Hayward v Zurich Insurance Company plc: Supreme Court
In 1998, the respondent suffered an injury at work which was caused by the negligence or breach of duty of his employer. In the respondent’s claim for damages of £419,316.59, the employer admitted liability as to 80% and the respondent accepted that he was 20% to blame.
In 2003, before the issue of quantum was due to be tried, the respondent and the appellant insurer of the employer reached a settlement agreement, incorporated in a Tomlin order, with the appellant agreeing to pay £134,973.11 in full and final settlement of the respondent’s claim. In 2005, the respondent’s neighbours approached the employer to say that they believed that his claim to have suffered a serious back injury was dishonest and they made full witness statements to that effect.
In 2009, the appellant commenced proceedings against the respondent, claiming damages for deceit, which was subsequently amended to claim, in the alternative, rescission of the settlement agreement and the repayment of the sums paid under it. At trial, the judge found that the respondent had deliberately and dishonestly exaggerated the effects of his injury throughout the court process.
Although the appellant’s solicitor and claims manager could not be said to have believed the representations complained of to be true, they did believe that they would be put before the court as true and that there was a real risk that the court would accept them in whole or part, and consequently make a larger award that the appellant would otherwise have considered appropriate.
Therefore, he set aside the compromise and awarded the respondent damages of £14,720. An order was made, directing him to repay the sum paid under the settlement less that amount. The Court of Appeal, Civil Division, allowed the respondent’s appeal, essentially because of the appellant’s state of mind when the settlement had been made. The appellant appealed.
The issues for determination were, first, in order to set aside a compromise on the basis of fraudulent misrepresentation, to show the requisite influence by, or reliance on, the misrepresentation: (i) whether the defrauded representee had to prove that it had been induced into settlement because it had believed that the misrepresentations had been true; or (ii) whether it sufficed to establish influence that the fact of the misrepresentations had been a material cause of the defrauded representee entering into the settlement.
Second, under what circumstances, if any, did 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 was subsequently established.
The appeal would be allowed.
(1) In order to set aside a compromise on the basis of fraudulent misrepresentation, to show the requisite influence by or reliance on the misrepresentation, the defrauded representee did not have to prove that it had been induced into settlement because it had believed that the misrepresentations had been true. It sufficed to establish influence that the fact of the misrepresentations had been a material cause of the defrauded representee entering into the settlement. In a claim for deceit based upon an alleged fraudulent misrepresentation, it had to be shown that the defendant had made a materially false representation which had been intended to, and had, induced the representee to act to its detriment. It was not necessary, as a matter of law, to prove that the representee had believed that the representation had been true. There was no clear authority to the contrary.
However, that was not to say that the representee’s state of mind might not be relevant to the issues of inducement. A person might have suspicions as to whether the representation was true and might even be strongly of the view that it was not true. However, the question was not what view they took, but what view the court might take in due course. The authorities did not lead to any other conclusion.
The authorities showed that questions of inducement and causation were questions of fact. Although the claimant had to show that he had been induced to act as he had by the misrepresentation, it need not have been the sole cause. Qualified belief or disbelief did not rule out inducement. Accordingly, a claimant alleging deceit did not have to show that he had believed the misrepresentations (see , , , , , ,  of the judgment).
The judge had correctly perceived that the employer and its advisers had to take into account the possibility that the respondent would be believed by the judge at the trial. That was because the views of the judge would determine the amount of damages awarded. In any event, the present was not a case in which the appellant or the employer had known that the respondent had been deliberately exaggerating the seriousness and long-term effects of his injuries. The pleas showed that the appellant had been suspicious of the respondent, but no very clear allegations had been, or could have been, made.
The fact was that the appellant had not known the extent of the respondent’s misrepresentations. It had not been until the advent of the neighbours that the appellant had realised the true position. The questions whether the appellant had been induced to enter into the settlement agreement and whether having done so had caused it loss were questions of fact, which had correctly been decided in its favour by the judge.
The small amount ultimately awarded by the judge showed the extent of the dishonest nature of the claim. The importance of encouraging settlement, which was considerable, was not sufficient to allow the respondent to retain money which he had only obtained by fraud (see , , , ,  of the judgment).
Edgington v Fitzmaurice [1881-5] All ER Rep 856 applied; Briess v Woolley  1 All ER 909 applied; Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd  3 All ER 581 applied; Standard Chartered Bank v Pakistan National Shipping Corp  1 All ER 173 applied; Sharland v Sharland  1 All ER 671 applied; Redgrave v Hurd [1881-5] All ER Rep 77 considered; Smith v Chadwick [1881-5] All ER Rep 242 considered; Smith v Kay (1859) 11 ER 299 considered; Downs v Chappell  3 All ER 344 considered; BP Exploration Operating Co Ltd v Chevron Shipping Co  1 All ER (Comm) 1 considered; Ross River Ltd v Cambridge City Football Club Ltd  1 All ER 1004 considered.
(2) The answer to the second issue followed from the answer to the first. It was difficult to envisage any circumstances in which mere suspicion that a claim had been fraudulent would preclude unravelling a settlement when fraud was subsequently established (see ,  of the judgment).
Decision of Court of Appeal, Civil Division,  All ER (D) 04 (Apr) reversed.
Patrick Limb QC and Jayne Adams QC (instructed by DAC Beachcroft Claims Ltd) for the appellant; Guy Sims (instructed by Hewitsons LLP) for the respondent.