Settle Smart series part four: Setting aside a settlement agreement for fraud – allegations of fraud not “some kind of open sesame”

Our series focused on the settlement of disputes considers issues encountered by practitioners across a range of dispute resolution specialities. This blog explores when a settlement agreement can be set aside for fraud, highlighting the delicate balance between justice and finality.

Fraud “unravels all” – or does it?

It is a well-established principle of contract law that if an agreement was entered into as a result of fraud, it should be set aside. There is also, however, the principle of the finality of litigation and, linked to this, the strong public interest in upholding settlements. These two principles may be seen as standing in slight contradiction to one another when it is alleged that a settlement agreement was entered into as a result of fraud.

Background

In 2016 the Supreme Court, in the case of Hayward v Zurich Insurance, unanimously found that a settlement agreement could be set aside if a party was influenced by fraudulent misrepresentations when entering into that agreement.

In 2017, the Court of Appeal in Takhar v Gracefield Developments Ltd, considered the question of whether a judgment could be set aside for fraud and the circumstances in which evidence, obtained after a judgment has been handed down, can form the basis for this. The Court of Appeal concluded that two requirements had to be met for a judgment to be set aside on the basis that it was obtained by fraud:

1. The evidence of fraud must be new evidence which must not have been available to the party seeking to adduce it in the course of the original proceedings (the fresh evidence requirement); and

2. The party, exercising reasonable diligence, must not have been able to discover the new evidence before receiving judgment (the reasonable diligence requirement).

The Court of Appeal’s decision in Takhar was then reversed by the Supreme Court which unanimously held that there is no reasonable diligence requirement when considering whether a judgment should be set aside for fraud. Therefore, the only requirement to be satisfied for a judgment to be set aside is the fresh evidence requirement.

Clarification of the position by the Privy Council in Finzi

The Privy Council, in the recent case of Winston Finzi v Jamaican Redevelopment Foundation (Jamaica) (‘Finzi’), considered the Supreme Court decisions in both Hayward and Takhar and, in light of these, reviewed the rules around setting aside settlement agreements for fraud. A particular point discussed in the judgment was the circumstances in which new evidence, not relied on during the original proceedings, may be introduced to set aside a settlement agreement for fraud.

In the course of litigation that spanned over 10 years, the Jamaican Redevelopment Foundation (“JRF”) sought to recover loans made to Mr Finzi and to one of his companies. The parties eventually entered into a settlement agreement whereby JRF agreed to accept a reduced sum in full and final settlement of its claim.

Around 4 and a half years after the settlement agreement was entered into Mr Finzi alleged that it was procured by fraud and should be set aside. The Court of Appeal found against Mr Finzi, asserting that he failed to meet the reasonable diligence requirement. Mr Finzi appealed to the Privy Council and argued that as there is no reasonable diligence requirement when seeking to set aside a judgment for fraud, as per the Supreme Court judgment in Takhar, and therefore it should not be a requirement when setting aside settlement agreements for fraud.

The Privy Council confirmed that the only requirement to be satisfied when seeking to set aside a judgment or settlement agreement obtained by fraud is the fresh evidence requirement. In addition, it clarified the requirements where a party seeks to rely on evidence not adduced in the original proceedings. It held the claimant must establish that:

1. The evidence of fraud is new “in the sense that it has been obtained since the judgment or settlement”, or
2. If the evidence is not new in that sense, the claimant must establish “any matters relied on to explain why the evidence was not deployed in the original action”; and put forward a good reason that “prevented or significantly impeded the use of the evidence in the original action.”

In relation to the need to exercise reasonable diligence requirement, the Privy Council reiterated the position articulated by the Supreme Court in Takhar, namely, that fraudsters should not profit from “passivity or lack of reasonable diligence” on behalf of the other party.

However, the Privy Council dismissed Mr Finzi’s appeal: importantly, the substantive evidence Mr Finzi sought to rely on to establish fraud was available to him prior to him entering into the settlement agreement.  He had ample opportunity to deploy it earlier and gave no good explanation why he did not do so. 

Conclusion

The Finzi case is significant for a number of reasons. First, it clarifies that a party seeking to set aside a settlement agreement or judgment for fraud only needs to satisfy the new evidence requirement. In that sense, it comes down in favour of the principle that fraud “unravels all”.

Secondly, it emphasises the importance of timing when a party is in possession of information which forms the basis of an allegation of fraud. It is essential that information relied on to set aside a settlement or judgment obtained by fraud was not known to the party in question until after the settlement was agreed or judgment handed down. Otherwise, as in Finzi, the court will not speculate as to why fraud was not alleged at an earlier stage of the proceedings and, in turn, may find that the new allegations of fraud are an abuse of the court’s process.

Further information

If you have any questions regarding this blog, please contact Laurence Clarke.

About the author

Laurence Clarke is a senior associate in the Dispute Resolution Team.  He has broad experience as a general commercial litigator with a focus on complex large scale civil fraud and financial disputes.  He often works as part of a team of global professional advisors on matters with multi-jurisdictional elements.