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Settlement of Employment Disputes – Parties Must Have Capacity

schoolWhat happens if one of the parties to a settlement in an employment dispute does not have the capacity to reach such an agreement? That quandary was considered by the Employment Appeal Tribunal (EAT) in a case that broke new legal ground.

A teacher had accused his local authority employer of harassment, victimisation and direct race discrimination. He complained to an Employment Tribunal (ET) but later withdrew his claim after a settlement was reached. The settlement was on the face of it valid and contractually binding. However, he subsequently applied to the ET to set it aside on the basis that he lacked the legal capacity to instruct his solicitor and make decisions at the time he entered into it. The ET found that it had jurisdiction to consider that application.

In challenging that ruling, the employer argued that the ET had no such power. It was well established that settlements induced through an error or misrepresentation could be set aside by an ET. However, there was no such authority in respect of lack of capacity. The ET’s powers were entirely circumscribed by statute and it could not call upon any broader, common law, jurisdiction.

However, in rejecting the appeal, the EAT found that, on a true interpretation of Section 203 of the Employment Rights Act 1996, the ET was entitled to consider whether the settlement was invalidated by the teacher’s lack of capacity. It was for the ET to decide on the evidence whether its power to set aside the settlement should be exercised.