Employment settlement agreements can be set aside...

When a dispute arises in the workplace it is common for an employer and employee to reach an agreement, with or without mediation assistance, to resolve the issue (also known as a settlement agreement or Record of Settlement).

A settlement agreement is legally binding and enforceable on the parties. A party may only bring the terms of a settlement agreement to the Employment Relations Authority to enforce it. The settlement agreement cannot be cancelled due to repudiation, misrepresentation or breach. However, a recent case has indicated that a settlement agreement can potentially be set aside due to mental incapacity of a party.

After a dispute arose in the workplace the employer and employee reached an agreement on how to resolve the dispute and signed a settlement agreement. The mediator discussed the settlement with each party and was satisfied that each party understood the effects of the binding and enforceable agreement, and was willing to enter into the agreement.

The employee then made a claim to the Employment Relations Authority (ERA) alleging that she had been unjustifiably dismissed. The Employment Relations Authority and the Employment Court did not set aside the settlement agreement.

The employee once again appealed, this time to the Court of Appeal. The employee claimed that she did not have mental capacity to enter into the settlement agreement.

The Court said that issues of mental capacity may be grounds to set aside a settlement agreement. However, it is not enough that one party lacks mental capacity to enter into the settlement agreement. The other party must know, or ought reasonably to have known, that the other party lacked mental capacity.

In this case the employee was represented by a lawyer, entered into what was described as “an unremarkable” settlement agreement, and no issues about the employee’s mental capacity had been raised with the employer. The employer was, therefore, unaware of the mental capacity issue and ought not to have reasonably known.

As a result, the employee failed to set aside the settlement agreement.

While a settlement agreement can be set aside, this case shows that it can be very difficult to do so. Before signing a settlement agreement, a party should ensure that they fully understand the contents of the agreement as well as the effects of a legally binding agreement.

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