England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CAMBRIDGE COUNTY COURT
HHJ JUDGE YELTON
REF: 9LS01076

		Royal Courts of Justice Strand, London, WC2A 2LL
		27/05/2011

Lady Justice Smith :

1. This is an appeal from the order made by HH Judge Yelton sitting in the Cambridge County Court on 19 July 2010. It raises the question of whether an action alleging that the settlement of an earlier personal injuries action was obtained by fraud should be struck out on the grounds that the issues are res judicata or that the action is an abuse of process because the defendant in that earlier action had alleged that the claimant was exaggerating his injuries for gain.

Factual background

2. In 1998, Colin Richard Hayward, the respondent to this appeal, was injured in the course of his employment with David S. Smith Packaging Limited (Smith). Smith carried employers' liability insurance with Zurich Insurance Company plc (Zurich). A claim against Smith was intimated and, although we have not been shown the details, there was clearly some correspondence and exchange of medical reports between solicitors for the parties. Liability remained in dispute. It appears that, at an early stage, Zurich and its solicitors became suspicious that Mr Hayward might be exaggerating his injuries and, in October 1999, they instructed enquiry agents to undertake video surveillance of him.
3. In 2001, Mr Hayward issued proceedings against Smith. In the particulars of claim, dated 11 September 2001, it was alleged that he had suffered a spinal injury involving damage to two dorsal vertebrae. He was suffering from continuing physical disabilities and was fit for only light work. He was also suffering from a depressive disorder of moderate severity. Attached to the pleading were two reports from Mr J Bracegirdle, an orthopaedic surgeon and one from a consultant psychiatrist, Dr R. O'Flynn. The schedule of loss claimed damages amounting to just under £420,000. This included a claim for loss of earnings on the basis that Mr Hayward was and would remain unfit for any work.
4. The defence dated 30 October 2001, drafted by counsel instructed by Beachcroft Wansbroughs, solicitors for Zurich, was commendably detailed. It admitted that the claimant had suffered a back injury but said that, in the light of video evidence obtained, it was not accepted that the injury was as bad as had been described in Mr Bracegirdle's report. It was alleged that the claimant was fit for full time work, although not work which entailed heavy lifting. In view of the claimant's lack of candour in relation to his physical condition, the defendant did not accept that his depressive state, as described, had been consistent, was continuing or would continue into the future. Paragraph 7 of the defence said: "The claimant has exaggerated his difficulties in recovery and current physical condition for financial gain".
5. By order dated 20 March 2002, the defendant was given leave to adduce the video surveillance evidence at trial.
6. In April 2002, the orthopaedic surgeons produced a joint report on which they were agreed. By this time they had both seen the surveillance videos. Mr Bracegirdle had accepted that Mr Hayward was not as badly disabled as had been described in his earlier reports. The doctors thought that the discrepancy between the first video surveillance and Mr Hayward's description of his symptoms 'needed clarification'. The doctors agreed on the extent of the continuing disability and the existence of some pre-existing degenerative changes in the spine which would have given rise to symptoms in any event by the age of 55. There was agreement as to Mr Hayward's working capacity; he was fit for part-time work which did not entail heavy duties. The psychiatric condition was accepted as genuine and attributable to the injury but its prognosis would depend upon the efficacy of treatment which Mr Hayward was to undergo.
7. In August 2002, liability was compromised on the basis of a 20% reduction for contributory negligence. In November 2002 a second interim payment was made, bringing the total interim payments to £12,500. In June 2003, the defendant paid £100,000 into court. This was in addition to the interim payments and also to a sum of about £22,000 payable to the Department for Work & Pensions for recovery of Social Security benefits. In effect his amounted to an offer of just under £135,000. The offer was not accepted at the time but, in October 2003, the claimant sought and obtained the defendant's agreement to take the money in court in settlement of the action. The settlement agreement was embodied in an order in the form of a Tomlin order. However, the terms of the agreement were disclosed to the judge making the order and the schedule in which they were set out was part of the order.

