Contract May Be ‘Unravelled’ If Entered Into Following A Fraudulent Misrepresentation By One Party

A party entering into a contract in reliance on a representation by the other party, but which they suspect is not true, may now be able to ‘unravel’ the contract if they later obtain proof that what they were told was a fraudulent misrepresentation, following a Supreme Court ruling.

An employee exaggerated the effects of a work injury. His employer’s insurers suspected fraud, but decided the risks of losing – and having to pay not just the claim but also the employee’s legal costs – was too high to justify defending the claim in court. It therefore took the commercial decision to pay him compensation of just under £135,000.

The employee’s neighbour later provided evidence of the employee’s fraud. The insurer applied for the settlement to be set aside on the basis of the employee’s fraudulent misrepresentation.

As part of its claim, the insurer had to show it had relied on the fraudulent misrepresentation when entering into the settlement agreement. The employee claimed that the insurer had not relied on his misrepresentation when agreeing the settlement because it had not believed what he said. Instead, it had made a commercial decision to enter into the agreement, despite its suspicions, which it could not now back out of.

The Supreme Court ruled that the payment of £135,000 should be set aside because the insurer had entered into the settlement in reliance on a fraudulent misrepresentation. Even though it had not believed the claimant’s misrepresentations, those misrepresentations had still induced it to enter into the settlement agreement. This meant it had ‘relied’ on them. He was awarded the lesser amount of £14,720, reflecting the real effect of his injury.

Operative date

• Now

Recommendation

• A person or business entering into a contract in reliance on a representation by the other party, but which they suspect is not true, should consider whether they can ‘unravel’ the contract if they obtain proof that what they were told was a fraudulent misrepresentation

Case ref: Hayward v Zurich Insurance Company plc [2016] UKSC 48