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||Neutral Citation Number:  EWCA Civ 327
||Case No: B3/2013/2789
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM Cambridge County Court
His Honour Judge Moloney QC
Insert Lower Court NC Number Here
||Royal Courts of Justice
Strand, London, WC2A 2LL
||31st March 2015
B e f o r e :
LORD JUSTICE UNDERHILL
LORD JUSTICE BRIGGS
LADY JUSTICE KING
||- and -
||ZURICH INSURANCE COMPANY PLC
(Transcript of the Handed Down Judgment of
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Guy Sims (instructed by Hewitsons LLP) for the Appellant
Jayne Adams (instructed by Dac Beachcroft Claims Ltd) for the Respondent
Hearing date: 3 December 2014
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Lord Justice Underhill :
- In June 1998 the Appellant suffered an accident at work in which he injured his back. In May 2001 he started proceedings against his employers, David S Smith Packaging Ltd. He claimed that his injury continued to cause him serious lumbar pain which restricted his mobility; that he had also in consequence developed a depressive illness; and that his ability to work was seriously impaired. His claim was supported by expert evidence from an orthopaedic surgeon, Mr John Bracegirdle. In his Schedule of Special Damages he claimed just under £420,000: that did not include damages for pain and suffering and some other unquantified losses.
- The employers' defence was conducted by their insurers, the Respondent ("Zurich"). Liability was admitted at an early stage, subject to a 20% deduction for contributory negligence. As regards quantum, however, it was contended that the Appellant had exaggerated the consequences of his injury. Reliance was placed on video surveillance evidence ("the 1999 video") which appeared to show him doing heavy work at home. In the Defence, which was dated 30 October 2001, it was pleaded that:
"6. It is admitted that the Claimant suffered an injury to his back as a result of the accident. The Defendant relies on the medical reports of Mr Sharp dated 11th June 2000, 20th August 2000 and 26th November 2000. The view of the Claimant's ongoing physical condition from Mr Bracegirdle relied on by the Claimant is not accepted by the Defendant. As a result of video surveillance obtained Mr Sharp formed the view that the Claimant's disability was not as great as he had described and he was capable of working full time even if not with heavy lifting. In view of the Claimant's lack of candour in relation to his physical condition it is not possible to accept that his depressive state, as described, has been consistent, is continuing or will continue into the future.
7. The Claimant has exaggerated his difficulties in recovery and current physical condition for financial gain."
(The reference to "Mr Sharp" is to the employers' orthopaedic expert, Mr David Sharp.)
- On 3 October 2003, shortly before the issue of quantum was due to be tried in the Cambridge County Court, the parties reached an agreement, embodied in a Tomlin order, under which the employers (in practice Zurich) agreed to pay £134,973.11 in full and final settlement of the Appellant's claim.
- About two years later the Appellant's neighbours, a Mr and Mrs Cox, approached the employers to say that they believed that his claim to have suffered a serious back injury was dishonest. From their observation of his conduct and activities, they believed that he had entirely recovered from his injury at least a year before the settlement. They were referred to Zurich and gave full witness statements.
- In February 2009 Zurich commenced the present proceedings against the Appellant in the County Court claiming damages for deceit. It was pleaded that the statements as to the extent of the Appellant's injury in the Particulars of Claim and Schedule of Loss, and his accounts given to the medical experts, constituted fraudulent misrepresentations. Damages were claimed equivalent to the difference between the amount of the settlement and the damages that should have been awarded if he had told the truth. The claim was subsequently amended to claim in the alternative rescission of the settlement agreement and the repayment of the sums paid under it. No point has been taken about the action being brought in the name of Zurich rather than the employers.
- The Appellant applied to strike out the proceedings, or for summary judgment. He contended that the Tomlin order created an estoppel per rem judicatam and/or by record, alternatively that the action was an abuse of the process because the issue of fraud had been compromised by the settlement: I return to this latter point in more detail below.
