Court of Appeal confirms that a Record of Settlement can be set aside for mental incapacity

The Court of Appeal has upheld a decision of the Employment Court which found a Record of Settlement can be set aside for mental incapacity in some circumstances

Background

An employee and employer entered into a Record of Settlement which ended the employee’s employment. The Record of Settlement was signed by a Mediator under section 149 of the Employment Relations Act 2000 meaning it was final and binding, and the terms could not be brought before the Authority or Court (except for enforcement purposes). The employee subsequently claimed she had been unjustifiably constructively dismissed.

Employment Court

Chief Judge Inglis found that section 149 limits revisiting the terms of a Records of Settlement, not the validity of the agreement itself. As a result, the Court was able to set aside the Record of Settlement on the grounds of medical incapacity.

The Employment Court found, on the balance of probabilities, the employee was mentally incapacitated when the Record of Settlement was entered into. However, the Chief Judge was not satisfied the employer knew, or ought reasonably to have known, about the mental capacity issue.

As a result, the Employment Court declined to set aside the Record of Settlement applying the orthodox approach – that a contract is voidable for lack of capacity if one party lacks capacity to enter into it, and the other party knows or ought to have known of that mental incapacity.

Court of Appeal (COA)

The employee appealed to the Court of Appeal. The Court of Appeal agreed with the Employment Court that section 149 does not override protections relating to incapacity, duress, or other grounds for contract voidability. Section 149 prevents “agreed terms of settlement” being challenged – but where a Record of Settlement is voidable there is no contract and no “agreed terms of settlement.”

The COA said the orthodox approach – that a contract is voidable for lack of capacity if one party lacks capacity to enter into it, and the other party knows or ought to have known of that mental incapacity – struck the correct balance between respecting parties’ autonomy and protecting vulnerable parties.

Lessons

While section 149(3) of the Employment Relations Act 2000 states that a Record of Settlement is final and binding, this decision confirms that there are exceptions to this when it comes to the capacity of the parties, duress and unconscionability.

Employers should not simply rely on Mediator sign-off. If they know or suspect that an employee has mental incapacity issues, they should not enter into a Record of Settlement with that individual without first obtaining appropriate assurances as to their capacity.

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