The current proceedings

8. There matters rested until 2005 when Mr and Mrs Ian Cox approached Smith to inform that company that they believed that Mr Hayward had acted dishonestly in connection with his claim against Smith. They had been living next door to Mr Hayward from June 2002 until October 2005. In essence they thought that by the time they knew him, there was nothing wrong with Mr Hayward but he was pretending that there was. They were referred to Zurich's solicitors and witness statements were prepared in which they described their association with Mr Hayward, explained the basis of their belief that he had acted dishonestly and described physical activities which they had seen him perform. They claimed to know that, from the time they knew him, Mr Hayward was capable of walking about quite easily and did so when at home; but he used two sticks when he went out because he was aware of the possibility of surveillance. If accepted, the evidence could demonstrate that Mr Hayward had made a complete recovery by mid-2002, over a year before settlement.
9. In early 2009, Zurich (standing in the shoes of Smith, as to which no point is taken), commenced an action against Mr Hayward alleging that the settlement of the claim had been obtained by false representations as to words and conduct. The particulars related to written representations made in his witness statements, in the particulars of claim (which had been accompanied by a statement of truth) and in the schedule of loss and also oral representations made to the medical experts. It was said that these representations were such as to induce Zurich to make a greater offer of settlement than it would otherwise have done and were intended to have that effect. It was said that Mr Hayward had made these representations fraudulently, knowing them to be untrue; alternatively, they were made implying his belief in them when he did not have such belief. Full particulars of that allegation were pleaded. Finally, it was alleged that, by reason of the said deceit and misrepresentations, the claimant, Zurich, had suffered loss and damage. It was estimated that Zurich had paid at least £72,000 more in damages than it would otherwise have done. Costs had also been increased.
10. Mr Hayward filed a defence in which his primary position was that Zurich had no cause of action because the cause of action had been compromised by the agreement embodied in the Tomlin order of October 2003. Without prejudice to that contention, the defence asserted that the admission of any fresh evidence would have to satisfy the rules in Ladd v Marshall [1954] 1 WLR 1489. Without prejudice to that contention, the defendant denied that he had misled Zurich by words or conduct. Further it was alleged that Zurich had clearly put Mr Hayward's good faith in issue during the first action, by its pleadings and by arranging video evidence. Therefore, in making the payment into court and settling the claim it had voluntarily compromised all the issues of bad faith.
11. Mr Hayward applied to the court to strike out the claim under CPR 3.4. It was said that the claim was an abuse of process. The issues were res judicata and the evidence on which the claimant sought to rely failed the test in Ladd v Marshall.
12. The application was heard by Deputy District Judge Bosman on 17 March 2010. The deputy district judge held that the form of the action (namely a freestanding action for damages for deceit and misrepresentation) was misconceived and the correct way for Zurich to litigate their complaint was to apply to set aside the Tomlin order on the ground of fraud. If the Tomlin order were set aside, the effect would be to reactivate Mr Hayward's original claim, giving rise to the possibility that he might recover more than the amount of the original settlement. If the claim were to be recast as an application to set aside the Tomlin order (as to which the deputy district judge was prepared to grant permission to amend), he was of the view that the claim should not be struck out. He said that there were two important and conflicting principles in play: the need for finality in litigation and the need for the court not to be misled. Largely in reliance on observations of this Court in Owens v Noble [2010] EWCA Civ 224, he held that the need for the court not to be misled would outweigh the need for finality in litigation. That was so, even in a case such as this where the defendant in the original action had pleaded exaggeration. The deputy district judge also held that the rules in Ladd v Marshall were not relevant in a new action, only where it was sought to introduce fresh evidence on appeal in an existing action. But if he were wrong about that, he thought that the rules were satisfied in any event. Accordingly, Mr Hayward's application failed. Shortly afterwards, Zurich amended the claim to add a prayer for an order that the Tomlin order be set aside. It maintained the claim for damages as originally pleaded.
13. Mr Hayward's appeal from the deputy district judge's decision succeeded. HH Judge Yelton struck out the claim, holding that the consent order created an estoppel by res judicata. He noted that the defence in the first action had expressly pleaded that Mr Hayward had exaggerated his difficulties in recovery and current physical condition for financial gain, which he regarded as amounting to an allegation of fraud. He cited the case of Kinch v Walcott [1929] AC 482 as authority for the proposition that a consent order creates an estoppel by res judicata in just the same way as a judicial determination. In support of this, he quoted a statement of principle derived from Spencer-Bower and Handley: Res Judicata (4^th Edition 2009 by K.R. Handley, a judge of the Court of Appeal of New South Wales) to the following effect:

"The court is discharged from the duty of investigating or further investigating the matter and does not pronounce a judicial opinion; but at the request of the parties it gives judicial sanction and coercive authority to an agreement which, except by statute, could not otherwise operate as a bar."

The judge was of the view that a Tomlin order was indistinguishable from a consent order and carried with it the judicial sanction and authority of the court.

14. The judge then turned to consider the cases in which it had been held that there was jurisdiction to strike out a claim or defence as an abuse of process, where the party sought to re-litigate a matter which could have been raised before, even though the matter was not res judicata. He quoted the well-known passage from the speech of Lord Bingham of Cornhill in Johnson v Gore Wood & Co [2002] 2 AC 1 at page 31A:

"Henderson v Henderson abuse, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be vexed twice in the same matter…The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before."

15. The judge regarded those principles as irrelevant in the present case because the broad merits-based judgment (which he described as a discretion) did not apply where there was a true estoppel by res judicata, as he was about to hold there was in the present case. He dismissed as inapplicable the submissions he had heard relating to Ladd v Marshall and it is accepted in this court that he was right to do so.
16. The judge recognised that there was a well-established principle that one party may bring a fresh action to have an earlier judgment set aside on the grounds of the fraud of the other party and that that principle encompasses settlements and consent orders as well as judgments made after trial. The real issue in the present case was whether or not, when the Tomlin order was agreed, the then defendant (in effect Zurich) compromised the issue of fraud. He noted that there did not appear to be any reported cases which discussed or decided the issue of whether a claim of fraud raised in a second action had been compromised in a previous action. He mentioned two cases which were not on the point and which did not appear to give any real assistance. He therefore had to apply his own judgment and he concluded that the issue had been compromised because of the pleading, at paragraph 7 of the defence, that Mr Hayward had exaggerated his condition for gain. The judge could see no material difference between that allegation and the allegation which Zurich now sought to rely on. Zurich had put fraud in issue and the claimant had settled at a lower figure than originally claimed. Zurich now thought that it had better evidence on which to rely but the judge considered that that did not give it the right to have the issue reopened. Zurich had not needed to compromise in 2003; it had chosen to do so and was now bound. The issue of fraud was res judicata and no question of 'discretion' arose. The appeal was allowed and the claim was dismissed.

