Where an employer agrees to pay a sum of money in full and final settlement of an employee’s work injury claim, and the employee is subsequently discovered to have dishonestly exaggerated the effects of his injury, is the employer entitled to rescind the settlement agreement on the basis of the employee’s fraudulent misrepresentations? This issue was recently considered by the English Court of Appeal in Hayward v Zurich Insurance Company plc [2015] EWCA Civ 327.
Facts
The employee injured his back following an accident at work and started proceedings against his employers. He claimed that his injury restricted his mobility, caused him to develop a depressive illness and seriously impaired his ability to work.
The employers, whose defence was conducted by their insurers, admitted 80% liability but disputed the quantum as they alleged that the employee had exaggerated the consequences of his injury. The employers’ insurers had filed a Defence which pleaded that the employee had dishonestly exaggerated his difficulties in recovery and current physical condition for financial gain based on video surveillance evidence that appeared to show him doing heavy work at home.
However, before the issue of quantum was due to be tried, the parties reached a full and final settlement agreement embodied in a Tomlin order1 under which the employers agreed to pay GBP 134,973.11 to the employee.
Subsequently, the employee’s neighbours informed the employers that based on their observations, they believed the employee’s claim to have suffered a serious back injury was dishonest as he had recovered at least a year before the settlement.
The employers’ insurers then sued the employee for damages for deceit and successfully applied for the settlement agreement to be set aside in the county court after a trial.
The trial judge concluded that although the employers’ insurers were aware at the time of the settlement of the real possibility of fraud, the employee had continued his deliberate misrepresentations even after the disclosure of the video. The continuing misrepresentations therefore influenced the employers’ insurers into agreeing a higher level of settlement than they would otherwise have made.
Summary Of Decision
The Court of Appeal (comprising Lord Justice Underhill, Lord Justice Briggs and Lady Justice King) unanimously allowed the employee’s appeal against the trial judge’s decision and held that the settlement agreement remained binding.
In his judgment, Underhill LJ’s starting point was that the contract which the employers’ insurers sought to rescind was “a contract to compromise a disputed claim” and the “misrepresentations relied on comprise the very allegations advanced as part of the claim being settled”.
In this context, the employers were not entitled to rescind the agreement at a later date on the basis that they can now show that the employee’s claims were false or fraudulently advanced. In deciding to settle, the employers took the risk that the employer’s claim would not be proved at trial and the settlement sum was commensurate with their assessment of that risk. Although the Court will not usually accept that the defendant had taken the risk that the claimant’s case is fraudulent, this general rule did not apply in this case since the employers had chosen not to test their allegation of fraud against the employee in court. To allow the employers to revive that allegation now would be contrary to the important public interest in the finality of settlements, given that they had made the deal with “their eyes wide open”.
Hence, even though the result of the Court of Appeal’s decision was “unattractive” as it essentially meant that the employee had obtained a windfall, Underhill LJ emphasized that a wider principle was at stake, namely, “that parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later”.
Briggs LJ took a similar view. He held that the employee’s misrepresentations did not unravel the settlement agreement as the employers’ insurers had alleged from the outset that they were fraudulent. The only development was that better evidence of the employee’s fraud had surfaced after the settlement agreement was made.
Briggs LJ also pointed out two “unfortunate consequences” if the settlement agreement was set aside. Firstly, the public policy which encourages settlement of litigation would be “gravely undermined” as a litigant can easily rescind a settlement agreement by claiming that “he was influenced to settle a case for more than it was worth because of a fear that the judge might believe his opponent, even though he did not”. Secondly, such an extension of the law of rescission could be applied beyond settlement agreements to other commercial contexts, “with debilitating effects upon contractual force and certainty”.
Conclusion
This case, although not binding on the Singapore courts, is a timely reminder for employers to be careful when entering into agreements in full and final settlement of their employees’ legal claim, which can occur in a variety of employment scenarios. Such settlement agreements are generally not easy to rescind, especially when the employer has had the benefit of legal advice (see e.g. in a non-employment context, Subramaniam s/o Muneyandi and another v Pandiyan John [2011] SGHC 102). Employers should therefore be alert to the issue(s) that they are compromising when making a settlement agreement as there is usually no turning back down the road.
End Notes:
1 “A Tomlin Order is a court order in the English civil justice system under which a court action is stayed, on terms which have been agreed in advance between the parties and which are included in a schedule to the order. It is a form of consent order, and permits either party to apply to court to enforce the terms of the order, avoiding the need to start fresh proceedings.“ (see Woo Koon Chee v Scandinavian Boiler Service (Asia) Pte Ltd and others [2010] 4 SLR 1213 at [20]).
For further information, please contact:
Kaylee Kwok, Partner, RHTLaw Taylor Wessing
kaylee.kwok@rhtlawtaylorwessing.com
