Unravelling Commercial Contracts on Misrepresentation

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A contract or settlement can be ‘unraveled’ if, in the circumstances, it was entered into following a fraudulent misrepresentation. At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and disputes.

A contract or settlement can be ‘unraveled’ if, in the circumstances, it was entered into following a fraudulent misrepresentation.   At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and disputes.

This ruling is particularly significant as it was passed down by the UK’s highest court, the Supreme Court, and it has persuasive effect on the courts in The Bahamas.  The case concerned an insurance claim following a work injury, but the principles have wider commercial implications.

What was the case about?

An employee exaggerated the effects of a work injury, and although his employer’s insurers suspected fraud, it decided on balance that the risks of losing was too high to justify defending the claim in court.  The insurers therefore took the commercial decision to pay him compensation of nearly £135,000.

Sometime later, the employee’s neighbour provided evidence of fraud on the part of the employee, and the insurer therefore asked the court to set aside the settlement on the basis of fraudulent misrepresentation. Importantly, the insurer had to demonstrated that it had relied on the fraudulent misrepresentation when it entered into the settlement agreement in order to succeed.

However, the employee argued that the insurer had not relied on it, and had simply not believed what he had said.  He said the insurer had made a commercial decision which it could not now back out of.

The Supreme Court found in the insurer’s favour, finding that the insurer had entered into the settlement in reliance on a fraudulent misrepresentation.  It ruled that the employee’s misrepresentations had induced the insurer to enter into the settlement agreement.  Critically, whether or not the insurer had believed the representations to be true was not a deciding factor.

As a result, the employee received a significantly reduced sum of £14,720 which reflected the real effect of his injury.

What does this mean?

When negotiations are in progress, representations must be clear, transparent and true.  Where a fraudulent representation leads to a party entering into a contract, that contract could later be unraveled.

How can we help?

For expert, incisive legal advice on your commercial contracts and disputes, call the experienced commercial lawyers at ParrisWhittaker.  If you are considering or negotiating new contract terms, we can help you with clear, effective drafting of commercial contract terms to fully protect your interests.

^{1 Hayward v Zurich Insurance Company plc [2016] UKSC 48}