The appeal to this court

17. I granted permission for Zurich to appeal from the decision of HH Judge Yelton.
18. Mr Patrick Limb QC for the appellant advanced three grounds of appeal. First, he submitted that the judge had been wrong to hold that a Tomlin order was indistinguishable from a consent order. It could not give rise to an estoppel by res judicata. The Tomlin order was in effect a commercial agreement: see paragraph 18 of the speech of Lord Steyn in Sirius International Insurance Co v FAI General Insurance Ltd [2004] UKHL 54, [2004] All ER (D) 24. In consequence, Zurich was entitled to bring an action for damages for fraud and/or misrepresentation inducing the contract. Thus, the action as originally framed, as an action for damages for fraud or misrepresentation, was perfectly proper and should be allowed to proceed.
19. If that were wrong, and the judge had been right to hold that a Tomlin order was indistinguishable from a consent order and could create an estoppel by res judicata, it had not done so in the present case. First, there could be no question of cause of action estoppel; the question was whether there was an issue estoppel. There was not because the issue of fraud as raised in the second action had not been compromised by the settlement. Res judicata only applied if the issue in the second action was either expressly or necessarily by implication determined or compromised in the first action. Here, the issue which had been compromised in the first action was whether and the extent to which the claimant had exaggerated his disabilities. In the second action, it was being alleged that he had fraudulently concealed that he had made a complete recovery from his injuries by mid-2002. There was a significant difference between the two. Mr Limb accepted that there was some connection between the two issues but this was not such that the second action would amount to an abuse of process in the Johnson v Gore Wood sense. Mr Hayward was not being vexed twice by the same allegations.
20. Finally, Mr Limb submitted that, as a matter of justice and public policy, Zurich should be allowed to proceed with its present action. He submitted that the deputy district judge had been right to say that, where two public policies were both in play, (the need for finality in litigation and the need to avoid corruption of the administration of justice by the court being misled), the latter would hold sway. If Zurich were not allowed to proceed, an unfair and anomalous situation would arise. The result would be contrary to public policy.
21. Mr Guy Sims for the respondent submitted that Judge Yelton had been right to hold that this was a case of res judicata. All issues of bad faith had been compromised and no question of abuse of process had arisen. If it had, Mr Hayward would have succeeded on the application of the broad based merits test. He was being vexed a second time over the same questions of dishonest representation about his injuries. The action was an abuse of process.
22. In reply, Mr Limb submitted that, if it came to the application of the broad based merits test, there could be no question but that the decision should fall in his favour.

