Settlement agreements – different avenues reaching different results

A significant number of employment relationship problems are raised each year, however, many of these problems are not heard before the Employment Relations Authority, or even the Employment Court.  Section 3 of the Employment Relations Act 2000 (the ERA) sets out that one of the objectives of the ERA is to promote mediation as the primary problem-solving mechanism.

While mediation is considered to be a primary problem-solving mechanism, a common method to resolve these issues is parties agreeing to settle the matter prior to/ or after attending mediation.  This can be achieved through one of two main avenues:

1. the parties enter into a record of settlement with a mediator under s149 of the ERA; or
2. the parties enter into a record of settlement without a mediator sign off.

The main difference between the options listed above is that when the record of settlement is signed by a mediator there are limited circumstances where the settlement can be overturned.

Section 149 Record of Settlement

A record of settlement that has been entered into under s149 of the ERA also provides additional protections, such as minimum terms that must be included, these are contained in s149(3) that upon mediator sign off:

(a)      the terms are final and binding on, and enforceable, by parties;

(ab)   the terms may not be cancelled under ss36 to 42 of the CCLA; and

(b)     except for enforcement purpose, neither party can seek that the terms of the agreement are brought before the Employment Relations Authority, or the Employment Court.

The most significant restriction is s149(3)(ab). This section prevents a party from cancelling the contract under the Contract and Commercial Law Act 2017 (CCLA).

The Court of Appeal in TUV v Chief of New Zealand Defence Force considered s149(3)(ab) and acknowledged that the wording of this section may have the surprising and unintended consequence of precluding cancellation of a settlement agreement even if it was entered into as a result of through fraud, or innocent misrepresentation was made.[1]  It is not clear if this was intended by Parliament.  Section 149 of the ERA provides minimal protections in these circumstances.

This arguably runs contrary to the object of the ERA which looks to build productive employment relationships, through the promotion of good faith.

Voiding a s149 Record of Settlement

While the Courts have confirmed you cannot cancel a contract under the CCLA, they can still be found void.  A void contract is one that is found to be entered into illegitimately and is invalid.  The Court of Appeal confirmed this position in TUV by stating it would be abhorrent if a settlement agreement had been procured through duress and it was enforceable simply because it had received a mediator sign off.[2]

Two methods of voiding a contract which have been explored in the context of employment law are:

1. duress; or
2. lack of capacity.

Duress

For duress to apply, a party to the signed record of settlement would need to prove that:

1. a threat, or pressure was placed on the victim;
2. that threat and or pressure was improper;
3. the threat or pressure imposed on the victim was so extreme that the victim’s free will and judgment was displaced;
4. the threat or pressure induced the victim into entering the agreement;
5. the victim had no reasonable alternative due to the grave nature of the threat and or pressure.

Duress was considered by the Employment Court in Tinkler v Fugro PMS Pty Ltd & Pavement Management Services Ltd.[3]  The Employment Court found that no duress was present, as the employee was unable to establish that a threat was made in the first place.  The Court relied on the employee’s failure to raise any concerns of the alleged threat to their lawyer, or with the mediator when contacted prior to the record of settlement being signed.

An employee who feels that they have acted under duress needs to raise these concerns to parties involved. Failure to say anything, as was the case in Tinkler, will likely result in the claim failing.

Lack of capacity

In 2015, Chief Justice Colgan left the door open to void a record of settlement, as a matter of public policy, if a party lacked mental capacity.

The Supreme Court in TUV v Chief of New Zealand Defence Force[4] held that if a party could establish that, at the time of entering into the agreement they did not have mental capacity to enter the record of settlement, and the other party knew, or had imputed knowledge of the mental incapacity then the contract may be voided.  To successfully argue this before the Authority or Court a two-limb tests set out in O’Connor v Hart needs to be satisfied.[5]

1. the applicant lacked mental capacity at the time of entering into the transaction; and
2. the respondent knew, or ought to have known of that lack of capacity.

Difficulties may arise in proving one party had actual or imputed knowledge of the persons mental incapacity.  This becomes especially difficult to prove in cases where:

1. the parties have come to a s149 agreement after attending mediation;
2. the applicant was represented at the time; and
3. no concerns of mental incapacity were raised at any time prior to entering the agreement.

Learning

It may be beneficial for employers and employees to enter a record of settlement with a Mediator under s149 as it minimises the possibility of the matter being re litigated.  If one party enters the agreement as a result of a misrepresentation (fraudulent or innocent) the law as it currently stands provides little protection.  However, it may still be possible to overturn the record of settlement if there duress, or lack of capacity can be established.

Standard (non- s149) Record of Settlement

A record of settlement that has not been entered into under s149 – is governed by the CCLA and other common law principles.  These agreements can therefore be cancelled under ss36 – 42 of the CCLA.  These situations include but are not limited to.

1. misrepresentation; and
2. repudiation.

Despite these agreements being outside the realm of the ERA, the Supreme Court in FMZ v TZB confirmed that if a breach of a record of settlement arises from an employment relationship, then the matter must be brought to the Employment Relations Authority, or the Employment Court.[6]

Settlements entered outside the sphere of the ERA are not bound to have any specific terms and conditions and provide the parties freedom to include or exclude any terms they please.

In 2022, Alexandria Till – Employment Partner at Harkness Henry – successfully argued before the Employment Court in the case of Butts v Attorney General that a record of settlement that was not entered into under s149 of the ERA should be overturned due to misrepresentation.[7]

The misrepresentation claimed by the Butts was that a ‘half-truth’ made by the Ministry of Health created an “erroneous picture”.[8]

The Butts submitted that the factual matrix in the lead up to settlement negotiations resulted in the Ministry of Health being on notice that payment for training of care providers was a critical aspect of any settlement. The Butts argued that counsel for the Ministry of Health failed to expressly state that Mrs Butt would not be paid for any training giving rise to a half-truth and a misrepresentation.

Justice Beck held the plaintiffs were induced into entering the contract as a result of the above half-truth.  The effect of this misrepresentation substantially reduced the plaintiff’s benefit in entering the agreement, allowing them to cancel the contract and proceed with their claim.

Learning

Employers and employees should consider which form of settlement best suits their need prior to use, nothing that settlements outside the scope of the ERA do not have the same protections as section 149 agreements and can be cancelled under the CCLA, therefore reopening the matter to future litigation.

Enforcement

Finally, parties should also consider the ease and cost of enforcement before determining what type of record of settlement to use. A s149 record of settlement will be enforced through the Employment Relations Authority, whereas a non- s149 record of settlement may be enforced in the District Court or the Employment Court (with recent decisions suggesting the Employment Court will be the directed forum). The ability to enforce or void the record of settlement considering the factors in this article should be considered along with cost and delay of proceedings.

If you require advice around raising/responding to a PG, negotiating or settling a dispute related to Employment Law, then please contact one of our specialists in the Employment team including, Alexandria Till and Brett Edwards.

[1] [2020] NZCA 12.

[2] Ibid at [44].

[3] [2012] NZEmpC 192, (2012) 10 NZELR 74.

[4] [2022] NZSC 69.

[5] [1985] 1 NZLR 159 (PC).

[6] FMV v TZB [2021] NZSC 102.

[7] [2022] NZEmpC 183.

[8] Ibid.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.