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An important case on what needs to be established to set aside a judgment in circumstances where the Insurer knew there were problems with a Claimant’s case but could not be confident that  trial judge would reject the Claimant’s evidence.

LORD CLARKE
“18. Subject to one point, the ingredients of a claim for deceit based upon an alleged fraudulent misrepresentation are not in dispute. It must be shown that the defendant made a materially false representation which was intended to, and did, induce the representee to act to its detriment. To my mind it is not necessary, as a matter of law, to prove that the representee believed that the representation was true. In my opinion there is no clear authority to the contrary. However, that is not to say that the representee’s state of mind may not be relevant to the issue of inducement. Indeed, it may be very relevant. For example, if the representee does not believe that the representation is true, he may have serious difficulty in establishing that he was induced to enter into the contract or that he has suffered loss as a result. The judge makes this point clearly and accurately in the third sentence of para 2.5 of his admirable judgment.

19. He makes a further point in the same paragraph which is of importance in the context of this somewhat unusual case. It is this. A person in the position of the employer or its insurer may have suspicions as to whether the representation is true. It may even be strongly of the view that it is not true. However, the question in a case like this is not what view the employer or its insurer takes but what view the court may take in due course. This is just such a case, as the judge correctly perceived. As he put it, the employer and its advisers must take into account the possibility that [the Defendant] would be believed by the judge at the trial. That is because the views of the judge will determine the amount of damages awarded.

22. These pleas show that [the Insurer]was suspicious of [the Defendant] but no very clear allegations were, or could be, made. However, it is not in dispute that [the Insurer]did as much as it reasonably could to investigate the position before the settlement. The evidence was not as good from its point of view as it might have hoped but the fact is that [the Insurer]did not know the extent of [the Defendant]’s misrepresentations. The case was settled at a time when the only difference between the experts was the likely duration of future loss. The figure agreed was about half way between the respective opinions of the experts. It was not until the advent of Mr and Mrs C that [the Insurer]realised the true position. Hence, as the judge expressly found, the amount of the settlement was very much greater than it would have been but for the fraudulent misrepresentations made by [the Defendant]. The small amount ultimately awarded by the judge, which is not challenged, shows the extent of the dishonest nature of the claim. I am not persuaded that the importance of encouraging settlement, which I entirely agree is considerable, is sufficient to allow [the Defendant] to retain moneys which he only obtained by fraud.

The authorities
23. I am not persuaded that the authorities lead to any other conclusion. As stated above, the ingredients of the tort of deceit are not in dispute subject to one question, which is whether a claimant alleging deceit must show that he believed the misrepresentation. In my opinion the answer is no.

24. There are many formulations of the relevant principles in the authorities. I take two examples. In Briess v Woolley [1954] AC 333, 353 Lord Tucker said:
“The tort of fraudulent misrepresentation is not complete when the representation is made. It becomes complete when the misrepresentation – not having been corrected in the meantime – is acted upon by the representee. Damage giving rise to a claim for damages may not follow or may not result until a later date, but once the misrepresentation is acted upon by the representee the tortious act is complete provided that the representation is false at that date.”
To like effect, Lord Mustill said in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (No 2) [1995] 1 AC 501, 542A:
“In the general law it is beyond doubt that even a fraudulent misrepresentation must be shown to have induced the contract before the promisor has a right to avoid, although the task of proof may be made more easy by a presumption of inducement.”

25. The authorities show that questions of inducement and causation are questions of fact. I would accept the submissions made on behalf of [the Insurer].

32. I would not accept this analysis. As I see it, the representee’s reasonable belief as to whether the misrepresentation is true cannot be a necessary ingredient of the test, because the representee may well settle on the basis that, at any rate in a context such as the present, he thinks that the representation will be believed by the judge. But it is centrally relevant to the question of inducement and causation. Logically, the representee is more likely to settle for a different reason other than the representation, if his reasonable belief is that it is false. One of the extraneous factors in this case, for example, was the fact that the insurers’ expert Mr Sharp had failed to produce, in their view, a report which set out the extent of the misrepresentations with sufficient clarity – see para 15 above.

33. As to sub-para (ii), multiple causes, the text books strongly support the proposition that it is sufficient for the misrepresentation to be an inducing cause and that it is not necessary for it to be the sole cause: see eg Chitty on Contracts, 32nd ed, volume 1, para 7-37. See also, for example, Barton v Armstrong [1976] AC 104, where Lord Cross, delivering the majority advice of the Privy Council in a case involving duress by threats of physical violence, invoked, as an appropriate analogy, the treatment of contributing causes in fraud cases. He said at p 118G-H:
“If it were established that Barton did not allow the representation to affect his judgment then he could not make it a ground for relief. … If on the other hand Barton relied on the misrepresentation Armstrong could not have defeated his claim to relief by showing that there were other more weighty causes which contributed to his decision … for in this field the court does not allow an examination into the relative importance of contributing causes …”
Lord Hoffmann made much the same point in Standard Chartered Bank Ltd v Pakistan National Shipping Corpn Ltd (Nos 2 and 4) [2003] 1 AC 959, paras 15-16:
“if a fraudulent representation is relied upon, in the sense that the claimant would not have parted with his money if he had known that it was false, it does not matter that he also had some other negligent or irrational belief about another matter and, but for that belief, would not have parted with his money either. The law simply ignores the other reasons why he paid.”
Lord Hoffmann then quoted with approval the part of the advice of Lord Cross quoted above and added:
“This rule seems to me to be based upon sound policy.”…

LORD TOULSON:

51. Bogus or fraudulently inflated personal injury claims are not new. One of the great advocates of the 20th century, Sir Patrick Hastings, recounted vividly in his memoirs, “Cases in Court” (William Heinemann Ltd, 1949, pp 4 to 20), how as a young barrister before World War 1 he built up a practice defending insurance companies against such claims. Now as then, they present a serious problem. Personal injury claims usually fall to be met by insurers and the ultimate cost is borne by other policy holders through increased premiums.