Discussion

23. I accept that Kinch v Walcott [1929] AC 482 is authority for the proposition that a consent order is capable of creating an estoppel such as will bar a party from bringing a second action and does create an estoppel if the parties to the second action are the same as the parties to the first and the issues raised in the second action were necessarily compromised in the first action. Whether this type of estoppel should properly be described as estoppel by res judicata or whether it would more accurately be described as estoppel by conduct does not greatly matter. It might be more logical if the term res judicata were reserved for cases in which the issues had been determined by a judge of competent jurisdiction. In Kinch, the appellant wished to bring an action based on allegations of misconduct against the respondent which he had withdrawn as part of the settlement of a libel action which the respondent had brought against him. In the new action, the respondent alleged that the appellant was estopped from raising the allegations again. At page 493, Lord Blanesburgh said that: "… in relation to this plea of estoppel it is of no advantage to the appellant that the order was a consent order". The effect of the decision was that the appellant was not allowed to make an allegation in the second action that he had expressly withdrawn when settling the first. So far as I can see, there is no reference in the report to estoppel by res judicata, only to estoppel. However, I note that Spencer Bower and Handley describe this form of estoppel as res judicata.
24. In so far as Mr Limb submitted that Lord Steyn's dictum in Sirius International Insurance Co v FAI General Insurance Ltd [2004] UKHL 54 at paragraph 18 demonstrated that a settlement contained in a Tomlin order cannot give rise to an estoppel, I would reject it. Lord Steyn was not discussing the question of whether the Tomlin order in that case gave rise to an estoppel; he was discussing how one should construe the meaning of the words used in the Tomlin order about which there was a dispute. The order had been made in settlement of a commercial dispute. In my view, Lord Steyn said only that the Tomlin Order must be construed (viz its meaning determined) as if it were a commercial agreement.
25. So far as the creation of an estoppel is concerned, I do not think there can logically be any difference between a consent order which is in ordinary form and one which is embodied in the form of a Tomlin order. The terms of the agreement are set out in a schedule to the Tomlin order and sometimes the terms are kept secret as between the parties and not shown even to the judge, let alone made public. But I do not think that that can logically make any difference to the question of whether the terms create an estoppel between the parties. In my view, they will do so in respect of the issues which are covered by the agreement.
26. It is well established that any judgment, whether resulting from a judge's decision or by consent of the parties is capable of being set aside if one party can show that it was obtained by fraud. However, it is common ground that that principle will not apply in a case in which the first action was itself either based on an allegation of fraud of the defendant or was defended on the basis of the fraud of the claimant if, in the second action, the claimant seeks to rely on the self-same fraud. That issue of fraud will have been determined or compromised. It seems to me that it will often be more difficult to ascertain exactly what issues are subject to an estoppel where the first action has been compromised than where it has been decided by a judge. The judgment will or should make the position clear; the same will not always be true in respect of a settlement. In my view, there should only be an estoppel if it is clear that the issue now raised has been decided or compromised in the first action.
27. I do not think that an estoppel will arise merely because there was an allegation of fraud in the first action. I think that, before an estoppel can arise, there must be congruence between the allegation of fraud which was determined or compromised in the first action and the allegation of fraud made in the second action. In other words, the two allegations must be essentially the same. I do not accept Mr Sims' submission that merely putting Mr Hayward's good faith in issue was sufficient to create an estoppel in respect of any subsequent allegations of bad faith or fraud. To create an estoppel there must be a specifically identifiable allegation of fraud and an attempt to repeat that very allegation.
28. I consider that these two requirements (of clarity as to what was in fact compromised and as to congruity between the first and second allegations) are necessary before there can be an estoppel because an estoppel creates a hard and fast rule that the allegation cannot be made again. If there is an estoppel there is no possibility of allowing the action to proceed on the basis that it is fair and just and because the importance of the purity of justice outweighs the need for finality in litigation. Because the estoppel creates a strict rule, it seems to me right that its application should be strictly confined. This does not mean that the gates will be open to litigants to bring actions which allege almost the same thing as has been alleged before. That can be prevented by the application of the flexible principles set out in Johnson v Gore Wood.
29. The judge was of the view that the allegation of fraud raised by Zurich in the present action was essentially the same as the defence of exaggeration which had been pleaded in the first action. He was also satisfied that that allegation had been compromised by the settlement. I can see that an allegation that a disability is being exaggerated for gain amounts to fraud and that that allegation of fraud is similar to the allegation now made in the second action. However, in my judgment it is not the same allegation. Nor do I consider that it is clear exactly what was compromised in the first action. For those reasons, I must respectfully disagree with the judge that the first allegation has created an estoppel in respect of the second.
30. I reach that conclusion on the basis of the following factors. It appears to me that the first action was settled on the basis of the joint report of the two orthopaedic surgeons. The meeting and their attempt to reach agreement was arranged in accordance with good practice under the Civil Procedure Rules. These rules are designed to facilitate settlement of personal injury disputes. The two doctors agreed that Mr Hayward had a continuing disability, although not of the severity which he had claimed when interviewed by Mr Bracegirdle, who was instructed on his behalf. It was agreed that the disparity between Mr Hayward's claim of disability and his capacities as demonstrated on the video film needed clarification. That clarification could only be effected by judicial determination at trial. Meanwhile, Smith/Zurich had sensibly to protect their position on costs by making a part 36 offer by way of payment into court. In the event that was accepted. From that one must infer that both parties accepted that the disability was not in fact as great as Mr Hayward had claimed. But I do not think that that means that the parties had agreed on the extent of Mr Hayward's exaggeration or whether it was in fact fraudulent at all. They had compromised the value of the claim; that was all.
31. It follows that, in my judgment, the judge was wrong to hold that Zurich was estopped from alleging that the settlement was obtained by fraud. It remains therefore to consider whether the present action is an abuse of process in the Johnson v Gore Wood sense. In my judgment, it is not.
32. I reach that conclusion for the following reasons. I have considered the two conflicting principles of finality of litigation and the need to protect the administration of justice from the effects of fraud. Finality of litigation is desirable for many reasons but in this context the principle is designed to protect a litigant from being vexed more than once by the same allegations. I do not think that this consideration weighs heavily in the present case. True it is that Mr Hayward faces litigation which must be most unwelcome. However, there is nothing apparently harassing about Zurich's conduct in bringing this action. It appears to be acting in response to fresh evidence from Mr and Mrs Cox of which it was previously unaware and could not with reasonable diligence have been expected to discover at the time of the first action. Moreover, the effect of the new claim on Mr Hayward is not necessarily severe. If he has not been dishonest, he will win and will recover all his costs. Zurich is solvent and I would have thought that, if the fraud allegation were held to be wholly without foundation, there would be a good argument for indemnity costs.
33. The second consideration is the need to protect the administration of justice from the effects of fraud. In the post CPR world, one aim of the rules is to encourage the parties to reach settlement of their disputes. This means that the statements or representations made at the pre-trial stage have taken on an even greater importance than they had under the old rules, where it was expected that their truthfulness and accuracy would probably be tested at trial. The importance of the truthfulness of pre-trial statements is evidenced by the new requirement that a statement of case must be accompanied by a declaration of truth. The intention is that a party should be able to rely on a pre-trial statements in reaching settlement. Thus pre-trial statements play a vital role in the administration of civil justice. Here the allegation is that Mr Hayward was dishonest in respect of various pre-trial statements and representations. Those are important allegations from the view point of the protection of the integrity of the administration of justice. Of course, it is clear that Zurich did not, at the time of the first action, accept the truthfulness of Mr Hayward's statements about his disabilities. It suspected exaggeration. In the light of those suspicions, it behaved impeccably in every respect. It disclosed its video film at an early stage. It pleaded its suspicions about exaggeration in its defence, as it is now required to do by CPR part 16.5. It instructed its expert in the preparation of an agreed report – again in accordance with the spirit of the CPR. It then made a sensible part 36 offer on the basis of that report. Although that offer was not accepted immediately, it agreed that the money in court should be taken out in settlement. In sum, it conducted the action in compliance with the letter and the spirit of the rules. If, following a settlement, a defendant or insurer is to be prevented from raising a subsequently discovered fraud merely because it pleaded fraudulent exaggeration in the first action, there would be a disincentive to plead the defence fully. If the insurer were to be so prevented because it had settled a claim leaving the extent of fraud undecided, there would be a disincentive to settle claims. Both of these are important as a matter of public policy.
34. Weighing those two types of consideration, I am of the view that the public interest in the integrity of the administration of justice and the private interests of Zurich in seeking the investigation of these allegations of fraud far outweigh the public interest in the finality of litigation and Mr Hayward's understandable wish to avoid a second action. This action is not, in my judgment, an abuse of process.
35. For those reasons, I would allow this appeal.

