22 August 2016

The Supreme Court recently unanimously held that where a party has settled a claim despite suspecting fraud, the settlement agreement can subsequently be set aside should that party later discover evidence confirming fraud. Importantly, the Court did not consider it necessary for the defrauded party to have believed the misrepresentation upon which it relied to its detriment.

This was an English case heard in the UK Supreme Court. Such decisions are technically not binding but are highly persuasive in Scottish Courts. The question is, could we expect to see the same result if a similar case was raised north of the border?

The claim against Mr Hayward was based on the English tort of deceit. In Scotland, the remedies available to an insurer in an identical set of circumstances are different to those in England and would be to either reduce the settlement agreement and recover any payments made under the law of unjustified enrichment or sue in delict (tort). In each case the insurer would need to establish induced error or fraud. These contractual and delictual concepts undoubtedly overlap.

To successfully have a contract reduced in Scotland, a party must show that they were induced into the contract by operative misrepresentation. This requires (i) an inaccurate statement of fact; (ii) the statement must have been made prior to conclusion of the contract; (iii) the misrepresentation must in fact have induced the party to enter into the contract; and (iv) the misrepresentation must have been material in the sense that it was sufficiently important that it would have been a factor which would have induced a reasonable person to enter into the contract.

If a party can prove that they entered into a contract under an error induced by an operative misrepresentation, they will be entitled to reduction (cancellation) of that contract. Once the contract has been reduced, it becomes retrospectively null and it will then be open to the insurer to recover its losses.

In the event that a misrepresentation has been made fraudulently, it will also be open to a defrauded party to sue for damages in delict. The difficulty however would be to prove that the fraudster knew that their statement was false, believed it was false or was recklessly indifferent as to whether it was true or false.

Summary

There is no doubt that the Supreme Court’s recent decision can be viewed as a warning to fraudsters that fraud will not be tolerated. This is consistent with the Government’s attempts to crack down on reportedly increasing personal injury fraud.

In terms of practicality, the Supreme Court recognised the risks of litigation which insurers will take into account when considering settlement offers. Despite Zurich’s suspicions of fraud, they did not have conclusive evidence and were presumably not willing to run the risk at trial where the court may have believed Mr Hayward’s evidence. Further, the decision sends a message that fraud will not be tolerated. It is possible that the Scottish Courts would be minded to follow the decision on the basis of both practicality and in consideration of public policy.

However, it remains to be seen whether the decision would necessarily apply in Scotland. A brief overview of the remedies available in Scotland clearly demonstrates the complexities and hurdles a defrauded party requires to overcome. The position remains that misrepresentation is arguably the easier route. Cases in this area, as always, will remain very fact specific.

Contact: Garry Ferguson Partner gfe@bto.co.uk T: 0141 221 8012