- The Appellant's application was dismissed by the District Judge. His decision was reversed on appeal by HH Judge Yelton. However, on Zurich's further appeal to this Court (Maurice Kay, Smith and Moore-Bick LJJ) the decision of the District Judge was restored: see  EWCA Civ 641. It was held that the settlement gave rise to no estoppel of any kind and that the action was not an abuse of process. The result was that the claim was enabled to proceed. Again, I will have to return some of the reasoning below, but at this stage I will only note that Moore-Bick LJ said, at para. 58 of his judgment:
"If it is to succeed in its action Zurich will have to persuade the court that it was induced to agree to the settlement by fraud on the part of Mr. Hayward, a task that may not prove easy, given the fact that it already knew enough to justify the service of a defence in the terms indicated earlier."
- The action came on for trial before HH Judge Moloney QC in the Cambridge County Court in November 2012. He heard evidence for Zurich from the solicitor and claims manager who were responsible for the conduct of the litigation, Ms Winterbottom and Mr Birkenshaw, from Mr and Mrs Cox, from Mr Sharp and from another orthopaedic surgeon, Mr Varley. The Appellant gave evidence together with three members of his family.
- In due course a draft reserved judgment was circulated in which the Judge found that the Appellant had indeed dishonestly exaggerated the effects of his injury. I need not set out his reasoning, since the finding is not challenged before us. On that basis he went on to hold that the settlement agreement should be set aside. He addressed the issue of reliance as follows. At para. 2.5 of his judgment he dealt with the law. He said:
"Lastly, of course, it is necessary that the employer/Zurich should rely on the representations and suffer loss as a result. Here an interesting (and apparently unresolved) question of principle arises. In the ordinary case, sale of goods for example, reliance by the purchaser is effectively equivalent to his belief in the truth of the statement; if he believes the goods are as represented, he will be relying on the representation (and acting on it by his purchase) and if not, not. In the litigation context the position is different. In such a situation, the party to whom the representation is made is by no means likely to believe it to be true at the pre-trial stage. At the very least, statements made in the course of litigation will be viewed with healthy scepticism and weighed against the other material available. Often the other party will not be sure, even then, whether the statement is in fact true, and will mainly concern himself with how likely it is to be accepted by the court. Sometimes (a staged road traffic "accident" for example) the other party may actually be certain from his own direct knowledge that the statement is a deliberate lie. But even then he and his advisers cannot choose to ignore it; they must still take into account the risk that it will be believed by the judge at trial. This situation is quite different from a proposed purchase, where if in doubt one can simply walk away. For these reasons, it appears to me that the many dicta relied on by CH, to the effect that liability requires that the representation must be believed by the other party, are not applicable to a case like the present. The formulation adopted by the editors of Clerk and Lindsell (20th edn. 2010) at 18-34 fits the case better; "The claimant must have been influenced by the misrepresentation" (my emphasis)."
('CH' is a shorthand for the Appellant.) At para. 2.6 he applied that approach to the evidence. He said:
"I heard the evidence of Ms Winterbottom and Mr Birkinshaw respectively in 2003 Zurich's litigation solicitor and claims handler. Each was aware of the 1999 video and of the real possibility that this was a fraudulent claim. Each was frustrated by the reluctance of "their" expert, Mr Sharp, to produce a clear supplemental report saying that he now believed CH to have been shamming and to have sustained far less harm than was being claimed. Neither can be said to have believed the representations complained of to be true. But, if the law is as stated at 2.5 above, this does not matter provided the representations influenced them in their decision how much to pay CH in settlement. I am in no doubt that they did. They may not themselves have believed the representations to be true; but they did believe that they would be put before the court as true, and that there was a real risk that the court would accept them in whole or part and consequently make a larger award than Zurich would otherwise have considered appropriate. Acting in reliance on that belief (which, whether or not CH was truthful or honest, was the belief he and his advisers must have wanted them to form on the basis of the statements) they made the payment into court which led to the Tomlin Order settlement."
At para. 6.6, he gave his formal conclusion as follows:
although Zurich was aware at the time of the settlement of the real possibility of fraud here, CH had continued his deliberate misrepresentations even after the disclosure of the 1999 video, and those continuing misrepresentations did influence Zurich into agreeing a higher level of settlement than it would otherwise have made."
- It followed that the issue of quantum in the original action remained to be tried. Following a further hearing of that issue on 6 September 2013 the Judge handed down a judgment awarding the Appellant damages in the sum of £14,720. An order was made in the later action directing him to re-pay the sum paid under the settlement less that amount.