Lord Justice Moore-Bick:

Background

36. In 2001 the respondent, Mr. Hayward, began proceedings in the Cambridge County Court against his former employer, David S. Smith Packaging Ltd ("David S. Smith"), claiming damages for injuries sustained at work. He said that he had suffered spinal injuries which had rendered him fit only for light work and also a depressive disorder of moderate severity. David S. Smith was insured by the appellant, Zurich Insurance Co. Plc ("Zurich"), in respect of employer's liability. Zurich took over the conduct of the litigation on its behalf.
37. Zurich accepted that Mr. Hayward had suffered some injury to his back, but it must have viewed his claim with some scepticism, because it took the trouble to obtain evidence in the form of a video-recording which, it contended, suggested that his injury was not as severe as he alleged. Nor did it accept that his depressive condition, as described by the doctors, was likely to continue. In its defence, therefore, David S. Smith pleaded that he had exaggerated his difficulties in recovery and his current physical condition for financial gain. It was given leave to adduce the video-recording in evidence at the trial.
38. In April 2002 the medical experts, who had by then seen the video-recording, produced a joint report in which they agreed that Mr. Hayward was not as seriously disabled as they had previously thought. They agreed that he suffered from some continuing disability as well as pre-existing degenerative changes in the spine which would in any event have given rise to symptoms by the age of 55. They also agreed that Mr Hayward was fit for part-time work which did not entail heavy duties. The experts agreed that his depressive condition was genuine and attributable to the injury, but they considered that his recovery would depend upon the efficacy of the treatment he received.
39. In August 2002 liability was compromised on the basis that David S. Smith was 80% liable, there being 20% contributory negligence on the part of Mr. Hayward. In June 2003 Zurich paid £100,000 into court on behalf of its insured, which, together with various interim payments and a sum payable in respect of the recovery of social security benefits, brought the total amount offered to a little under £135,000. In October 2003 the claim was settled, the terms of settlement being contained in a schedule to a Tomlin order made by consent by which all further proceedings in the action were stayed, save for the purposes of the carrying the agreement into effect.
40. Thereafter the matter took a rather unusual turn. In later 2005 Mr. Hayward's former neighbours contacted David S. Smith with information about Mr. Hayward. They said that they were concerned that he had acted dishonestly in relation to his claim, because they had seen him doing all sorts of things which suggested that his injury was far less serious than he had made out. David S. Smith referred them to Zurich's solicitors, who took statements from them in which they described the various activities that they had seen Mr. Hayward carrying out at the relevant time. Their evidence tended to suggest that he had made a substantially full recovery by the middle of 2002.
41. In the light of that evidence Zurich took the view that Mr. Hayward had indeed been dishonest in the pursuit of his claim. On 12^th February 2009 it issued proceedings against him claiming damages for fraud on the grounds that it had been induced to make the payment called for by the settlement agreement by false and dishonest representations on his part that he had continued to suffer serious orthopaedic and psychiatric symptoms which rendered him incapable of anything other than light work that did not involve repetitious stooping, lifting or carrying.
42. On 4^th February 2010 Mr. Hayward made an application to strike out the claim, or, alternatively, for summary judgment to be entered against Zurich, on the grounds that the claim was an abuse of process, that the issues were res judicata and that the evidence on which it sought to rely was not admissible under the rule in Ladd v Marshall [1954] 1 WLR 1489. The application was heard by Deputy District Judge Bosman on 17 March 2010. He observed that the case exemplified the tension than can arise between two competing public interests, namely, the need for finality in litigation and the need to ensure that the court is not misled. He recognised that there is a long line of authority to support the proposition that a judgment can be challenged on the grounds of fraud, but considered that the right course was for Zurich to apply to set side the Tomlin order rather than to make a claim for damages. He then considered whether it was open to it to do so in this case, given that the issue of Mr. Hayward's honesty had been raised in the original proceedings. In the end he held that the public interest in ensuring that the court was not misled should be given precedence and dismissed the application. Zurich subsequently amended its claim to seek an order that the Tomlin order be set aside, but retained its original claim for damages as well.
43. Mr. Hayward appealed against that decision and on 30^th June 2010 the matter came before His Honour Judge Yelton. He held that the Tomlin order created an estoppel by res judicata against Zurich because the issue of fraudulent exaggeration had been raised in the original action and had been compromised under the Tomlin order. He therefore allowed the appeal and dismissed the claim. Zurich now appeals against his order.
44. Of the three grounds of the original application, one, namely, reliance upon the principles of Ladd v Marshall, was not longer pursued before us. That was sensible, because, as Judge Yelton pointed out, that case is concerned with adducing fresh evidence on appeal. It has no application to fresh proceedings by which a party claims damages for fraud or seeks to set aside a judgment obtained by fraud. The two remaining grounds of the original application, however, remain for consideration.