52. Insurers may often have grounds for suspicion about a claim but lack the hard evidence necessary to prove fraud. To pursue an allegation of fraud without strong evidence is risky. If in such circumstances insurers settle a claim, not in the belief that it is bona fide but in the belief that it is likely to succeed, and if afterwards they discover evidence which proves that the claim was fraudulent, can they bring proceedings to set aside the agreement and recover damages for deceit? In this case the judge at first instance said yes, but the Court of Appeal said no, because in such circumstances the insurers were not deceived. The question which court gave the right answer is important, both for insurers and for those who advise personal injury claimants.

53. The Court of Appeal rightly rejected Mr Hayward’s application to strike out the action on the ground that the issue was res judicata or that the action was an abuse of the process of the court: [2011] EWCA Civ 641. The claim had been compromised by an agreement but, as Lord Bingham emphasised in HIH Casualty and General Insurance Ltd v Chase [2003] UKHL 6, [2003] 2 Lloyd’s Rep 61, paras 15 and 16, “fraud is a thing apart” and “unravels all”. Once proved, “it vitiates judgments, contracts and all transactions whatsoever” (per Denning LJ in Lazarus Estates Ltd v Beasley [1956] 1 QB 702, 712, cited by Lord Bingham). I refer to this matter because in his judgment now under review Underhill LJ called into question the correctness of the Court of Appeal’s earlier judgment, and [the Defendant’s] arguments on this appeal were similarly flavoured with criticism of it, although it was not open to him to attack it directly.

58. To establish the tort of deceit it must be shown that the defendant dishonestly made a material false representation which was intended to, and did, induce the representee to act to its detriment. The elements essential for liability can be broken down under three headings:
(a) the making of a materially false representation (the defendant’s conduct element);
(b) the defendant’s accompanying state of mind (the fault element); and
(c) the impact on the representee (the causation element).
Where liability is established, it remains for the claimant to establish
(d) the amount of any resulting loss (the quantum element).

59. In this case there is now no issue as to elements (a), (b) and (d). [The Defendant] made false and material representations to the insurers as well as to the court, both directly and through what he told the doctors and his own legal advisers with a view to it being communicated to insurers and to the court. He did so dishonestly, with the intention of inducing the insurers to pay compensation to him on a false basis. The judge’s assessment of quantum is not challenged. The issue concerns element (c).

67. So far I have been considering the typical case. But it is possible for a representor to make a false and fraudulent misrepresentation, with the intention of influencing the representee to act on it to its detriment, without the representee necessarily believing it to be true. If the representor succeeds in his object of influencing the representee to act on the representation to its detriment, there will be the concurrence of fraud and deceit in the representor and resulting damage to the representee. In principle, the representee should therefore be entitled to a remedy in deceit.

68.That inducement is a question of fact, necessary to establish causation in all cases but not necessarily in the same way, was recognised and well expressed in the decision of the Court of Appeal of New South Wales in Gipps v Gipps [1978] 1 NSWLR 454. …

70.Some assistance may also be had from the judgment of Hobhouse LJ in Downs v Chappell [1997] 1 WLR 426, 433, where he said that for a plaintiff to succeed in the tort of deceit of deceit it is necessary for him to prove that (1) the representation was fraudulent, (2) it was material and (3) it induced the plaintiff to act to his detriment. He added that “As regards inducement, this is a question of fact” and that “The word “reliance” used by the judge has a similar meaning but is not the correct criterion.”

71. I agree with [the trial judge’s] analysis in para 2.5 of his judgment. The question whether there has been inducement is a question of fact which goes to the issue of causation. The way in which a fraudulent misrepresentation may cause the representee to act to his detriment will depend on the circumstances. He rightly focused on the particular circumstances of the present case. [The Defendant’s] deceitful conduct was intended to influence the mind of the insurers, not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than it was worth if the true facts had been disclosed, because the value of a claim for insurers’ purposes is that which the court is likely put on it. He achieved his dishonest purpose and thereby induced them to act to their detriment by paying almost ten times more than they would have paid but for his dishonesty. It does not lie in his mouth in those circumstances to say that they should have taken the case to trial, and it would not accord with justice or public policy for the law to put the insurers in a worse position as regards setting aside the settlement than they would have been in, if the case had proceeded to trial and had been decided in accordance with the corrupted medical evidence as it then was.

72. For those reasons…I too would allow the insurers’ appeal and restore the order of [the trial judge] .

Postscript
73. It was expressly conceded on behalf of the insurers for the purposes of the present appeal that whenever and however a legal claim is settled, a party seeking to set aside the settlement for fraud must prove the fraud by evidence which it could not have obtained by due diligence at the time of the settlement. It makes no difference to the outcome of the present case and the court heard no argument about whether the concession was correct. Any opinion on the subject would therefore be obiter, and since the court has not considered the relevant authorities (including Commonwealth authorities such as Toubia v Schwenke [2002] NSWCA 34) or academic writing, it is better to say nothing about it.”

Edited for ease of reading.

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