- The Appellant appeals against the decision that the settlement should be set aside. If that appeal is unsuccessful there is no appeal against the assessment of quantum in the original action or the order for re-payment. He is represented by Mr Guy Sims; Zurich is represented by Ms Jayne Adams. Both counsel appeared below.
- Mr Sims put his case in two distinct, albeit overlapping, ways. First, he submitted that as a matter of principle in a claim based on misrepresentation "belief is a necessary component
essentially, the representee must be deceived"; and that the Judge was accordingly wrong to hold that Zurich could succeed on the basis that, although it had not believed the misrepresentations, it was "influenced" by the fear that the Court might do so. In support of his proposition of principle he referred to a number of authorities containing statements to the effect that, as Ward LJ put it pithily in Sprecher Grier Halberstam LLP v Walsh  EWCA Civ 1324, at para. 17, "a man cannot be deceived if he knows the truth": see also Arkwright v Newbold (1881) 17 Ch D 301, per Cotton LJ at p. 324, and Strover v Harrington  Ch 390, per Sir Nicholas Browne-Wilkinson V-C at p. 407 B-C. I need not set out the passages in question, since the proposition itself is unexceptionable in the typical case and none of the authorities cited was concerned with a case with the untypical features relied on in this case or contains any relevant discussion of principle. Secondly, he relied on para. 3-55 in Cartwright Mistake, Misrepresentation and Non-Disclosure (3rd ed), which reads (so far as material):
"If [the representee] did not trust what he was told but made his own inquiries about whether the statement was true, then he relied not on the statement, but on his own inquiries."
He referred to a statement to the same effect by Sir George Jessel MR in Redgrave v Hurd (1881) 20 Ch D 1, at p. 15. He submitted that Zurich had in the present case plainly decided to undertake its own investigations and not to rely on what it was told by the Appellant.
- Ms. Adams submitted that the Judge's reasoning was right. His adoption of a criterion of whether Zurich had been "influenced" by the Appellant's misrepresentations, rather than whether it had believed in their truth, reflected a correct understanding that the underlying question was simply whether they had been (part of) the cause of its entering the settlement agreement. Although the typical way in which a misrepresentation would cause a representee to act would be by his believing in its truth, that need not be the only way. In the present case the Appellant's misrepresentations about the effects of his injury had caused Zurich to settle at the inflated level that it did because of its legitimate fear that they would be believed by the Court. As to Mr Sims's submission that Zurich was relying on its own investigations, that was plainly not so: it was obliged to settle because its own investigations had failed fully to persuade its expert and might thus fail to persuade the Court.
- I believe, with all respect to him, that the Judge's approach was wrong; but I have had some difficulty reconciling my preferred reasoning with that of the Court on the earlier occasion. I will start by setting out what I believe is the correct analysis without reference to that reasoning.
- I start from the fact that the contract of which rescission is sought is a contract to compromise a disputed claim and that the misrepresentations on which the claim for rescission is based consist of (some of) the very averments of fact which the claimant made in advancing that claim that is, the averments in his pleadings and witness statements and which had been put in issue. It is important not to lose sight of that context. In particular, we are not concerned with what might be called collateral representations designed to induce the settlement (as in cases like Gilbert v Endean (1878) 9 Ch D 259 or Dietz v Lennig Chemicals  1 AC 170).
- It seems to me clear that in such a case a defendant will not be entitled to seek to have the agreement set aside at some later date only on the basis that he can (now) show that the claimant's factual statements of the case being advanced were wrong (or, to use the technical language, "false"). In deciding to settle the defendant takes the risk that those statements are in fact untrue (or, to put it more accurately, would not be proved at trial) and pays a sum commensurate with his assessment of that risk. He could have taken the case to trial in order to disprove the statements in question; but by settling he agrees to forego that opportunity and he cannot reserve the right to come back later for another attempt. If it were otherwise no settlement would be final.
