Litigation Fraud

‘No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever’[1]

The question of the impact of fraud upon settled litigation was recently considered by the Supreme Court[2]. Whilst the decision in Hayward is one which derives from a personal injury case, its scope is not limited to such cases. It is of considerable importance to practitioners across the civil spectrum.

In brief, Hayward had sued his employer for injuries sustained whilst at work. Despite suspicions and surveillance evidence pointing towards exaggeration, the insurer remained unconvinced of their position and ultimately settled the case at £135,000 (in round figures). The original claim was in excessive of £400,000. However, subsequent to that settlement the insurer was approached by Hayward’s neighbours who gave evidence that he had never been as badly injured as he had made out. The case ultimately came for trial on the insurer’s action in deceit before HHJ Moloney QC who found that the case was properly worth £14,720 and ordered the return of the balance.

The primary question for the Supreme Court was whether the insurer had to prove that they were induced into settling because they believed the fraudulent representations to be true or whether it sufficed that the fact of the representations was a material cause of the settlement. The Supreme Court came down in favour of the latter formulation. In essence, they found that whilst the insurer might not have believed the representations, they accepted that there was a risk that the Court might find in Hayward’s favour and settled accordingly.

It is therefore clear that in any litigation if a fraud has been perpetrated then any settlement based thereon is susceptible to challenge. Plainly the fraudulent element must be a material consideration. In other words, an irrelevant lie does not suffice.

Whilst a decision based upon a personal injury case, it clearly has much wider ramifications. It is plain that it can be applied to any settlement which has been procured, at least in part, by fraud. The key to establishing such a cause of action will of course be sufficient evidence to establish the fraud in the first place. That is always a troublesome burden for any party.

It is arguable that a case in deceit to unravel a settlement agreement can be brought at any time. Whilst an action in deceit is subject to the usual rules on limitation, there remains the exception within s. 32(1) of the 1980 Act where an action is based upon a fraud by the Defendant. Limitation does not begin to run until either the Claimant became aware of the fraud or with due diligence could have become aware. The Court of Appeal in Allison v Horner[3] determined that it is the precise fraud which is subsequently pleaded which is relevant as opposed to more generalised suspicions of fraudulent behaviour. The bar is therefore a relatively low one for a defrauded Claimant to surmount and potentially leaves a very open ended period within which to challenge a settlement.

It remains to be seen whether this decision opens up a new tranche of litigation or whether in fact it remains somewhat unique. It is though something to sweeten a pill to a losing client who thinks that the other side has been less than candid. The key, as ever, is going to be proof.

[1] Lazarus Estates v Beasley [1956] 1 QB 702 per Denning LJ at 712

[2] Hayward v Zurich [2016] UKSC 48

[3] Allison v Horner [2014] EWCA Civ 117