UK Supreme Court: Fraud Trumps the Finality of Settlements

By Warren Koshofer
Michelman & Robinson, LLP

Sep 23, 2016

In a recent decision that can have equal application in the United States, the UK Supreme Court ruled that fraud trumps the public policy arguments of finality and encouragement of settlements.

In Hayward v. Zurich Insurance Company, Zurich sought to set aside or rescind a settlement it had reached with Hayward. Hayward had suffered a back injury at work and made a claim for damages against Zurich, his employer’s insurer. Zurich suspected that Hayward was exaggerating his injuries, and even alleged fraud during the course of the litigation. Zurich, however, was not able to conclusively prove Hayward’s fraud, and thus settled his claim before trial for a significant sum.

Long after the settlement was reached, Zurich obtained proof that Hayward had fully recovered from his injuries at least a year before entry of the settlement. Armed with this proof, Zurich brought a claim against Hayward for deceit, seeking to set aside the prior settlement and recover the sums paid.

The trial court judge found that the settlement should be set aside because of Hayward’s fraud. However, the Court of Appeal disagreed, finding that a settlement could only be set aside on the basis of a fraudulent misrepresentation if the other party believed it to be true and had been induced to enter the settlement agreement by it. The Supreme Court reversed the Court of Appeal, finding that although Zurich did not believe Hayward’s representations, it was nevertheless induced to enter into the settlement because of the risk that the court would accept them as true.

The UK Supreme Court held that Zurich’s belief of Hayward’s misrepresentation was “not a necessary ingredient of the test,” as Zurich could instead settle Hayward’s claim on the basis that the factfinder might believe the misrepresentations about the severity of his injuries. It was sufficient to show then that Zurich was influenced by the Hayward’s misrepresentations in assessing his claim’s value; i.e., that the misrepresentations were a material cause of Zurich’s entering the settlement.

The Court, in balancing the principle that no one should benefit from their own fraud against the edict of settlements being full and final, found that Hayward’s misrepresentations caused Zurich to act to its detriment by settling Hayward’s claim on a false basis. Hayward’s deceitful conduct “was intended to influence the mind of the insurers, not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than it was worth.”

The Court made clear that Zurich’s suspicion that Hayward was committing fraud did not preclude its subsequent challenge to a settlement; “it is difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unraveling a settlement when fraud is subsequently established.”

The logic of the UK Supreme Court seems sound under U.S. jurisprudence, despite the strong public policy supporting the finality of settlements. As explained, among other places, by the U.S. Court of Appeals for the Ninth Circuit in Matsuura v. Alston & Bird, insistence on the finality of settlements is based on the assumption that the parties have freely bargained. Settlements induced by fraud can be set aside then because the defrauded party has not freely bargained, but instead has been induced to settle by affirmative misrepresentations by the other party. So too, broad releases included in settlement agreements, such as those made under California Civil Code Section 1542, may be set aside if induced by a party’s extrinsic fraud. This is in keeping with California Civil Code Section 1668, which finds void against policy of law those contracts which seek to exempt a party from responsibility for their own fraud.

The UK Supreme Court’s decision in Hayward v. Zurich Insurance Company evidences an increasing intolerance for fraud and gamesmanship by litigants. That same intolerance certainly exists in courts throughout the United States. The extent to which later-discovered fraud (which had encouraged prior settlement) can re-open the courtroom door is something that can and should be evaluated on a case-by-case and jurisdiction-by-jurisdiction basis.