- As to how that position is best analysed in legal terms, it would be possible to say that the defendant does not in this context as a matter of fact rely on statements of the character in question but only on his own assessment of all the material facts. This is essentially Mr Sims's second way of putting his case: see para. 12 above. But arguably that is something of a fiction: at least in some cases, and at least in some sense, the defendant will to a greater or lesser extent rely on the claimant's statements about factual matters relevant to liability or quantum in deciding whether, or at what level, to settle. It seems to me that the more satisfactory analysis is that the defendant, by entering into the settlement, necessarily implicitly agrees not thereafter to seek to have it set aside on the basis that the statements made in support of the claim were false; another way of putting that would be that he agrees not to rely on them for the purpose of deciding whether to settle.
- I have thus far been referring to misrepresentation generally. The position is no doubt different where the factual statements advanced by the claimant and relied on by the defendant are not merely false but fraudulent. That appears from Callisher v Bischoffsheim (1870) LR 5 QB 449. That case is of course the locus classicus for the proposition that the settlement of an ill-founded claim is nonetheless binding, but the Court went out of its way to emphasise that that would not be the case where the claim was fraudulent. As Cockburn CJ put it at p. 452:
"It would be another matter if a person made a claim which he knew to be unfounded, and, by a compromise, derived an advantage under it: in that case his conduct would be fraudulent. If the plea had alleged that the plaintiff knew he had no real claim against the [defendant], that would have been an answer to the action."
(See also per Blackburn J at p. 452 and Mellor J at p. 453.) In fact in that case the analysis was in terms of absence of consideration that is, that the forgoing of a bona fide but unfounded claim is good consideration for a payment made in settlement of it but not the forgoing of a fraudulent claim. But I do not think it makes any difference whether the compromise is challenged on the basis of absence of consideration or misrepresentation: the principle must be the same. Thus, in terms of the analysis above, while it may be fair to treat the defendant as having taken the risk of the claimant's statements in support of his claim being wrong, it will not absent any indication to the contrary be fair to treat him as having taken the risk of them being dishonest.
- But the qualification "absent any indication to the contrary" is important. The reason for treating fraud differently is that the Court will not normally accept that a defendant has taken the risk that the claimant's case is not just ill-founded but dishonest. But what risk the defendant is to be treated as having accepted must depend on the circumstances of the particular case. If it is in any case sufficiently apparent that the defendant intended to settle notwithstanding the possibility that the claim was fraudulently advanced, either generally or in some particular respect the paradigm being where he has previously so asserted there can be no reason in principle why he should not be held to his agreement even if the fraud subsequently becomes demonstrable. In such a case the position is no different from that discussed at paras. 16-17 above. It cannot be right that a defendant who has made an allegation of fraud against the claimant but decided in the end not to have it tested in the court should be allowed, whenever he chooses, to revive that allegation as a basis for setting aside the settlement. It may stick in the throat that the claimant can retain the reward of his dishonesty, but the defendant will have made the deal with his eyes open to the possibility of fraud, and there is an important public interest in the finality of settlements.
- If those principles are applied to the facts of the present case it is in my view clear that Zurich ought not to be entitled to rely on the fraudulent misrepresentations found by the Judge. The statements in question are, as I have said, the statements made by the Appellant in his pleadings and witness statements. The employers had in their Defence not simply put them in issue but positively asserted that they were dishonestly advanced: see para. 2 above. Ms Adams argued that the relevant paragraphs did not amount to a plea of fraud, but I cannot see how an averment that the Appellant was exaggerating his disability "for financial gain" can be anything else. Against that background it is in my view necessarily implicit in the settlement agreement that the employers, and Zurich, gave up the right to have it set aside if they were subsequently in a position to prove the identical dishonesty already alleged.
- I indicated earlier that I had found some difficulty in reconciling that reasoning with the decision of this Court on the earlier appeal. Although much of the argument on that occasion was concerned with issues of estoppel per rem judicatam and abuse of process which are not material for our purposes, it seems also to have gone rather further. In the course of his judgment in the County Court Judge Yelton said this:
"In my judgment, the issue of fraudulent exaggeration is clearly raised in the pleadings and was clearly compromised in the Tomlin order. As already stated, it was specifically alleged that the then claimant "has exaggerated
his current physical condition": I see no material difference between that assertion and the allegation which [counsel] puts before the court to the effect that the evidence of Mr and Mrs Cox is such as to suggest that the claimant had fully recovered by the time of the settlement. The defendant in the first action put fraud into issue, and the claimant settled at a figure far less than his original claim. What Zurich now has is better evidence than they had at the time of the consent order, but on the principles set out above it seems to me that does not give them the right to have an issue reopened. They did not need to compromise in 2003 but having elected to do so it seems to me they are bound by it. The question of discretion in the court simply does not arise."
