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Must a party seeking to set aside a compromise for fraudulent misrepresentation prove that it believed the representation was true?

No, says the Supreme Court

In Hayward v Zurich Insurance Co Ltd [2016] UKSC 48, the Supreme Court has decided that a party seeking to set aside a compromise on the basis of fraudulent misrepresentation does not need to prove that it believed the representation to be true.

The Respondent (“H”) suffered an injury at work in 1998. He issued a claim against his employer. The Appellant insurer (“Z”) conducted the employer’s case on its behalf. Liability was admitted and the issue of quantum was due to be tried.

Z was suspicious of H’s evidence as to the seriousness of his injury; in particular, following its obtaining video surveillance evidence. However, it did not know that he was lying. The only difference between the parties’ experts was the likely duration of future loss.

In 2003, shortly before the trial was due to take place, the parties settled the claim for around £134,000. This reflected a period of future loss roughly halfway between the respective opinions of the two experts.

In 2005, H’s neighbours approached his employer to say that they believed his claim to have suffered a serious back injury was dishonest. In February 2009, Z commenced a fresh claim against H. The claim was for rescission of the compromise agreement and repayment of the sums paid under it; alternatively, damages for deceit. Z averred that the various statements made by or on behalf of H in the original claim were fraudulent misrepresentations. No point was taken that Z, rather than H’s employer brought the second claim.

Following a trial, the first instance judge found that H had deliberately and dishonestly exaggerated the effects of his injury throughout the court process. The judge found that although Z was aware at the time of settlement of a real possibility of fraud, H’s continuing misrepresentations had influenced Z to agree a higher level of damages than it would otherwise have agreed. The judge therefore set aside the compromise. The issue of quantum was then tried and H was awarded £14,720. He was therefore ordered to repay to Z the difference between the original settlement and the judgment.

H appealed successfully to the Court of Appeal. Z appealed to the Supreme Court. The Supreme Court unanimously overturned the decision of the Court of Appeal and reinstated the decision of the first instance judge.

Before the Supreme Court, the parties agreed that to establish the tort of deceit Z had to show that H had dishonestly made a materially false representation which was intended to, and did, induce Z to act to its detriment. The issues before the Supreme Court concerned what constituted inducement for these purposes. The parties agreed two issues for determination, which may be summarised as follows:

  1. In order to set aside a compromise on the basis of fraudulent misrepresentation, must the defrauded representee prove that it was induced into settlement because it believed the representation was true or merely that the misrepresentation was a material cause of its entering into the settlement?
  2. Under what circumstances, if any, does the representee’s suspicion of exaggeration for financial gain by the representor preclude setting aside the compromise when fraud is subsequently proved?

It was agreed that Z did not know that H was deliberately exaggerating his symptoms when it entered into the compromise. It was further agreed that Z had done as much as it reasonably could to investigate the position before settlement.

Lord Clarke, giving the leading judgment, held that it was unnecessary for Z to prove that it believed that the representations were true. In a case such as this, all that was required was that Z was influenced by the misrepresentation, in that it was a material cause of its entering into the settlement agreement.
On the second issue, he held that it was difficult to imagine circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement if fraud is subsequently established.

The following points arise from the judgment:

  • The questions whether a representee was induced to enter into an agreement and whether doing so caused it loss are questions of fact.
  • It is not a necessary ingredient of the cause of action that the representee believes the representation to be true. But it is centrally relevant to the questions of inducement and causation. Logically, the representee is more likely to settle for a different reason other than the representation if his reasonable belief is that it is false. In such circumstances, it may have serious difficulty in proving that it was induced to enter into the contract or that it suffered loss as a result.
  • The fact that the representee does not wholly credit the fraudsman and carries out its own investigations does not preclude it from having been induced by the representations. Qualified belief or disbelief does not rule out inducement.
  • In a case such as this, the representee may have strong suspicions that the representations are untrue. However, the question is not what it thinks but what the court might think at trial. Z therefore had to take into account the possibility that H would be believed at trial.
  • If the representee makes out the other elements of the cause of action, the court will make an inference of fact that the fraudulent misrepresentation influenced the representee (i.e. induced it to act to its detriment). This inference of fact is often referred to as a “presumption of inducement”.
  • Materiality of the misrepresentation is evidence of inducement, as what is material tends to induce.
  • It is necessary for the misrepresentation to be an inducing cause, but it need not be the sole cause.
  • There is no duty on the representee to be careful, suspicious or diligent in research to determine whether there are reasonable grounds to believe the representations made.

Although it was unnecessary to express a final view on the question whether it will always follow that if the representee knows that a representation is false it cannot succeed, it seemed to Lord Clarke that there may be circumstances in which a representee may know that the representation is false but nevertheless may rely on it as a matter of fact. The kind of case in which the representee might prove inducement was that of a staged road traffic accident where the representee may know from his direct knowledge that the representation was a deliberate lie and yet he must still take into account the risk that it would be believed by the judge at trial.

Further, on the facts of the case, the Supreme Court did not need to decide what was necessary to rebut the presumption of inducement. However, Lord Clarke noted that the authorities seemed to support the conclusion that it was very difficult to rebut the presumption.

The decision will be welcomed by insurers but it has broader effect.

In the context of parties attempting to reopen settlements when further evidence later comes to light, the Supreme Court has placed less emphasis than the Court of Appeal on the public interest in the settlement of disputes. One might be wary of an increase in satellite litigation consequent upon this decision. However, a limiting factor will be the necessary ingredient that the party seeking to reopen the settlement still has to prove fraud – no easy task.

In the context of fraudulent misrepresentation claims more broadly, it has narrowed the potential defences available to a party who has dishonestly misrepresented the position to another. One might regard it as a bit rich for a proven liar to seek to defend himself simply by alleging that the other party knew he was lying. The Supreme Court has now made clear that this in and of itself will not assist the fraudsman in avoiding a claim based on his fraudulent conduct.

Winston Jacob / 4th Aug 2016


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