Estoppel by res judicata

45. Estoppel by res judicata, or estoppel by record, is a manifestation of the principle that judicial decisions once made must be accepted as final and are not open to challenge. Ultimately, it rests on a rule of policy that it is in the public interest for there to be finality in litigation, but it also sustains an important principle that decisions of competent tribunals must be accepted as providing a stable basis for future conduct. The Latin words "res judicata" mean simply "a thing judicially determined." They may apply to the claim as a whole (usually referred to as "cause of action estoppel"), or may refer to one or more specific issues which the court was required to decide in the course of reaching its decision on the matter before it (what is generally referred to as "issue estoppel"). In his celebrated judgment in Thoday v Thoday [1964] P. 181 at pages 197-198 Diplock L.J. summarised the principles of estoppel by record in the following way:

"The particular type of estoppel relied upon by the husband is estoppel per rem judicatam. This is a generic term which in modern law includes two species. The first species, which I will call "cause of action estoppel," is that which prevents a party to an action from asserting or denying, as against the other party, the existence of a particular cause of action, the non-existence or existence of which has been determined by a court of competent jurisdiction in previous litigation between the same parties. If the cause of action was determined to exist, i.e., judgment was given upon it, it is said to be merged in the judgment, or, for those who prefer Latin, transit in rem judicatam. If it was determined not to exist, the unsuccessful plaintiff can no longer assert that it does; he is estopped per rem judicatam. This is simply an application of the rule of public policy expressed in the Latin maxim "Nemo debet bis vexari pro una et eadem causa." In this application of the maxim "causa" bears its literal Latin meaning. The second species, which I will call "issue estoppel," is an extension of the same rule of public policy. There are many causes of action which can only be established by proving that two or more different conditions are fulfilled. Such causes of action involve as many separate issues between the parties as there are conditions to be fulfilled by the plaintiff in order to establish his cause of action; and there may be cases where the fulfilment of an identical condition is a requirement common to two or more different causes of action. If in litigation upon one such cause of action any of such separate issues as to whether a particular condition has been fulfilled is determined by a court of competent jurisdiction, either upon evidence or upon admission by a party to the litigation, neither party can, in subsequent litigation between one another upon any cause of action which depends upon the fulfilment of the identical condition, assert that the condition was fulfilled if the court has in the first litigation determined that it was not, or deny that it was fulfilled if the court in the first litigation determined that it was."

46. One question that arises in this case is whether a Tomlin order of the kind which brought the original proceedings to a conclusion can give rise to estoppel by record in the sense in which that expression is properly used. There are two aspects to this: the nature of the order and the fact that it was made by consent. It is convenient to consider the second of these first.
47. The fact that an order is made by consent does not in my view prevent it from giving rise to an estoppel by record, provided that the nature of the order is such that it would otherwise have that effect. The clearest case is a judgment entered by consent. If the parties agree that judgment should be entered for one or other of them, there is no need for the court to investigate the substance of the dispute; it is entitled to act on the parties' agreement and enter judgment accordingly. The effect of the judgment is the same as that of a judgment entered after a trial. It is binding to the same extent and creates an estoppel by record (cause of action estoppel); the cause of action merges with the judgment and is no longer capable of supporting proceedings (see the explanation of the doctrine of merger given by Lord Goff in Republic of India v Indian Steamship Co. Ltd (The 'Indian Grace') [1993] A.C. 410).
48. It does not follow, however, that every consent order will have that effect. Although various consequences may flow from the fact that it embodies an agreement between the parties, it may not be of such a nature as to give rise to an estoppel by record. Although every order must be construed by reference to its own provisions, Tomlin orders were designed to terminate proceedings without requiring any decision of the court on the substance of the claim or defence. It is for that reason that in its classic form it provides simply for a stay of the proceedings on the terms of the schedule, often with liberty to apply to carry those terms into effect. The Tomlin order in the present case falls into that category (at least so far as the substance of the action is concerned), although it also contains ancillary provisions, including provisions for the payment of costs, which are in the nature of a judgment. The court was not called upon to decide whether Mr. Hayward's claim was well-founded and did not adjudicate upon it. The stay simply consigned the proceedings to a procedural limbo from which, in the ordinary way, they can be expected never to return. In those circumstances I am unable to accept that the order can give rise to an estoppel by res judicata in the proper sense of that expression.
49. Judge Yelton was fortified in his conclusion that the order was capable of giving rise to an estoppel by res judicata by a passage in Spencer Bower and Handley, Res Judicata (4^th ed.), paragraph 2.16, in which it is stated that "a judgment (or order) by consent is a res judicata", citing in support the case of Kinch v Walcott [1929] AC 482. Although, as I have said, I do not doubt that a consent order may give rise to an estoppel by record, for the reasons I have given I do not think that the learned editor of Spencer Bower and Handley can be taken to have suggested that it will always have that effect and I do not think that Kinch v Walcott is authority for the proposition that it does.
50. In that case leave was given by consent to discontinue an action for libel on the defendant's withdrawing the allegations of which complaint was made. He subsequently sought to bring an action based on the allegations he had agreed to withdraw, but was held to be precluded from doing so. Lord Blanesburgh, giving the opinion of the Board, confirmed that the consent order remained as effective as any other order of the court unless and until discharged and operated to preclude the defendant from relying on the allegations that had been withdrawn. The precise basis of the decision is, however, less clear. The language used is not that of estoppel by record in the true sense, but is more redolent of what is now regarded as abuse of process. The court took the view that since the defendant had agreed to withdraw the allegations, an agreement that was reinforced by providing the basis for an order of the court, he was precluded from resiling from it. That was no doubt correct, but I do not think the decision was based on estoppel by record in the conventional sense or that it can be regarded as supporting the proposition that a consent order will invariably create such an estoppel. The agreement which underlies a Tomlin order may itself have the effect of precluding one or other party from taking an inconsistent position in later proceedings (see, for example, The Carphone Warehouse UK Ltd v Cyrus Malekout [2006] EWCA Civ 767, in which it was effective to establish Dr. Malekout's status as a statutory tenant), but that is because it has contractual force. Nonetheless, such an agreement could, like any other, be avoided on the grounds of fraud.