Although the Judge appears to have treated that conclusion as part of his reasoning on res judicata, it seems that in this Court Mr Sims relied on it as founding a more broadly-based estoppel. Both Smith LJ and Moore-Bick LJ rejected that argument. Smith LJ said, at para. 29:
"The judge was of the view that the allegation of fraud raised by Zurich in the present action was essentially the same as the defence of exaggeration which had been pleaded in the first action. He was also satisfied that that allegation had been compromised by the settlement. I can see that an allegation that a disability is being exaggerated for gain amounts to fraud and that that allegation of fraud is similar to the allegation now made in the second action. However, in my judgment it is not the same allegation. Nor do I consider that it is clear exactly what was compromised in the first action. For those reasons, I must respectfully disagree with the judge that the first allegation has created an estoppel in respect of the second."
She went on, at para. 30, to say that the parties had done no more than compromise the value of the claim and had reached no agreement "on the extent of Mr Hayward's exaggeration or whether it was in fact fraudulent at all". Likewise Moore-Bick LJ said, at para. 60:
"A large part of Mr. Sims's argument depended on the broad submission that the issue of fraud had been "compromised" by Zurich in a way that gives rise to an estoppel. In my view, however, even accepting that Zurich can be treated as a party to the settlement agreement, that proposition calls for careful analysis. The settlement involved an agreement on the part of Zurich and its insured to pay a sum of money to Mr. Hayward in consideration of his agreeing to abandon his claim and consent to a stay of the proceedings. Zurich did not consent to judgment and no decision was made on any of the issues raised in the action (apart from the admission that Mr. Hayward had suffered an injury of some kind). Neither side accepted the other's case in relation to the nature and degree of his injuries. I am not sure, therefore, what is meant by the expression "compromised the issue of fraud", other than that Zurich agreed to pay a sum of money to Mr. Hayward, despite the fact that it disputed his honesty. Nothing in the settlement agreement involved an admission on the part of Mr. Hayward that his claim was exaggerated or an admission on the part of David S. Smith or Zurich that it was genuine; nor did David S. Smith or Zurich agree to withdraw the allegation of exaggeration. It is difficult to see, therefore, how Zurich could be precluded by the agreement from raising the issue of Mr. Hayward's honesty in another context, if it were to become relevant."
Arguably Smith LJ and Moore-Bick LJ do not put the point in quite the same way, but it is nevertheless clear that both decided, as a matter of ratio, that the fact that the employers had alleged deliberate exaggeration prior to the settlement did not preclude them from relying on it subsequently as a ground for rescission.
- It is a debatable point whether that conclusion, so reasoned, precludes me from deciding the appeal on the basis developed in the previous paragraphs. The Court had not of course heard any evidence and was concerned only with whether Zurich's claim should be struck out; but I am not sure that the Judge's findings of fact are relevant on the present issue. I could point to the fact that the discussion was couched in terms of estoppel rather than contract, but I have an uneasy feeling that that is in this context a distinction without a difference. In the end I think the fair thing is to park that question and consider whether my reasoning can be re-cast in a form which, albeit perhaps less satisfactory, avoids the potential conflict.
- I believe that such a course is indeed possible. Although at para. 17 above I have expressed a preference for a contractual analysis, I regard the alternative analysis based on reliance as perfectly viable. I repeat that it is important to recall the very particular context in which the reliance is said to occur that is, that the contract in issue is a settlement agreement and the misrepresentations relied on comprise the very allegations advanced as part of the claim being settled. No doubt in one sense those allegations do operate on the mind of the defendant in his consideration of whether to settle, and at what level: he may actually believe them to be true, but even if he does not he will inevitably be influenced by the possibility that they will be believed by the Court which is of course what the Judge found to be the case here. But to my mind that does not constitute reliance in the relevant sense. The defendant is not concerned with the truth or otherwise of the statements as the factor motivating his action. Rather, he is treating them simply as part of the claimant's case. It is inherent in the antagonistic relationship of claimant and defendant that in deciding whether to settle he has to form an independent judgment about whether the disputed statements made as part of the claim are (to the extent that they are material to the outcome) likely to be accepted by the Court. I do not believe that a relationship of reliance arises in that context.
