Settlements & Mental Capacity

The case of Glasgow City Council v Mr Dahhan UKEATS/0024/15 By Amanda Beattie Employers often use settlement agreements to protect themselves from future liability of court or tribunal claims against an employee or ex-employee. Fundamental to making a legal binding agreement is that both parties must have the mental capacity in order to enter into the contact.

But what happens when there is an issue with mental capacity? Can a Tribunal determine the validity of an agreement?

What are settlement agreements?

Settlement agreements by their nature are legally binding contracts, which are generally used to agree terms when an employment relationship is coming to an end. These agreements can also be used when the employment relationship is ongoing, such as to agree a dispute regarding holiday or sick pay. Once there has been a valid settlement agreement made, the employee will be unable to make claims regarding any type of claims which is outlined in the agreement.

Case background

Mr Dahhan had settled his employment tribunal claim of discrimination, harassment and victimisation by entering into a settlement agreement. The employment tribunal were informed that the claim had been settled and Mr Mr Dahhan was withdrawing his claim.

Accordingly, the tribunal issued a Judgment which dismissed Mr Dahhan’s claim in June 2014. In July 2014, Mr Dahhan informed the tribunal that he wished to apply for reconsideration of the Judgment dismissing his claim on the basis that he did not have the mental capacity to instruct his solicitor or make decisions in relation to the settlement. The Council objected to Mr Dahhan’s application and at a preliminary hearing to determine whether the tribunal had the requisite jurisdiction to decide whether it could set aside the settlement agreement on the grounds of the employee’s lack of mental capacity, the tribunal concluded that it did. The Council then appealed this decision to the Employment Appeal Tribunal (“EAT”).

EAT appeal

The EAT dismissed the Council’s appeal and outlined that when a tribunal is deciding whether they are prevented from hearing a claim which has been settled by a settlement agreement, they are obliged to look at the substance and form of the agreement to assess its validity. The EAT referred to the case of Industrious Ltd v Horizon Recruitment Ltd and the general principle from that provided that an employment tribunal does have the power to set aside a settlement agreement.

Further, the relevant legislation provides a statutory requirement upon the tribunal to consider a settlement agreement’s validity. Therefore, when a party to a settlement agreement claims they did not have the capacity to enter into a contact, there is a duty provided by statute that the tribunal refuse to enforce a settlement agreement, if on the evidence, it is established that a party lacked the capacity to entering into it.

Guidance

Therefore, notwithstanding a purported valid settlement agreement, an employer can continue to be exposed to litigation in relation to the agreement if the employee subsequently claims that they did not have the mental capacity to enter into it. It should also be noted, that this case dealt solely with the issue of whether the employment tribunal could set aside a settlement agreement for lack of mental capacity.

Even though it has been decided the tribunal can do this, it is still subject to a Claimant establishing on the evidence that they did not have the capacity to enter into the agreement and it is only when a Claimant is successful in do so, will a tribunal be obliged to set it aside.