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Settlement agreements – how powerful are they?

Posted
November 10, 2022
Employment Law

Settlement agreements are frequently used to document the arrangements for the termination of a person’s employment and the settlement of any related claims. But just how effective are they?

What is a settlement agreement and why are they used?

A settlement agreement is a formal legal contract under which an employee agrees to settle the claims they may have against their employer, normally in return for a cash payment. Many employment rights are the product of legislation (e.g. the Employment Rights Act 1996 and the Equality Act 2010). In order to bindingly sign away one’s rights, settlement agreements must satisfy the strict legal requirements set out in these acts of parliament. Under section 147 of the Equality Act 2010, a settlement agreement is only effective if it relates to a ‘particular complaint’. This begs the question as to whether a settlement agreement can settle a complaint of which nobody is aware because it has not yet arisen.

Bathgate v Technip UK Ltd and others

In the recent case of Bathgate v Technip UK, after entering into a settlement agreement with his employers, Mr Bathgate fell out with them about the precise sums due to him in relation to his redundancy. When he tried to bring age discrimination claims against Technip, the company argued that he had settled any such claims under the terms of the settlement agreement.  

When the dispute went to the Employment Appeal Tribunal, the EAT considered past cases in this area and concluded that a settlement agreement cannot settle a future claim which is unknown to the parties at the time at which the agreement is signed. It is not enough simply to refer to the settlement of any ‘age discrimination claims’ or ‘claims under section X of the Equality Act 2010’. Instead, the EAT appears to have concluded that the parties need to know and have in their contemplation a specific and particular complaint at the time at which the settlement agreement is signed.

What does this mean?

Settlement agreement frequently seek to broadly settle any and all claims an employee may have against their employer, whether past, present or future. Sometimes, there are no ‘particular complaints’ in the contemplation of the parties when a settlement agreement is signed. Nevertheless, the agreement will often be drafted on the basis that a whole raft of prospective claims are being settled. The capacity for settlement agreements to settle any and all claims has been questioned over the years.  This case seems to contribute to the uncertainty. It casts further doubt on whether settlement agreements will be effective in settling claims which neither party is specifically contemplating at the point at which the agreement is signed.

How should you react?

This case probably ought to alter the way in which both employers and employees assess the likely implications of entering into a settlement agreement. They may be less powerful than they seem. By the same token, such agreements are highly likely to remain a very effective way of agreeing the arrangements for the termination of an employee’s employment and resolving potential legal disputes. They just come with a bit of a health warning, especially for employers, that they are not (and never have been) bullet-proof.

If you need our help with the negotiation and preparation of a settlement agreement, please get in touch.

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