- I draw some support for that approach from the decision in Kyle Bay Ltd v Underwriters Subscribing under Policy no. 019057/08/01  EWCA Civ 57, in which this Court upheld a finding that an underwriter who settled a claim had not relied on a misrepresentation made by an assured as to the effect of the policy because he had treated it as a contention rather than a representation. Neuberger LJ said, at paras. 41-42:
I can see the force of the point that the statements as to the effect of the Policy
did induce the Settlement, in the sense that they were a causative factor in the claimant and [the underwriter] agreeing on a settlement figure of around £200,000, rather than around £300,000.
42. However, I think the Judge effectively found that [the underwriter] merely treated the statements as contentions which he decide to assume were right for the purposes of the Settlement, and which he would thereafter investigate (as he did) with a view to obtaining compensation for the claimant. In effect, he chose to treat them as correct for the time being, without necessarily believing that they were accurate,
That is not on all fours with the present case, but it does illustrate a rather similar distinction being applied.
- I would for those reasons allow the appeal in this action. The result is that the settlement in the original action remains binding and the judgment of Judge Moloney must be set aside. The result is unattractive because it means that the Appellant retains the benefit of a settlement far in excess of the value of his actual loos, though I dare say somewhat reduced by the incidence of costs in these protracted proceedings. But there is a wider principle at stake, that parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later.
Lord Justice Briggs
- I agree that this appeal should be allowed. I would gladly have embraced any sound basis for upholding the trial judge's decision to strip the Appellant of the grossly inflated amount which he received upon the settlement of his fraudulently exaggerated claim. But in my opinion the judge's finding that Zurich was induced into making the settlement agreement by reliance on the Appellant's dishonest misrepresentations about his continuing injury was based upon a view of the law for which there is no authority, which is wrong in principle and the recognition of which would have most unfortunate consequences.
- The principle upon which the judge relied appears to be this: that if A makes a contract with B, to the terms of which A has been influenced into agreeing because he fears that a statement by B which he believes is untrue may nonetheless be believed and acted on by C, then A may later rescind his contract with B if he can prove the untruth of the statement. Put in negative terms it comes to this: that the requirement common to the law of misrepresentation and deceit that the misrepresentation must induce the contract sought to be rescinded is only a bare causation requirement, and does not require that the representee be in any way misled. Nor does it appear to require that A learn something about the untruth of the statement after making the contract. It is enough if the mere making of the misstatement, rather than A's perception that it was true, had a causative effect upon A's entry into the contract. It appears that A would be free to seek rescission merely using the evidence he already had when making the contract, because he had in the meantime simply repented of it, or because his apprehension about the effect of the statement upon C had gone away.
- In my judgment the authorities on rescission for misrepresentation speak with one voice. For a misstatement to be the basis for a claim to rescind a contract, the claimant must have given some credit to its truth, and been induced into making the contract by a perception that it was true rather than false. Where judges and text-book writers have used the word 'influenced' as the touchstone for reliance they have done so in order to allow for belief in the truth of the misrepresentation to be a contributory rather than sole cause of the representee's entry into the contract: see for example Clerk and Lindsell on Torts (21st ed.) para 18-35. They have not thereby intended to allow in any case where the representee can show that he was influenced into making the contract by the mere making of a representation which he did not believe was true.
- It is not necessary to cite copious authority for this principle. It is sufficient to note that in Moore-Bick LJ's judgment in the earlier appeal he said that the question whether the Appellant's fraud was an inducement to Zurich to enter into the settlement agreement depended upon:
"the extent to which, if at all, it was in fact misled when it approved that agreement"
- I readily acknowledge that the representee may not need to have had blind faith in the truth of the representation. He may only have been prepared to give the representor the benefit of considerable doubt. If by doing so he was influenced into making the contract, then he may succeed. But in this case Zurich did not merely disbelieve the Appellant's assertions about the continuing effect of his injury. It went so far as to plead (under a statement of truth) that they were fraudulent. Again I acknowledge that the subsequent discovery by the representee that a statement which he had thought genuine but mistaken was in fact fraudulent might be sufficient for rescission because, in principle at least, fraud unravels all. But in this case there can be no such unravelling. Zurich alleged that the statement was fraudulent from the outset. All that happened thereafter was that better evidence of the fraud came to light than was available when the settlement contract was made.
