Setting Aside A Settlement Agreement Image

Settlement Agreements: The Circumstances in Which They Can Be Set Aside

Setting aside a settlement agreement can be pursued on a number of grounds.

Grounds For Setting Aside A Settlement Agreement

The grounds for setting aside a settlement agreement are as follows:-

  • Misrepresentation in relation to a material fact
  • Incapacity of one of the parties (e.g. a minor or a person with a mental disorder)
  • A fundamental mistake has been made that makes it impossible for the parties to fulfill the terms of the settlement agreement
  • Illegality of the settlement agreement
  • Duress and undue influence

There have been some important recent cases in several of the above categories. This has provided some clarity in relation to the issue of setting aside a settlement agreement

Fraudulent Misrepresentation

A recent example in which it was argued that a settlement agreement should be set aside on the grounds of fraudulent misrepresentation, was the case of Hayward v Zurich Insurance Company plc [2016] UKSC 48.

Underpinning this area of law is the tort of deceit. To establish it, it must be shown that the employee made a material fraudulent misrepresentation with the intention of, and which ultimately did, induce the employer to enter into the settlement agreement.

The issue of inducement was at the heart of the Hayward case. At the time it entered into the settlement agreement, the employer (and its insurers) suspected that the employee had exaggerated their work injury claim. However, they had no evidence to support these suspicions at that point. Only after entering into the settlement agreement, did the employer receive sufficient evidence from the employees neighbours. However, the Court of Appeal overturned a first instance decision to set aside the settlement agreement, on the grounds that the employer (and its insurers) had suspicions of fraud at the time they signed the settlement agreement. On appeal, however, the Supreme Court overturned this ruling and held that a settlement agreement could be set aside, even where the employer had suspicions of fraud at the time they entered into the settlement agreement. The Supreme Court held that it was sufficient to show that the fraudulent misrepresentation was “a material cause” which induced the decision to enter into the settlement agreement. That is, an employer may not believe the misrepresentation and may suspect fraud. However, if there is insufficient evidence to support these suspicions, then an employer may well decide to settle on the basis that a court would be likely to believe the misrepresentation. On this basis, the misrepresentation was the material cause in the Hayward case, which induced the employer to enter into the settlement agreement. Hence, a settlement can therefore be set aside when fraud is later ultimately established. Indeed, Lord Clark, who provided the lead judgment in the Hayward Supreme Court case, stated that: “it is difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established”.

Mental Incapacity

In 2016, the Employment Appeal Tribunal (EAT) held in the case of Glasgow City Council v Dahhan UKEATS/0024/15/JW, that Employment Tribunals do have jurisdiction to set aside settlement agreements on the grounds that a party to it did not have sufficient mental capacity to enter into it and contract, thereby rendering it invalid.

In the Dahhan case, Mr Dahhan had settled an Employment Tribunal case which he had brought against Glasgow City Council before it reached a final hearing, and on that basis his case was withdrawn and dismissed. However, Mr Dahhan later applied to the Tribunal to have the judgment in which his case had been dismissed reconsidered, and the settlement agreement set aside, on the grounds that he lacked mental capacity to contract at the time he entered into the settlement agreement. The Employment Tribunal set aside the settlement agreement. However, Glasgow City Council appealed to the EAT. Referring back to its earlier decision in Industrious Ltd v Horizon Recruitment Ltd & Anor (2009), the EAT held that an Employment Tribunal does have the power to set aside a settlement agreement, as it is under a statutory obligation to ensure that settlement agreements are valid under s203 Employment Rights Act 1996 and s144-147 Equality Act 2010. Furthermore, to be valid, the parties must have mental capacity. Accordingly, if a party does not have mental capacity to contract, then an Employment Tribunal has jurisdiction to set the settlement agreement aside on the grounds that it is invalid.

Economic Duress

Following the introduction of Employment Tribunal fees in July 2013, one interesting area that remains untested is that of economic duress as a reason for setting aside a settlement agreement.

In the case of Hennessey v Craigmyle (1986), the Court of Appeal held that settlement agreements could be set aside on the grounds of economic duress in circumstances where the employee was under such economic pressure to enter into the agreement, that it did not constitute a voluntary act. Later, in the case of Sphiks v Porter (1996), economic duress was defined by the EAT as a mixture of pressure brought about by financial circumstances, and the lack of realistic choices for resolution. In the Hennessey case, the Claimant brought an Employment Tribunal claim, despite having earlier entered into a settlement agreement. Whilst the Employment Tribunal agreed to set aside the settlement agreement (compromise agreement, as it was known then), this was later overturned by the EAT, which held that financial pressure does not constitute economic duress in all cases, as inexpensive and expeditious Employment Tribunal proceedings offered a realistic alternative to entering into a settlement agreement. Hence, the EAT held that in the Hennessey case, and in most cases, there was realistic choice, and therefore no economic duress.

However, since the introduction of Employment Tribunal fees in July 2013, the EAT’s conclusions are quite simply no longer valid. With the introduction of fees, Claimant’s are now expected to pay up to £1,200.00 to pursue a case. For many, this is completely unaffordable. Hence, the option of bringing an Employment Tribunal case is no longer a realistic alternative for many, to entering into a Settlement Agreement. Accordingly, it is arguable that a case like Hennessey would now succeed in the era of Employment Tribunal fees. Nevertheless, this has yet to be tested. However, should Employment Tribunal fees not be scrapped, then sooner or later, it is likely to be tested.

Posted in General Employment Law, Settlement Agreements and tagged , .