EXAGGERATION = FRAUD – KEY COURT OF APPEAL CASE

EXAGGERATION = FRAUD – KEY COURT OF APPEAL CASE

The Court of Appeal has said that exaggerating injuries for financial gain is fraud. This is a very important decision that suggests that the fundamentally dishonest threshold will be very much lower than most people thought. This is of key relevance in relation to the whole claim being dismissed under Section 57 of the Criminal Justice and Courts Act 2015 and to defeat Qualified One Way Costs Shifting protection.

In Hayward v Zurich Insurance Company plc [2015] EWCA Civ 327

the Court of Appeal overturned a first instance decision that a claimant should repay a large part of a personal injury award from an earlier settled action.

It will now be very difficult for the settled cases to be reopened.

Here the claimant had been injured at work and liability was admitted and shortly before trial the action was settled for £134,973.11, the insurer having argued that the claim was exaggerated. It settled for around one third of the sum claimed.

After settlement the insurers were informed that the claim had been inflated and they successfully sued the claimant for fraudulent misrepresentation in claimed rescission of the agreement. The judge held that the true value of the claim was £14,720.00 and ordered the claimant to repay the balance.

On appeal it was argued that the insurer had settled the original action on the basis that it was overstated and fraudulent and thus should not be allowed to reopen the case simply because it now had better evidence to establish one of the factors that it had taken into account when deciding to settle. To allow the insurer to reopen the case would make settlements difficult, if not impossible.

The Court of Appeal upheld those submissions. It pointed out that the contract was one to compromise a disputed claim and that the misrepresentation on which the claim for rescission was based consisted of some of the very facts averred by the claimant in advancing the claim. This was not a case of collateral representations designed to induce the settlement as in cases such as:-

Gilbert v Endean [1878] 9 Ch D 259 or Dietz v Lennig Chemicals [1969] 1 AC 170.

Consequently the defendant could not now have the agreement set aside simply because he could now show that the statements put forward by the claimant had been wrong.

“In deciding to settle the defendant takes the risk that those statements are in fact untrue (or, to put it more accurately, would not be proved at trial) and pays a sum commensurate with his assessment of that risk. He could have taken the case to trial in order to disprove the statements in question; but by settling he agrees to forego that opportunity and he cannot reserve the right to come back later for another attempt. If it were otherwise no settlement would be final.” (Paragraph 16 of the Judgment).

By entering into the settlement the defendant implicitly agrees not to seek to have it aside on the basis that the statements made in support of the claim were faults.

The Court of Appeal went on to say that the position would be different where the factual statements advanced by the claimant and replied upon by the defendant were not merely faults but were fraudulent. However the court went on to say:-

“If it is in any case sufficiently apparent that the defendant intended to settle notwithstanding the possibility that the claim was fraudulently advanced, either generally or in some particular respect – the paradigm being where he has previously so asserted – there can be no reason in principle why he should not be held to his agreement even if the fraud subsequently becomes demonstrable.” (Paragraph 19 of the Judgment).

The Court of Appeal said that it cannot be right that a defendant who has made an allegation of fraud against the claimant but decided not to have it tested in the court should be allowed, whenever he chooses, to revive that allegation as a basis for setting aside the settlement.

That was the case here.

Parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later. Here Zurich had alleged fraud from the outset and what happened afterwards was that better evidence of that fraud came to light after the settlement contract had been made.

At paragraph 33 the court said:-

“To extend the law of rescission in the manner here under consideration would have the most unfortunate consequences. The first would be that it would become almost impossible to compromise a whole swathe of litigation if settlements were vulnerable to being set aside in this manner. Apprehension by one party that his opponent may persuade the trial judge of matters which he denies, and disbelieves, is an everyday characteristic of litigation, and a healthy driver towards settlement, as every mediator knows. If the principle contended for were correct, almost any litigant could say that he was influenced to settle a case for more than it was worth because of a fear that the judge might believe his opponent, even though he did not. To be able to treat as an actionable misrepresentation the opponent’s statement of his case merely because of such an everyday apprehension would expose almost any settlement to subsequent attack if fresh evidence became available. Indeed, there is nothing in the reliance test propounded by the judge that would even make the obtaining of fresh evidence a necessary condition. 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.”

This case would have been decided differently had the new section 57 of the Criminal Justice and Courts Act 2015 been in force at the time.

The court clearly found fundamental dishonesty, indeed fraud, and therefore there could have been no question of any part of the claim being allowed to stand; the whole claim would have had to have been dismissed, even though the Defendant was liable for part of the damages.

The case is potentially significant in relation to the definition of fundamental dishonesty, both in relation to section 57 and also in relation to Qualified One-Way Costs Shifting.

Working on the basis that anything that constitutes fraud has also passed the fundamental dishonesty test, that is assuming that fundamental dishonestly is in fact a step short of fraud, then any exaggeration for financial gain will constitute fundamental dishonesty and thus trigger the loss of Qualified One-Way Costs Shifting protection and also the loss of the whole claim which otherwise would have been successful.

Here the allegation of the defence was as follows:-

“The Claimant has exaggerated his difficulties in recovery and current physical condition for financial gain.”

There was no direct reference to fraud or dishonesty.

Indeed the whole point of the second action was that they had now discovered that the claimant had acted fraudulently and they had not taken that into account when setting the first action.

Here the court said, at paragraph 20:-

“The employers had in their Defence not simply put them in issue but positively asserted that they were dishonestly advanced: see para. 2 above. Ms Adams [counsel for the insurance company] argued that the relevant paragraphs did not amount to a plea of fraud, but I cannot see how an averment that the Appellant was exaggerating his disability “for financial gain” can be anything else.”

Later at paragraph 26 another judge of the Court of Appeal referred to “the grossly inflated amount which he received upon the settlement of his fraudulently exaggerated claim”.