Zurich Insurance Company Plc v Hayward

A consent settlement, including one recorded in a Tomlin order, does not create a blanket estoppel against later fraud proceedings merely because the earlier defence alleged exaggeration. Estoppel requires clarity about what was decided or compromised and essential congruence between the earlier and later fraud allegations.

Where those requirements are absent, the court must apply a flexible, merits-based abuse-of-process inquiry. A later claim is not necessarily abusive because it could have been raised earlier. Fresh evidence, absence of unjust harassment, and the public interest in protecting the integrity of civil justice may outweigh finality. A fraud claim inducing a settlement may proceed to trial where its success depends on disputed questions of inducement and dishonesty.

Mr Hayward brought a personal injury claim against his former employer. Zurich, which conducted the defence, pleaded that he had exaggerated his condition for financial gain. The claim was settled in 2003 by a Tomlin order.

After former neighbours supplied new evidence suggesting that Mr Hayward had substantially recovered before settlement, Zurich brought proceedings alleging that the settlement had been induced by fraudulent misrepresentations. A deputy district judge refused to strike out the claim, but HH Judge Yelton allowed Mr Hayward’s appeal and dismissed it on the basis of estoppel by res judicata.

The Court of Appeal considered whether the earlier allegation of exaggeration barred the later fraud claim, and whether pursuing it was an abuse of process.

1. Estoppel. The appeal was allowed. Smith LJ accepted that a consent order can create an estoppel where the parties are the same and the issues raised later were necessarily compromised in the earlier proceedings, following Kinch v Walcott [1929] AC 482. A Tomlin order can have that effect in relation to issues covered by its agreement. Moore-Bick LJ took a narrower doctrinal view: a Tomlin order which merely stays proceedings without adjudicating the substantive claim does not create estoppel by record in the proper sense, although its underlying agreement may have contractual force. The judges agreed that no estoppel barred this claim.
2. Estoppel required clarity about what had actually been compromised and congruence between the allegations. The earlier pleading alleged exaggeration, but did not clearly establish that the parties had compromised the extent or fraudulent character of any exaggeration. The later claim alleged a detailed and distinct fraud. Merely putting good faith in issue was insufficient.
3. The court applied the flexible, merits-based approach to abuse of process in Johnson v Gore Wood & Co [2000] UKHL 65, [2002] 2 AC 1. The fact that an issue could have been raised earlier did not make later proceedings necessarily abusive. Zurich had obtained fresh evidence which it had not previously known and could not reasonably have been expected to discover. Its conduct was not apparently harassing.
4. The public interest in protecting the integrity of civil justice, including reliance on truthful pre-trial statements, outweighed the interest in finality on these facts. Preventing an insurer from pursuing subsequently discovered fraud merely because exaggeration had been pleaded could discourage both full pleading and settlement. Moore-Bick LJ also held that the damages claim was not misconceived merely because the settlement was embodied in a Tomlin order; Zurich could claim damages for fraud inducing the settlement and could also seek to avoid the agreement or set aside the order if necessary.
5. The rule in Ladd v Marshall [1954] 1 WLR 1489 concerned fresh evidence on appeal and had no application to fresh proceedings alleging fraud or seeking to set aside a judgment. The claim was not struck out and was to proceed to determination at trial.

• Court of Appeal (Civil Division): Appeal allowed. The strike-out order was set aside and the fraud claim was permitted to proceed.
• Cambridge County Court, HH Judge Yelton: Allowed Mr Hayward’s appeal from the deputy district judge and dismissed Zurich’s claim, holding that the Tomlin order created an estoppel by res judicata.
• Cambridge County Court, Deputy District Judge Bosman: Refused to strike out the claim and considered that Zurich should be permitted to pursue an application to set aside the Tomlin order.