Chris Hadrill, a specialist employment solicitor at Redmans, answers the question:
“Can I set aside the term of the settlement agreement that I entered into if I think that I have been defrauded? I was made redundant and now believe that there wasn’t in fact a redundancy situation”
Under the law of contract, there are certain defined circumstances whereby a settlement agreement may be invalid and can be set aside. These include (but are not limited to):
- Where a party to the settlement agreement lack capacity (for example, the party has a mental disability which rendered them incapable of understanding or consenting to the agreement);
- Where a mistake has been made about a fundamental matter or which makes it impossible to perform the settlement agreement; and
- Where there has been a misrepresentation of a material fact in certain circumstances
In this case, the relevant question is whether a settlement agreement can be set aside due to a fraudulent misrepresentation by one party to another, inducing them to enter into the settlement agreement (i.e. that there was a genuine redundancy situation when, it is contended as a matter of fact, this was not the case).
In Hayward v Zurich Insurance Company plc  EWCA Civ 327 the Court of Appeal held that, while the settlement of an ill-founded claim is nonetheless binding, this is not generally the case if the claim was fraudulent: if, subsequent to the completion of the settlement agreement, it is found that a statement about the claim was in fact fraudulent when the other party had believed it was genuine, this may be sufficient to rescind a settlement agreement. However, fraud does not necessarily ‘unravel all’, even when proved – if the party alleging fraud (“A”) was aware (prior to the settlement agreement being completed) that the representation made by the other party (“B”) may not be true but signs the agreement anyway, this will not be sufficient to unravel the settlement (as A had settled the case “with its eyes wide open”).
Applying the above principles to the current question, the crucial issue in the circumstances is whether the person alleging fraud (“A”) was aware – prior to entering into the settlement agreement – that there may not be a genuine redundancy situation at his employer (“B”). If A had alleged to B that there was not a genuine redundancy situation prior to entering into the settlement agreement, but subsequently entered into the agreement anyway, then it is probable that A would find it difficult to challenge the validity of the settlement agreement on the grounds of fraud: A had entered into the settlement agreement with “his eyes wide open”. However, if A had not alleged dishonesty by B from the outset then he may be able to challenge the settlement agreement on the grounds of fraudulent misrepresentation (depending, of course, on A being able to show on the balance of probabilities that the statement by B to this effect was fraudulent).
The practical outcome of this question is that parties need to take care about alleging fault or dishonesty prior to settling a dispute. Further, they also need to understand the implications of settling: advice from specialist legal advisers on this point will therefore normally be extremely helpful in determining the pro’s and con’s of settling a case.