Rescission of Settlement Agreement in Fraudulent Personal Injury Claims

Nick Blake discusses the Rescission of Settlement Agreement in Fraudulent Personal Injury Claims.

In recent years the sanctions which the Courts have been willing to visit upon Claimants found to have fraudulently exaggerated the value of their claims have increased dramatically with adverse costs orders, strike out and committal ever more commonplace. So the decision of the Court of Appeal in the case of Hayward v Zurich [2015] EWCA Civ 327 handed down on 31st March 2015 was awaited with interest. Would the Court of Appeal uphold the Judgment of the Trial Judge, who had ordered that a settlement embodied in a Tomlin Order should be set aside after the insurer (Z) backing the Defendant received additional evidence that the settled claim was tainted by fraud? Z argued that the settlement had been procured by Z’s reliance upon the Appellant (H)’s fraudulent representations in the pleadings and witness statements as to the extent of his injuries.

The facts of the case are that in June 1998 H suffered an accident at work in which he injured his back. In 2001 he started proceedings, claiming that his injury continued to cause him serious lumbar pain which restricted his mobility, and that he had also developed a depressive illness. He claimed damages in excess of £420,000. Liability was compromised at an early stage, with an agreed 20% reduction for contributory negligence.

In the Defence reliance was placed on video surveillance evidence and it was pleaded, inter alia, that: “The Claimant has exaggerated his difficulties in recovery and current physical condition for financial gain.”

In October 2003, shortly before the issue of quantum was due to be tried in the Cambridge County Court, the parties reached an agreement, embodied in the Tomlin Order, under which the Defendant agreed to pay £134,973.11 in full and final settlement of H’s claim.

In February 2009, H’s neighbours approached Z and provided witness statements, to the effect that they believed from their observations that H had entirely recovered from his injury at least a year before the settlement date. Z commenced proceedings claiming damages for deceit, later amended to plead rescission in the alternative, alleging that the statements as to the extent of the H’s injury in the Particulars of Claim and Schedule of Loss, and his accounts given to the medical experts, constituted fraudulent misrepresentations. Damages were claimed equivalent to the difference between the amount of the settlement and the damages that should have been awarded if H had told the truth.

After failed attempts by H to strike out Z’s claim, the case was eventually tried by HH Judge Moloney QC in the Cambridge County Court in November 2012. He found that H had indeed dishonestly exaggerated the effects of his injury and went on to hold that the settlement agreement should be set aside on the basis that Z had relied upon the representations made by H and had suffered loss as a result. In the course of his Judgment he stated that:

“…an interesting (and apparently unresolved) question of principle arises. In the ordinary case, sale of goods for example, reliance by the purchaser is effectively equivalent to his belief in the truth of the statement… in the litigation context … the party to whom the representation is made is by no means likely to believe it to be true at the pre-trial stage. At the very least, statements made in the course of litigation will be viewed with healthy scepticism and weighed against the other material available. Often the other party will not be sure, even then, whether the statement is in fact true, and will mainly concern himself with how likely it is to be accepted by the court… The formulation adopted by the editors of Clerk and Lindsell (20th edn. 2010) at 18-34 fits the case better; “The claimant must have been influenced by the misrepresentation” “

As to whether Z was influenced by H’s representations, HHJ Moloney found that:

“They may not themselves have believed the representations to be true; but 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 than Zurich would otherwise have considered appropriate.”

Following a further trial in September 2013 the Judge awarded damages to A in the sum of £14,720 and ordered him to re-pay the sum paid under the settlement less that amount.

H Appealed on two bases. First, he argued that in a misrepresentation claim “belief is a necessary component … essentially, the representee must be deceived” and that the Judge was accordingly wrong to hold that Z could succeed on the basis that although it had not believed the misrepresentations, it was “influenced” by the fear that the Court might do so. Secondly, he argued that if Z did not trust what he was told but made his own inquiries about whether the statement was true, as it had, then he relied not on the statement, but on his own inquiries” and therefore the necessary reliance was missing.

