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Zurich Insurance Company Plc v Hayward, Court of Appeal, 27 May 2011

6 June 2011
The issues

Fraud – res judicata – estoppel.

The facts

The Claimant was injured in an accident in 1998 in the course of his employment with David S. Smith Packaging Ltd (Smith). Smith were insured with Zurich Insurance Company Plc. In 2001 Mr Hayward issued proceedings against Smith alleging a spinal injury and a depressive disorder of moderate severity. A Schedule of Loss was served amounting to just under £420,000 and including a claim for loss of earnings on the basis that he would remain unfit for any work. Zurich had in the meanwhile obtained surveillance evidence. The Defence when filed admitted that the Claimant had suffered a back injury but did not accept, in light of the video evidence, that the injury was as bad as had been described. It alleged exaggeration for financial gain.

In August 2002 liability was compromised on the basis of a 20% reduction for contributory negligence. An offer of £135,000 was made by the Defendant in June 2003. In October 2003 the Claimant sought and obtained the Defendant’s agreement to take the money in Court in settlement. The agreement was in the form of a Tomlin Order.

In 2005 Smith were approached by a Mr and Mrs Cox who said that they thought Mr Hayward had been dishonest in connection with his claim. If their evidence was right, it would have demonstrated that the Claimant had made a complete recovery by mid-2002. In early 2009 Zurich brought an action against Mr Hayward alleging that the settlement of the claim had been obtained by false representation as to word or conduct. It was estimated that Zurich had paid at least £72,000 more in damages than it otherwise would have done, together with an increase in costs.

Mr Hayward filed a Defence to the effect that Zurich had no cause of action because the claim had been compromised by the agreement embodied in the Tomlin Order in October 2003 and that moreover, any admission of new evidence would have to satisfy the rule in Ladd v Marshall. Mr Hayward applied to strike out the claim. The matter came before the District Judge when Mr Hayward’s Application failed, although the Deputy District Judge took the view that the claim as pleaded was misconceived and that the correct way for Zurich to proceed was to apply to set aside the Tomlin Order on the ground of fraud.

Mr Hayward Appealed from the Deputy District Judge to the Judge who struck out the claim, holding that the Consent Order created an estoppel by res judicata.

Zurich Appealed to the Court of Appeal.

The decision

The issue was whether an action alleging that the settlement of an earlier personal injury action was obtained by fraud should be struck out on the ground that the issues were res judicata or that the action was an abuse of process because the Defendant in an earlier action had alleged that the Claimant was exaggerating his injuries for gain.

As far as the creation of an estoppel was concerned, there was no difference between a Consent Order in ordinary form and one embodied in the form of a Tomlin Order. It could not make a difference logically to the question of whether the terms created an estoppel. (This was Lady Justice Smith’s view; Lord Justice Moore-Bick took a contrary view.)

It was well established that any Judgment was capable of being set aside if one party could show that it was obtained by fraud. It was common ground that the principle would not apply in a case where the first action was itself based on an allegation of fraud or was defended on the basis of the fraud of the Claimant. It did not arise merely because there was an allegation of fraud in the first action. Before an estoppel could arise there had to be congruence between the allegation of fraud which was determined or compromised in the first action and the allegation of fraud made in the second action. The two allegations had to be essentially the same. The putting of Mr Hayward’s good faith in issue was not sufficient to create an estoppel in respect of a subsequent allegation of bad faith or fraud. To create an estoppel there had to be a specifically identifiable allegation of fraud and an attempt to repeat that very allegation. The Judge was wrong therefore to hold that Zurich were estopped from alleging that the settlement was obtained by fraud.

Was the action an abuse of process in the sense of Johnson v Gore Wood? There were two conflicting principles – namely, the importance of the finality of litigation, and the need to protect the administration of justice from the effects of fraud. Finality of litigation in this context was designed to protect a litigant from being vexed more than once by the same allegations. This consideration did not weigh heavily in this case. There was nothing harassing in Zurich’s conduct in bringing the action. It was acting in response to fresh evidence of which it was previously unaware and could not with reasonable diligence have been expected to discover at the time of the first action. Moreover, the effect of the new claim on Mr Hayward was not necessarily severe. If he had not been dishonest he would win and would recover all his costs.

The second consideration was the need to protect the administration of justice from the effect of fraud. The Rules encouraged the parties to reach settlement of their disputes. This meant that the statements made at the pre-Trial stage had taken on even greater importance than they had under the old Rules, where it was expected that their truthfulness would be tested at Trial. This was emphasised by the fact that a statement of case now had to be accompanied by a declaration of truth. The intention was that a party should be able to rely on pre-Trial statements in reaching settlement. They played a vital role in the administration of civil justice. The allegation here was that Mr Hayward had been dishonest in respect of various pre-Trial statements. Zurich had behaved impeccably in this case, disclosing its video film at an early stage and pleading its suspicions about exaggeration in its Defence, as it was required to do by CPR 16.5. It had instructed an expert in the preparation of an agreed report and made a sensible Part 36 offer. It had conducted the action in compliance with the letter and the spirit of the Rules. If, following a settlement, a Defendant was to be prevented from raising a subsequently discovered fraud merely because it had pleaded fraudulent exaggeration in the first action, it would be a disincentive to plead the Defence fully. If an insurer was to be prevented because it had settled a claim leaving the extent of fraud undecided, there would be a disincentive to settle claims. Weighing these two considerations, the public interest in the integrity of the administration of justice and the private interest of Zurich in seeking the investigation of these allegations, far outweighed the public interest in the finality of litigation.

Appeal allowed.

Comments

The Judgment of Lord Justice Moore-Bick differed from that of Lady Justice Smith who gave the main Judgment, on one important point. Lord Justice Moore-Bick took the view that whereas a Consent Order could give rise to an estoppel by records, a Tomlin Order could never do so, it amounted to a mere stay consigning “the proceedings to a procedural limbo from which … they can be expected never to return”. Lord Justice Maurice Kay noted this incongruity between the Judgments, but noting that neither concept availed Mr Hayward in this case, declined the “temptation to engage in further obite analysis”. Whilst the matter remains undecided, if there are such concerns in particular claims, it might be advisable to use the Tomlin form pending further guidance from above.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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