Hayward v Zurich Insurance Company Plc

Where a party settles litigation involving disputed factual allegations, the settlement ordinarily allocates the risk that those allegations may be false. The settling party cannot later rescind merely because better evidence shows that the allegations were wrong, or because the court might have accepted them. Rescission for misrepresentation requires the representee to have been misled. Mere influence caused by fear that a judge may believe a statement which the representee already regards as false is insufficient. Fraud may justify different treatment, but the circumstances may show that the party settled with the possibility of fraud in view. A party that has already alleged the same dishonesty and nevertheless settles will ordinarily be taken to have surrendered the right to reopen the settlement on that basis. The public interest in finality of settlements reinforces that conclusion.

The appellant suffered a back injury at work and brought proceedings against his employers. Liability was admitted, but the extent of the injury and resulting losses were disputed. The parties settled the claim in 2003 for £134,973.11.

After later evidence suggested that the appellant had dishonestly exaggerated his injury, Zurich brought proceedings for deceit and rescission. HH Judge Moloney QC found dishonest exaggeration, set aside the settlement, assessed the genuine damages at £14,720 and ordered repayment of the balance. An earlier interlocutory appeal had allowed Zurich’s claim to proceed: [2011] EWCA Civ 641.

The central issue was whether a settlement could be rescinded where the alleged fraud had already been pleaded before settlement, Zurich did not believe the appellant’s statements, but feared that a court might accept them.

1. Appeal allowed. The settlement remained binding. The judgment setting it aside and the consequential repayment order were set aside.
2. Underhill LJ held that the context was a compromise of a disputed claim in which the alleged misrepresentations were the factual averments advanced in the pleadings and witness statements. By settling, a defendant ordinarily accepts the risk that those statements are false or will not be proved at trial. The defendant gives up the opportunity for a second attempt to disprove them and cannot later reopen the settlement merely because better evidence becomes available.
3. Fraud may stand in a different category from mere falsity. However, the risk accepted by the settling party depends on the circumstances. Where, as here, the defendant had already alleged that the claimant was exaggerating for financial gain and nevertheless settled, the agreement necessarily implied that the defendant surrendered the right to rescind if the same dishonesty was later proved. The analysis was supported by the distinction drawn in Callisher v Bischoffsheim (1870) LR 5 QB 449 between an ill-founded and a fraudulent claim.
4. Underhill LJ also gave an alternative reliance analysis. A defendant may be influenced by the possibility that the court will accept the claimant’s case, but that does not amount to reliance on the truth of statements which the defendant treats as disputed allegations. Briggs LJ agreed that rescission requires the representee to have been misled or defrauded. Belief need not be certain or the sole cause of contracting, but mere causation arising from apprehension that a judge may accept a statement already regarded as false is insufficient.
5. Briggs LJ added that a party who already knows or perceives the truth when contracting elects to proceed. Later evidence, a reduction in the relevant risk or subsequent repentance cannot by itself justify rescission. Treating ordinary litigation apprehension as an actionable misrepresentation would seriously undermine the finality and risk-management function of settlements. Lady Justice King agreed with both judgments.

1. Court of Appeal (Civil Division): The appeal was allowed. The settlement was held binding, and the trial judgment setting it aside was set aside.
2. Court of Appeal (Civil Division), earlier interlocutory appeal: The District Judge’s dismissal of the appellant’s strike-out and summary judgment application was restored, allowing Zurich’s claim to proceed: [2011] EWCA Civ 641.
3. Cambridge County Court, interlocutory stage: The District Judge dismissed the appellant’s application. HH Judge Yelton reversed that decision before the earlier Court of Appeal restored it.
4. Cambridge County Court, trial: HH Judge Moloney QC found dishonest exaggeration, set aside the settlement, assessed damages at £14,720 and ordered repayment of the balance.