What is the effect of fraud on a settlement agreement? article banner image

It is well known that the majority of civil claims settle before trial. Indeed, many claims are settled before the need to issue court proceedings even arises. This is no surprise given that issuing court proceedings can involve incurring significant costs. Settlement prior to the issue of court proceedings is likely to continue to be attractive to parties involved in a dispute given that the Ministry of Justice recently substantially increased the court fees payable on the issue of a claim.

A settlement agreement or deed is a form of contract that records the terms agreed between the parties to a dispute. Usually, the parties comply with their respective obligations under the settlement agreement and that brings matters to an end but there are sometimes occasions where a problem arises and in some cases one of the parties seeks to re-negotiate the terms agreed.

Settlement agreements are subject to the usual principles of contract law. Generally speaking, as long as the agreement meets the requirements for a legally binding contract, both parties will be bound by the terms of the agreement. However, there may be circumstances in which a settlement agreement is ineffectual and can be set aside, such as:

• Due to the incapacity of one of the parties (for example, a child or a mentally disordered person).

• Where a mistake has been made about a fundamental matter (in relation to the settlement) which makes it impossible to perform the settlement agreement.

• Where there has been a misrepresentation of a material fact in certain circumstances.

• Where there have been certain forms of duress and undue influence.

• Where the agreement is illegal either under statute or the general law.

A recent case in the Court of Appeal considered the effect of fraud on a settlement agreement. If an ill-founded claim is settled then the settlement will be binding (the defendant takes the risk of that when settling) but that is not generally the case if the claim was fraudulent. If it is subsequently discovered that a statement about the claim which the defendant had thought genuine was in fact fraudulent, that might be sufficient to rescind a settlement agreement. In the case of Hayward v Zurich Insurance Company plc (2015), however, the Court of Appeal confirmed that fraud does not unravel all. It will not unravel a settlement agreement, where the party seeking to rescind had been alleging dishonesty from the outset.

The case concerned an employers’ liability claim. The employers’ insurers admitted liability but disputed quantum on the basis that the claimant was exaggerating his injuries. The claim was then settled before the trial. After better evidence of the fraud came to light a couple of years later, the insurers sought to set aside the settlement and reclaim much of the amount they had paid to the claimant. They were successful at first instance. However, the Court of Appeal disagreed.

The Court of Appeal recognised that the decision to allow the appeal was unattractive because it meant that the employee retained the benefit of a settlement far in excess of the value of his actual loss. However, there was a wider principle at stake: parties who settle claims with their eyes wide open should not be entitled to revive them when better evidence comes along later. The practical implications of this decision are that parties need to take care about alleging fraud or dishonesty and understand the implications of settling. It will be difficult to reopen settled cases unless there was no knowledge of fraud at the time of settlement.

If you are involved in a dispute and would like advice on this or a related topic, please contact Catherine Mathews. Catherine specialises in commercial and contract litigation and has experience of many different forms of ADR, including mediation, adjudication and arbitration. She also deals with consumer disputes, including those relating to holidays, timeshare, cars and financial services. Catherine is a member of the Dispute Resolution Team in Exeter. Call Catherine on 01392 210700 or email solicitors@stephens-scown.co.uk