Can a Settlement Agreement be set aside if the employee claims to lack mental capacity?

A Settlement Agreement’s or ACAS COT3 agreement is the only way in which an employee can legitimately waive their employment rights. In this recent Employment Appeal Tribunal case it had to be decided whether an employee who signed a Settlement Agreement, after having had legal advice, could claim they did not have the mental capacity to agree to the settlement terms.

The Law

This case is a unique one in that there have been no previous decisions or authorities on the issue of mental capacity and Settlement Agreements. There have been other cases where an employee has challenged the validity of a Settlement Agreement but for reasons of error or misrepresentation.

The law regarding Settlement Agreements is set out in various Acts which give employees their employment rights.

In this case the relevant legal provision is sections 144 and 147 of the Equality Act 2010 because Mr Dahhan, the employee, was settling his claims for discrimination.

The Facts

Mr Dahhan, the employee, was employed as a Teacher by Glasgow City Council.

On the 17th July 2013 Mr Dahhan made a claim in the Employment Tribunal for direct discrimination, harassment and victimisation on the grounds of race. The proceedings were placed on hold whilst various internal processes took place and eventually a preliminary hearing took place on the 5th June 2014. It was agreed at that hearing that the proceedings would remain on hold until the 7th July 2015.

On the 20th June 2014 the Employment Tribunal was notified that a settlement had been reached and that Mr Dahhan wished to withdraw his claims. The claim was then dismissed, by Judgement on the 24th June 2014.

On the 9th July 2014 Mr Dahhan wrote to the Employment Tribunal stating that he lacked capacity to instruct his solicitor and make decisions at the time of the settlement and that he wanted the Judgement dismissing his claim to be reviewed.

The Employment Judge at Glasgow Employment Tribunal made a decision that the Employment Tribunal did have jurisdiction to set aside a Settlement Agreement.

Glasgow City Council appealed against the decision.

The Decision

The Employment Appeal Tribunal dismissed the appeal and agreed with the Glasgow Employment Tribunal.

It was decided that the Employment Tribunal did have the jurisdiction to set aside a Settlement Agreement in circumstances where an employee argues that they did not have mental capacity to make the contract.

Points to Note

This is a rare and unusual case and it is not something that is likely to happen to you, however it is useful to note that the Employment Tribunal could determine the validity of a Settlement Agreement on the basis of mental capacity.

The case will now return to the Employment Tribunal to hear evidence from Mr Dahhan in order to determine whether he had mental capacity.

In my opinion there are likely to be very few cases where an employee will successfully argue that they lacked mental capacity at the time of agreeing to a Settlement Agreement, as there is a requirement that employees obtain legal advice in order for the settlement to be binding.

Action to take

1. If you are in negotiations with an employee and you feel that there could be an issue with their mental capacity for any reason you should seek advice.
2. If you are considering terms of settlement you should seek advice and ensure that the terms provide you and your business with adequate protection.

Case Name: Glasgow City Council v Dahhan – Employment Appeal Tribunal

Alison@realemploymentlawadvice.co.uk or 023 8098 2006 or 01983 897003.

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