- In my opinion the true principle is that the equitable remedy of rescission answers the affront to conscience occasioned by holding to a contract a party who has been influenced into making it by being misled or, worse still, defrauded by his counterparty. Thus, once he discovers the truth, he must elect whether to rescind or to proceed with the contract. It must follow that, if he already knows or perceives the truth by the time of the contract, he elects to proceed by entering into it, and cannot later seek rescission merely because he later obtains better evidence of that which he already believed, still less if he merely repents of it. This seems to me to be a fortiori the case where, as here, the misrepresentation consists of a disputed claim in litigation, and the contract settles that claim.
- Nor is there anything contrary to conscience in holding a person to a contract made in order to deal with the risk that a statement which he believes to be untrue and even fraudulent may nonetheless persuade someone else, even a judge. The contract is made with his eyes open about the probable untruth of the statement. His contract is a form of risk management, and there is no reason why he should be enabled to walk away from it merely because that risk later diminishes or disappears.
- To extend the law of rescission in the manner here under consideration would have the most unfortunate consequences. The first would be that it would become almost impossible to compromise a whole swathe of litigation if settlements were vulnerable to being set aside in this manner. Apprehension by one party that his opponent may persuade the trial judge of matters which he denies, and disbelieves, is an everyday characteristic of litigation, and a healthy driver towards settlement, as every mediator knows. If the principle contended for were correct, almost any litigant could say 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. To be able to treat as an actionable misrepresentation the opponent's statement of his case merely because of such an everyday apprehension would expose almost any settlement to subsequent attack if fresh evidence became available. Indeed, there is nothing in the reliance test propounded by the judge that would even make the obtaining of fresh evidence a necessary condition. The public policy which encourages settlement of litigation would be gravely undermined if, in effect, dissatisfaction on either side led, with or without later forensic research, to the settlement being impugned on the ground that the opponent's case contained a misrepresentation which, without being believed, influenced the terms of settlement.
- In that context I accept that fraud stands in a different category but not if, as here, the settlement compromised an allegation of fraud already on the pleadings. For my part this does not depend on estoppel, but rather on a robust disinclination to set aside contracts in settlement of litigation, save where the traditional requirement of the party seeking rescission to show that he has been misled or defrauded is well and truly satisfied. For that reason I have encountered less difficulty than my Lord with the outcome of the strike out application in the earlier appeal to this court. My understanding of that decision is merely that there was no relevant estoppel sufficient to make the further pursuit of Zurich's case an abuse of process.
- The second unfortunate consequence would be that there would be no easy way of confining this more generous approach to inducement to the rescission of contracts in settlement of litigation. If the mere making of a misstatement rather than belief in its truth is to be a sufficient influencing factor, then there is no telling in what contractual contexts it may be applied, with debilitating effects upon contractual force and certainty.
- For those reasons I would also allow this appeal.
Lady Justice King
- I agree with both judgments.
Note 1 I should say that it was not argued before us that the Judges reference at para. 6.6 of his judgment to the Appellant having continued his misrepresentations even after the disclosure of the 1999 video meant that any distinction could be drawn for the purpose of reliance between his initial exaggeration of the extent of his injuries and anything said subsequently. Nor in any event would such a distinction be sustainable.
Note 2 For convenience I refer to the party who might wish to have the agreement set aside as the defendant but of course in principle it could be the claimant. [Back]
Note 3 There is perhaps some parallel with the Courts willingness to recognise the validity of the settlement of a claim based on an illegal transaction, as in Binder v Alachouzos  2 QB 151.
Note 4 I note that that was also the view of Smith LJ in the earlier appeal: see para. 29 of her judgment. [Back]
Note 5 Maurice Kay LJ identified a difference between the reasoning in the two judgments, which he thought it unnecessary to resolve; but what matters for present purposes is that the argument based on the effect of the agreement itself was rejected. [Back]
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