The Appeal was upheld. Underhill, LJ preferred a contractual analysis – that Z, by entering into the settlement, necessarily implicitly agreed not thereafter to seek to have it set aside on the basis that the statements made in support of the claim were false. Another way of putting that would be that Z agreed not to rely on them for the purpose of deciding whether to settle.

As to reliance, he found that while Z will inevitably have been influenced by the possibility that the allegations put forward by H would be believed by the Court, that did not constitute reliance in the relevant sense. Z was not concerned with the truth or otherwise of the statements as the factor motivating his decision to settle. Rather, Z was treating them simply as part of H’s case. Z had to form an independent judgment about whether the disputed statements made as part of the claim were likely to be accepted by the Court. A relationship of reliance does not arise in that context. An important factor was of course that the Defendant in the original action had in their Defence not simply put the representations in issue but positively asserted that they were dishonestly advanced.

While Underhill, LJ acknowledged that in misrepresentation cases in general the situation may be different where the factual statements advanced by the Claimant and relied on by the Defendant are not merely false but fraudulent, but if it is, as in this case, sufficiently apparent that Z intended to settle notwithstanding the possibility that the claim was fraudulently advanced, there can be no reason in principle why he should not be held to his agreement even if the fraud subsequently becomes demonstrable.

He stated that though the result was unattractive because it meant that H retained the benefit of a settlement far in excess of the value of his actual loss, the wider principle at stake, that parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later, must prevail.

Briggs LJ also stated that he would gladly have embraced any sound basis for upholding the Trial Judge’s decision to strip A of the grossly inflated amount which he received upon the settlement of his fraudulently exaggerated claim, but found that the Judge’s finding that Z was induced into making the settlement agreement by reliance on A’s dishonest misrepresentations about his continuing injury was based upon a view of the law for which there was no authority, which was wrong in principle and the recognition of which would have most unfortunate consequences that it would become almost impossible to compromise a whole swathe of litigation.

From a contractual perspective Briggs, LJ held that if the decision of the Trial Judge was upheld, the effect would be that “if A makes a contract with B, to the terms of which A has been influenced into agreeing because he fears that a statement by B which he believes is untrue may nonetheless be believed and acted on by C, then A may later rescind his contract with B if he can prove the untruth of the statement…” If that were the case then it appears that A would be free to seek rescission “merely using the evidence he already had when making the contract, because he had in the meantime simply repented of it, or because his apprehension about the effect of the statement upon C had gone away.” There was nothing in the reliance test propounded by the Judge that would even make the obtaining of fresh evidence a necessary condition.

Briggs LJ further held that “for a misstatement to be the basis for a claim to rescind a contract, the claimant must have given some credit to its truth, and been induced into making the contract by a perception that it was true rather than false.” In this case Z “did not merely disbelieve H’s assertions about the continuing effect of his injury. It went so far as to plead that they were fraudulent.” All that happened thereafter was that better evidence of the fraud came to light than was available when the settlement contract was made.

He found that there was nothing contrary to conscience in holding a person to a contract made in order to deal with the risk that a statement which he believes to be untrue and even fraudulent may nonetheless persuade someone else, even a judge. To the contrary the public policy which encourages settlement of litigation would be gravely undermined if, in effect, dissatisfaction on either side led, with or without later forensic research, to the settlement being impugned on the ground that the opponent’s case contained a misrepresentation which, without being believed, influenced the terms of settlement.

Ultimately the Court of Appeal preferred the traditional approach to the requirement of reliance upon a misrepresentation before a concluded settlement can be set aside, to the novel approach of the Trial Judge. Despite the distaste for the unattractive result in this case, the wider public policy considerations and the fact that it would be extremely difficult to confine his more generous approach to “inducement” to the rescission of contracts in settlement of litigation, led to the correct result.

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Author: Nick Blake Farrars (chambers@farrarsbuilding.co.uk)

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