Supreme Court case preview: settlement agreements and fraud
It is often said that "fraud unravels all", the maxim reflecting the basic principle that once deliberate dishonesty has been established, the innocent party is entitled to unwind his or her relationship with the wrongdoer. Thus, where a contract has been procured by fraud, the innocent party may elect to rescind the contract (and be put back into the pre-contractual position) rather than seeking the usual contractual remedy of compensatory damages (which aim to put him or her into a position whereby the contract had been properly performed).
But what if the contract in question is a settlement agreement compromising litigation in which fraud had been alleged all along? In such a case, the 'innocent' party might be considered to have entered into a settlement notwithstanding the risk that: a) their counterparty was indeed lying; and b) they might subsequently obtain proof of a).
This issue was considered by the Court of Appeal in Hayward v Zurich Insurance Co plc  EWCA Civ 327, a decision which will be reviewed by the Supreme Court this summer.
The case concerns proceedings brought by an employee against his employers in respect of a workplace injury. Insurers admitted liability but claimed the employee had overstated the severity of his condition, and prior to trial a settlement was reached.
Evidence later came to light which proved the employee had dishonestly exaggerated his injuries. Insurers commenced proceedings seeking rescission of the settlement agreement for fraudulent misrepresentation.
The County Court set aside the settlement agreement on the basis that, although insurers did not believe the injury claims, they undoubtedly took into account in entering into the settlement agreement the fact that the claimant’s assertions (made in pleadings and witness statements) would be put before the court.
However, the Court of Appeal overturned the decision below, finding that where the misrepresentations were the very matters in dispute in the settled proceedings, a representee must be taken to have entered into the settlement ‘with their eyes open’. Thus they should not be entitled to reopen the dispute in the event they are later able to prove their case.
The Court distinguished cases whereby a settlement is procured by a fraudulent representation pertaining to a mater not in issue in the settled proceedings. In such cases it seems the remedy of rescission will generally be available, depending on the scope of the releases in the settlement agreement.
The Court of Appeal also suggested that, where factual statements were not merely false or unfounded but ‘fraudulently advanced’, a different outcome might be reached. Accordingly, whilst the decision of the Court of Appeal is to be welcomed, its limits are left in some doubt.
It is therefore to be hoped that the Supreme Court will lend the matter some clarity following the appeal hearing in June of this year, not least because the extent to which settlement agreements are definitive is a fundamentally important issue for litigants.
Tom is a general commercial litigator with experience acting in a wide variety of cases including:
- Disputes between directors, partners, shareholders and joint-venturers;
- Corruption and bribery actions involving global asset tracing projects, acting both for Defendants and Claimants;
- Insurance and reinsurance litigation; and
- Complex multi-jurisdictional and multi-party commercial claims.