Re-opening settlement agreements: insight from the UK Supreme Court

Mr Hayward suffered a back injury at work. The employer admitted to being 80% at fault and the employer, and its insurer Zurich, reached an agreement by which Mr Hayward was paid £134,973.11 in full and final settlement of his claim.

Three years later, the employer was approached by Mr Hayward’s next-door neighbours. They told the employer that, from their observations of his behaviour, they believed Mr Hayward had fully recovered from his back injury at least a year before settlement. The neighbours provided information showing his claim to having a serious back injury had been dishonestly exaggerated. Zurich issued proceedings against Mr Hayward, claiming damages for deceit. The amount sought was the difference between the settlement that was actually awarded, and what Mr Hayward would have been paid had he not fraudulently misrepresented the extent of his injury.

Mr Hayward argued that the settlement agreement barred Zurich from bringing a claim as it provided that “all further proceedings in this action be stayed.” Further, he argued that his representations had not caused any loss to Zurich as the employer and Zurich already suspected, based on surveillance video they had of Mr Hayward, that his claims were untrue or exaggerated. In other words, he said Zurich was not induced by his representations to enter into the settlement agreement, because it never truly believed them.

The UK Supreme Court rejected this argument. The fact that the employer/Zurich suspected Mr Hayward’s representations were untrue did not persuade the Court that it was not nonetheless induced by them to enter into the settlement agreement. The Court held that the employer was still induced by the representations, because while it might not have believed they were accurate, its chief concern was whether the court would accept them. Thus, it was still the case that Zurich paid Mr Hayward a higher settlement than it would have otherwise done. It did so not because it believed Mr Hayward’s representations, but to avoid the risks involved in litigation. In settling for the sum it did, Zurich acted on the representations even though it suspected them to be untrue.

A useful comparison was made between a sale of goods and a settlement agreement. In both cases, one party relies on the other’s statements. In the former, this is effectively the same as believing the statements are true: the purchaser would not enter into the sale if it did not believe it was buying the goods as they were represented. In a litigation context, the position is different: the party making the settlement payment is less concerned with whether the statements are true than it is with the likelihood that they will be accepted in Court. Even if it is certain that the representations are a total lie, it must still take into account the risk that the judge will believe them.

The judges were of the view that there is no duty on representees to exercise due diligence and to be naturally suspicious of all claims. Nor did the fact that the employer had carried out its own investigations disprove that Mr Hayward’s statements influenced Zurich’s decision to settle; the evidence then available did not give it enough confidence that it would be guaranteed success at trial. It was not until the neighbours came forward that it knew the full extent of the lie.

While the judges were mindful of the importance of encouraging settlements, they did not think this outweighed other justice and public policy considerations. It would not be fair for defendants such as Mr Hayward to be allowed to retain money they acquired by fraud, especially where the ultimate cost is borne by other policy holders through increased premiums.

In the end, Mr Hayward was held to be entitled to £14, 720, roughly 10% of the original award. The case confirms a general presumption of inducement where a misrepresentation was made prior to the formation of a contract. It is clear that, where misrepresentations are found to be fraudulent, this presumption will be especially hard to rebut.

This case demonstrates the strong public policy in discouraging fraudulent conduct aimed at maximising an insurance settlement. An insured who obtains a benefit through making fraudulent statements in relation to their claim is liable to find the Court willing to overturn a settlement agreement and it is no defence for the insured to say that the insurer never believed the fraudulent statement.