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Settlement of disputes: look before you leap...

View profile for Nigel Adams
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Litigation can be a risky enterprise as outcomes are often uncertain. In order to try and avoid the uncertainty of a trial, sensible litigants will often consider whether they can reach a settlement of their dispute with the other side long before a trial is in the diary. Settlements give certainty and are very often much cheaper than resolving a dispute at a trial. However, for all its attraction, settlement must be thought through properly before a deal is concluded as otherwise disappointment can arise, as can be illustrated by the recent decision in the Court of Appeal in Hayward v Zurich Insurance Co Plc.

The facts of the case are straightforward: Mr Hayward injured his back at work and his claim for damages was settled by agreement with his employer’s insurance company who made a payment to him. Before the settlement had been concluded however, the insurer had argued that Mr Hayward had exaggerated the effect of his injuries. Despite this, a deal was done and the court claim halted. Some time later Mr Hayward’s employer was tipped off by a third party that the back injury was not as bad as Mr Hayward had made out. The insurer was informed and began proceedings against Mr Hayward to unwind the settlement and recover the money it paid to him. This claim made its way to the Court of Appeal.

While noting that courts will in general seek to uphold a settlement so that there can be finality, that being one of the attractions to settle a dispute in the first place, the Court of Appeal went onto say that while parties to litigation will invariably weigh up the relative merits of each side’s case, they will not normally also factor into their thinking whether the other side’s case is fraudulent. So while a party must evaluate – before settlement – the likelihood of the other side’s case being rejected by a judge, it will not normally need to consider if the other side’s case is dishonest as well.

So did Zurich get its money back from Mr Hayward? No. Unfortunately for Zurich, it was already on notice at the time it entered into the settlement that Mr Hayward’s claim might have been dishonest as it felt at the time that he was exaggerating his difficulty in recovering. As a result of this knowledge Zurich was found to have given up the right to unpick the settlement agreement for fraud and could not do so now that it had better evidence for its suspicion at the time.

This is a harsh decision for the insurer and one which rewards Mr Hayward for his conduct. However, it is a decision which fits squarely within the policy of the court to hold parties to their settlements where possible.  It is therefore preferable to think carefully about a settlement before it is concluded because it may not be possible to improve it later or avoid unintended adverse consequences of a poorly drafted agreement. Parties ought to consider fully the extent of the rights they are willing to give up when settling a claim and what rights, if any, they wish to preserve. The drafting of a settlement should then be carried out with the benefit of legal advice to ensure that the ambit of the settlement is defined precisely or yet further unwanted litigation might result.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact. Information correct as at 15 May 2015.