Abuse of process

51. In Henderson v Henderson (1843) 3 Hare 100 Sir James Wigram V.-C. set out the position which he understood to be already well-established, namely that

" . . . the court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time."

52. Henderson v Henderson itself and a number of later decisions in which the principle has been applied were considered by the House of Lords in Johnson v Gore Wood & Co [2000] UKHL 65, [2002] 2 AC 1, in particular by Lord Bingham of Cornhill, with whom Lord Goff, Lord Cooke and Lord Hutton agreed. Although Sir James Wigram described the principle in terms of res judicata, it has been recognised in many modern decisions that it is separate and distinct from estoppel by res judicata. The underlying considerations of public policy may have much in common, as Lord Bingham pointed out in Johnson v Gore Wood at page 31A, but in this context the principles of abuse of process come into play precisely because there has been no judicial decision on the point in question capable of supporting cause of action estoppel or issue estoppel. As May L.J. said on Manson v Vooght [1999] BPIR 376 at pages 377-378, the use in this context of the phrase "res judicata" is perhaps unhelpful, because the principle is not concerned with cases where a court has decided the matter in question, but rather with cases where the court has not decided it. It does, however, assume that the court has decided some other closely related matter. In the present case the result of the compromise was that the proceedings were stayed by agreement. The court was not called upon to decide anything (other than to accede to the parties' wishes to stay the proceedings) and no judgment was entered on the substantive claim.
53. The question for decision, therefore, is whether it is an abuse of the court's process for Zurich to pursue a claim against Mr. Hayward alleging that he fraudulently misrepresented his condition for the purposes of the original proceedings in order to induce it to pay him a sum of money. In Johnson v Gore Wood the House of Lords declined to lay down any hard and fast rules in this area, but in a helpful passage Lord Bingham provided guidance on identifying conduct likely to amount to this kind of abuse. He said at page 31B-E:

"I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before."

