court unanimously allowed Zurich’s appeal and restored the order of Judge Moloney.

Lord Clarke’s reasoning

The elements of deceit require a materially false representation, made dishonestly with intent to induce, which does induce the representee to act to its detriment. It is not necessary, as a matter of law, that the representee believed the representation was true. The representee’s state of mind is relevant to inducement and causation, but is not itself a separate legal ingredient.

In litigation, statements will often be viewed sceptically; the representee may settle not because it believes the representation but because of the risk that a court will accept it. The judge correctly applied the formulation that “the claimant must have been influenced by the misrepresentation”. Inducement need not be the sole cause; it suffices that it played a part.

There is a strong inference (not a legal presumption) of inducement, particularly in fraud cases, which is very difficult to rebut. Lord Clarke endorsed Baroness Hale’s observation in Sharland v Sharland that a party who has practised deception with a view to a particular end cannot deny its materiality or causative effect.

The representee owes no duty of diligence to the fraudster. Zurich did all it reasonably could to investigate before settling, but could not have known the true position until Mr and Mrs Cox came forward. The judge’s findings that Zurich was induced into agreeing a higher settlement than it would otherwise have made were findings of fact, unchallenged on appeal, and dispositive.

The Court of Appeal’s analysis (particularly Briggs LJ at para 28) was wrong: it set the bar too high in favour of fraudsters by requiring belief in the truth of the misrepresentation.

Lord Toulson’s reasoning

Lord Toulson agreed, emphasising that inducement is a question of fact going to causation. The manner in which a fraudulent misrepresentation may cause detriment depends on the circumstances. Mr Hayward’s deceitful conduct was intended to influence the insurers’ valuation of the litigation claim, since its value for insurers’ purposes is what the court would likely put on it. He achieved his purpose and induced Zurich to pay almost ten times what they would otherwise have paid.

Lord Toulson endorsed the analysis in Gipps v Gipps [1978] 1 NSWLR 454 that inducement is a single question of fact, and pre-contractual knowledge that a statement is not wholly true bears on, but does not necessarily answer, that question.

Knowledge of falsity

Where the representee has full knowledge that the representation is false, this will generally defeat the claim. However, Lord Clarke noted that even certainty of falsity may not always preclude inducement as a matter of fact — for example, where the representee must take account of the risk a judge at trial would accept the lie. This was not such a case; Zurich had suspicions, not full knowledge.

Implications

The decision clarifies the law of fraudulent misrepresentation, particularly in the context of litigation settlements. It confirms that belief in the truth of the representation is not a freestanding requirement for an action in deceit or for rescission; what matters is whether the misrepresentation materially influenced the representee’s decision.

For insurers facing inflated personal injury claims, the decision is of significant practical importance. Insurers who settle suspecting exaggeration but lacking proof of fraud are not thereby barred from later setting aside the settlement if cogent evidence of fraud subsequently emerges. Mere suspicion does not amount to election to settle on the footing the claim might be fraudulent.

For claimants and their advisers, the case reinforces that fraud “unravels all”, as Lord Bingham put it in HIH v Chase, including compromise agreements protected by Tomlin Orders. Dishonest claimants cannot shelter behind a settlement merely because the defendant was on notice of possible exaggeration.

The decision leaves some matters open. Lord Toulson noted in his postscript that the appeal proceeded on a concession that a party seeking to set aside a settlement for fraud must prove fraud by evidence which could not have been obtained by due diligence at the time of settlement; the correctness of that concession was not decided. Lord Clarke also left open whether full knowledge of falsity invariably defeats a claim in deceit, observing that there may be circumstances (such as where the representee is concerned about how a court might view the lie) in which reliance can still be established.

In the wider legal context, the case affirms the strong policy against allowing fraudsters to retain the fruits of their fraud, while accommodating the realities of litigation, where parties routinely make assessments of risk rather than forming settled beliefs about the truth of contested assertions.

Verdict: Appeal allowed. The Supreme Court restored the order of His Honour Judge Moloney QC setting aside the settlement agreement on the grounds of fraudulent misrepresentation, with consequent repayment by Mr Hayward of the sums received under the settlement (less the £14,720 properly awarded), together with interest and CRU adjustment.

Source: Hayward v Zurich Insurance Company plc [2016] UKSC 48