Fraud, settlement agreements and the neighbourhood watch

When can the claimant’s dishonesty enable a settlement agreement to be unstitched? Fraudulent misrepresentation may enable the agreement to be set aside but not where the defendant has already alleged fraud before settling the claim. In the words of Underhill LJ in Hayward v Zurich Insurance Company Plc:

“it may stick in the throat that the claimant can retain the reward of his dishonesty, but the defendant will have made the deal with his eyes open to the possibility of fraud, and there is an important public interest in the finality of settlements”.

We look at this important decision and some lessons for defendants and their insurers.

The claim

Mr Hayward suffered a back injury at work in 1998. Pre-action video surveillance in 1999 revealed that the claimant was exaggerating his injuries and this evidence was disclosed at an early stage. He began the action against his employers in 2001 seeking damages of about £420,000. The defence said: "The claimant has exaggerated his difficulties in recovery and current physical condition for financial gain".

In their joint report, the parties’ experts thought that the discrepancy between the video surveillance and Mr Hayward's description of his symptoms “needed clarification”. In 2002 the defendant admitted liability and contributory negligence of 20 per cent was agreed.

In 2003 the defendant made what amounted to an offer of about £135,000, including interim payments. It was subsequently accepted by the claimant and a settlement agreement was made in the form of a Tomlin order.

The alleged fraud

In 2005 Mr Hayward’s neighbours Mr and Mrs Cox approached his employer. They had been living next door to Mr Hayward from 2002 until 2005 and in their view there was nothing much wrong with him during that period. They had seen him walking about easily at home but using two sticks when he went out. If their evidence were to be accepted, it demonstrated that the claimant had made a complete recovery more than a year before the settlement.

Zurich’s action

In 2009 Zurich (standing in the shoes of the claimant’s employer) began an action seeking damages against Mr Hayward, alleging that he had made fraudulent misrepresentations to induce the insurer to make a greater offer of settlement than it would otherwise have done. Mr Hayward applied to the court to strike out the claim as an abuse of process or on the ground that the issues were res judicata.

A deputy district judge refused to strike out the claim. In response to his suggestion, Zurich amended the claim to seek, in addition to damages, an order that the Tomlin order be set aside. Mr Hayward’s appeal succeeded before HH Judge Yelton who struck out Zurich’s claim.

The first visit to the Court of Appeal

Zurich appealed successfully to the Court of Appeal. Smith LJ concluded that:

“the public interest in the integrity of the administration of justice and the private interests of Zurich in seeking the investigation of these allegations of fraud far outweigh the public interest in the finality of litigation and Mr Hayward's understandable wish to avoid a second action”.

Moore-Bick LJ commented presciently that to succeed, Zurich would have to persuade the court that it was induced to agree to the settlement by fraud on the part of Mr Hayward, a task that might not be easy, given the fact that it already knew enough to justify the allegation of fraud in the original defence.

The second visit to the Court of Appeal

The trial before HH Judge Moloney QC took place in 2012. The judge held that Mr Hayward had dishonestly exaggerated the effects of his injury and ordered that the settlement agreement should be set aside. Following a retrial on the issue of quantum, Mr Hayward was awarded damages of £14,720 and was ordered to re-pay the sum paid under the settlement less that amount.

Mr Hayward appealed to the Court of Appeal. The court allowed the appeal, acknowledging that the result was unattractive because it meant that Mr Hayward could retain the settlement sum in full despite his dishonesty. Briggs LJ commented that he would gladly have embraced any sound basis for upholding the decision below but could find none given that the settlement compromised an allegation of fraud already on the pleadings. Underhill LJ concluded that “parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later”.

Judgment rather than settlement?

A different approach to dishonesty is taken where the court, and not merely the other party, has been misled. The courts have consistently accepted that judgments obtained by fraud should be set aside. Prentice v Hereward Housing Association is a good illustration. The claimant gave evidence that he had been walking across an area of grass outside his house to his car and turned his ankle in a pothole for which the defendant housing association was responsible. Neighbours came forward to challenge his evidence after seeing a report of the outcome of the trial in the local paper. They said that he had been chasing his son when he slipped and that he had not mentioned the hole when talking about the accident. The Court of Appeal ordered a retrial.

Although retrials are often ordered where evidence of fraud emerges after judgment, this may not prove to be a financially beneficial outcome for the defendant and its insurers, particularly if the fraud concerns the extent of the injury rather than liability. In Owens v Noble the Court of Appeal ordered a retrial following a neighbour’s tip off that the claimant had lied about his disability. The allegation of fraud was not upheld at the second trial.

Conflicting principles of public policy

Reading both decisions in the Court of Appeal in this case, you could be forgiven for thinking that they give decidedly mixed messages. Smith LJ in the strike out appeal appears to be much more concerned about fraud going unpunished than the finality of litigation. She also points out two other public policy considerations. Refusing to set aside a settlement in these circumstances will act as a disincentive to defendants and their insurers to plead their case fully. It will also discourage them from settling claims.

Neither of these consequences is desirable but such considerations could not change the fact that taking a more generous approach to inducement in the context of settlement agreements would have damaging consequences. In the recent decision, Briggs LJ concludes that:

“if the mere making of a misstatement rather than belief in its truth is to be a sufficient influencing factor, then there is no telling in what contractual contexts it may be applied, with debilitating effects upon contractual force and certainty”.

Comment

It is tempting to relate the history of this claim to the prevailing concerns at each stage of the litigation. At the time of the May 2011 decision of the Court of Appeal, references to the “compensation culture” and fraudulent injury claims were widespread in the media. In February 2011, judgment was given in Locke v Stuart concerning a claim arising from one of nine “crash for cash” road accidents forming part of a fraudulent conspiracy. In March 2015, the Supreme Court gave Zurich permission to appeal in Fairclough v Summers so that the court’s jurisdiction to strike out fraudulently exaggerated claims could be reviewed. In April 2011 the Court of Appeal in Singh v Habib ordered a retrial in another “crash for cash” case, noting “widespread concern about fraudulent cases of this kind”.

Fast forward to 2015 and things have moved on. The Court of Appeal’s recent decision is made against a different backdrop. The Jackson reforms have made accident claims less attractive in many respects. The efforts of insurers such as Zurich have succeeded in getting legislation onto the statute book requiring the courts to dismiss a injury claim in its entirety if satisfied on the balance of probabilities that the claimant has been fundamentally dishonest in relation to the primary claim or a related claim, unless the claimant would suffer substantial injustice if the claim were dismissed. Section 57 of the Criminal Justice and Courts Act 2015 comes into force on 13 April 2015.

The background may have had its part to play in the decision not to strike out Zurich’s claim in 2011 but the logic of the recent decision would appear to be unaffected by current public policy concerns. A settlement agreement is a contract and the rules applying to contracts of all types need to be applied and developed with clarity and consistency. Where the defendant is already aware that the claim may be dishonestly exaggerated and pleads such a defence, it will not be able to reopen a settlement agreement if further evidence demonstrating the full extent of the fraudulent exaggeration emerges. Defendants and their insurers take that risk if they settle such a claim. Section 57 should mean that fewer claims are dishonestly exaggerated to a significant extent but the dilemma about whether or not to settle in these circumstances will remain.