54. When considering this matter it is necessary to bear in mind that Zurich itself was neither a party to the former proceedings nor to the settlement agreement, but it was intimately involved in both, having taken over the conduct of the litigation on behalf of its insured and having approved and funded the settlement agreement. In those circumstances the representations made by Mr. Hayward about his condition were directed as much to Zurich as to David S. Smith and I would accept that the principles of abuse of process may be capable of applying to a situation such as the present. I do not think, however, that the present proceedings as originally formulated, were misconceived, since it was open to Zurich to allege that it had been induced by Mr. Hayward's fraud to support and fund the settlement agreement, a position which does not involve challenging the Tomlin order, unless Zurich through David S. Smith also wishes to challenge the order for costs. The terms of the agreement do not form part of the court's order, despite the fact that they are set out in the schedule, and could, for example, have been varied by the parties without the need for a variation of the order. If the agreement was procured by fraud, David S. Smith could no doubt seek to avoid it and recover the money paid under it (which it would hold for Zurich); it could no doubt also apply to have the Tomlin order set aside and with it the judgment for costs, but none of that in my view affects Zurich's right to claim damages for fraud.
55. The only question in this case is whether, having approved a settlement of proceedings against its insured in which the nature and extent of Mr. Hayward's injury was put in issue, it is an abuse of process for Zurich to pursue a claim against him for fraud. Mr. Sims submitted on behalf of Mr. Hayward that the question of fraud or deliberate exaggeration was squarely raised in the original proceedings and that the issues which Zurich now seeks to raise on its own behalf are so closely connected with those which arose in the original action that the present proceedings amount to unjust harassment, in the sense used by Lord Bingham in Johnson v Gore Wood. His argument depended heavily on the proposition that the issue of fraud had been raised in the original action and had been compromised under an agreement endorsed by Zurich.
56. In response to Mr. Hayward's allegations that he had suffered injury to his spine, was fit only for light work and was psychologically disabled as a result of a depressive disorder David S. Smith (at Zurich's direction) had pleaded in paragraph 6 of its defence that the view of his medical expert was "not accepted" and that "in view of the claimant's lack of candour in relation to his physical condition it is not possible to accept that his depressive state, as described, has been consistent, is continuing or will continue into the future." If the pleading had stopped there, I do not think that there would have been any difficulty. The nature and extent of Mr. Hayward's injuries would simply have been put in issue. However, in paragraph 7 David S. Smith alleged that Mr. Hayward had "exaggerated his difficulties in recovery and current physical condition for financial gain." It did not expressly allege dishonesty, but that paragraph comes as close as possible to a plea of fraud without actually using the word. No particulars of the allegation were provided and no further information was sought. In the present proceedings, by contrast, Zurich alleges fraud in plain terms, giving detailed particulars of the respects in which the representations made by Mr. Hayward are said to have been false and of the respects in which he is said to have been dishonest.
57. Mr. Sims' argument seems to me to raise two rather different questions. The first is whether in the present action Zurich seeks to raise issues which ought to have been, but were not, raised in the first action, that being the classic form of abuse of process to which the authorities are directed. I do not think it does. If Mr. Sims is right, the issue of fraud was raised in the first action, [but was left undecided] but if it was not, or was not clearly raised, that was because Zurich did not have at its disposal the material that enabled it to do so. This is not therefore a case which falls squarely within the principles of abuse of process of the kind with which the authorities are concerned.
58. The second is whether Zurich is precluded from relying on Mr. Hayward's fraud as inducing it to make the payment for which the settlement provided. In my view that depends on the extent to which, if at all, it was in fact misled when it approved that agreement. The case is made more difficult than it might have been by the fact that Zurich clearly thought that Mr. Hayward was, or might be, exaggerating his symptoms, but could not be sure whether, or to what extent, that was so. Now it has evidence which it considers points strongly in favour of that conclusion. In those circumstances the question of inducement assumes considerable importance. If it is to succeed in its action Zurich will have to persuade the court that it was induced to agree to the settlement by fraud on the part of Mr. Hayward, a task that may not prove easy, given the fact that it already knew enough to justify the service of a defence in the terms indicated earlier.
59. In my view these questions can only be determined after a trial at which the court will have had an opportunity to examine the documents relating to the claim and its settlement and an opportunity to hear evidence from those who were responsible for handling the claim on Zurich's behalf. Although Zurich's action may ultimately fail, that is by no means clear, and in any event I do not think that the proceedings can properly be characterised as an abuse of process.
60. A large part of Mr. Sims' argument depended on the broad submission that the issue of fraud had been "compromised" by Zurich in a way that gives rise to an estoppel. In my view, however, even accepting that Zurich can be treated as a party to the settlement agreement, that proposition calls for careful analysis. The settlement involved an agreement on the part of Zurich and its insured to pay a sum of money to Mr. Hayward in consideration of his agreeing to abandon his claim and consent to a stay of the proceedings. Zurich did not consent to judgment and no decision was made on any of the issues raised in the action (apart from the admission that Mr. Hayward had suffered an injury of some kind). Neither side accepted the other's case in relation to the nature and degree of his injuries. I am not sure, therefore, what is meant by the expression "compromised the issue of fraud", other than that Zurich agreed to pay a sum of money to Mr. Hayward, despite the fact that it disputed his honesty. Nothing in the settlement agreement involved an admission on the part of Mr. Hayward that his claim was exaggerated or an admission on the part of David S. Smith or Zurich that it was genuine; nor did David S. Smith or Zurich agree to withdraw the allegation of exaggeration. It is difficult to see, therefore, how Zurich could be precluded by the agreement from raising the issue of Mr. Hayward's honesty in another context, if it were to become relevant.
61. For these reasons I agree that the appeal should be allowed. With all respect to those who have expressed the contrary view, I do not think that this is a case in which there is tension between the need for finality in litigation and the need to ensure that the court is not misled of the kind mentioned in Owens v Noble [2010] EWCA Civ 224. Such a tension may arise in cases where a judgment is obtained by fraud (although the courts have consistently accepted that a judgment obtained by fraud can and should be set aside), but in the present case the court has made no decision on the substance of the dispute of a kind that could be regarded as final in nature. The only question is whether Zurich can recover the amount it paid to Mr. Hayward on the grounds that it was induced to make the payment by fraud and, if necessary, set aside the settlement agreement and the Tomlin order. That is a question that falls to be decided in accordance with general principles.

Lord Justice Maurice Kay:

62. I too would allow this appeal.
63. I apprehend that the judgments of Smith LJ and Moore-Bick LJ are not entirely ad idem. Although they agree that this is not a case of res judicata or estoppel (however categorised), Smith LJ reaches that conclusion by reference to the circumstances of the case as to which there is a lack of congruence between the allegations in the two cases. Moore-Bick LJ concludes on a more doctrinal basis that a Tomlin order cannot give rise to "an estoppel by res judicata in the proper sense of that expression", although he accepts that "a consent order may give rise to an estoppel by record". As we all agree that none of these concepts avails Mr Hayward in the present case, I shall resist the temptation to engage in further obiter analysis. In any event, it seems to me that the difficulties are partly the result of, or are exacerbated by, excessive or inconsistent taxonomy in the authorities. Whilst I appreciate that the difficulties require resolution, I do not consider that this is the appropriate case for that to be undertaken, following relatively brief submissions on the authorities.
64. Smith LJ and Moore-Bick LJ further agree that this is not a case which calls for a stay as an abuse of process in accordance with the principles expounded by Lord Bingham in Johnson v Gore-Wood & Co. I agree. As Moore-Bick LJ observes, it will be for Zurich to establish its case of fraud at trial.