Employment Cases Update

Glasgow City Council v Dahhan UKEATS/0024/15/JW

Date published: 05/10/2016

Appeal against a decision that the ET had jurisdiction to set aside a settlement agreemnet on the basis that it was invalid because the Claimant did not have contractual capacity at the time of signing. Appeal dismissed.

The Claimant's claims were dismissed after he withdrew them following the signing of a settlement agreement between him and the Respondent. He then sought a reconsideration of the decision to dismiss his claims if and when the settlement agreement was set aside. The ET set aside the settlement agreement and the Respondent appealed, saying that the ET had no jurisdiction to set aside the settlement agreement, arguing that the position as set out by Silber J in Industrious Ltd v Horizon Recruitment Ltd (in liquidation) and Vincent did not extend to agreements where the alleged invalidity was due to capacity.

The EAT dismissed the appeal. A distinction between agreements induced through error or misrepresentation and those purportedly entered into by a party who lacked capacity is artificial and unsound. The relevant legislation requires the Employment Tribunal to consider the validity of any purported settlement agreement. Only if it is valid both in form and in substance will the Tribunal's jurisdiction to determine the claim be ousted.

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Appeal No. UKEATS/0024/15/JW

EMPLOYMENT APPEAL TRIBUNAL

52 MELVILLE STREET, EDINBURGH, EH3 7HF

At the Tribunal

On 11 May 2016

Before

THE HONOURABLE LADY WISE

(SITTING ALONE)

GLASGOW CITY COUNCIL (APPELLANT)

DAHHAN (RESPONDENT)

JUDGMENT

APPEARANCES

For the Appellant
Mr B Napier (One of Her Majesty's Counsel) Instructed by:
Glasgow City Council
Legal Services
City Chambers
George Square
Glasgow
G2 1DU

For the Respondent
Mr D Hay (Advocate)
Instructed by:
Bridge Litigation UK
Carlton Building
63 Carlton Place
Glasgow
G5 9TW

SUMMARY

On appeal against the decision of the Employment Tribunal that it had jurisdiction to set aside a settlement agreement on the ground that the claimant lacked capacity to contract, it was argued that the position as set out by Silber J in Industrious Ltd v Horizon Recruitment Ltd (in liquidation) and Vincent did not extend to agreements where the alleged invalidity was due to capacity.

A distinction between agreements induced through error or misrepresentation and those purportedly entered into by a party who lacked capacity is artificial and unsound. The relevant legislation requires the Employment Tribunal to consider the validity of any purported settlement agreement. Only if it is valid both in form and in substance will the Tribunal's jurisdiction to determine the claim be ousted.

THE HONOURABLE LADY WISE

Introduction

1. In a judgment dated 18 February 2015 and promulgated the following day, employment judge Shona MacLean, sitting in Glasgow, made a determination that the Employment Tribunal has jurisdiction to set aside the settlement agreement between the parties dated 19 June 2014 on the ground that it was invalid because the claimant did not have capacity to contract at the time of signing. I shall refer to the parties as the claimant and respondent as they were in the Tribunal below. At the hearing before the employment judge and before me the claimant, Mr Dahhan, was represented by Mr David Hay, Advocate. The respondent, Glasgow City Council, was represented on both occasions by Mr Brian Napier, QC.

2. The issue in this appeal is apparently a novel one, namely whether the Employment Tribunal has power to set aside a purported settlement agreement on the basis that one of the signatories to the agreement lacked the capacity to enter into it. While there are a number of authorities, particularly in England, in relation to the power of the Employment Tribunal to set aside settlement agreements, none of those has related to contractual capacity as opposed to an absence of agreement through essential error or misrepresentation.

Background

3. The background is set out in the judgment of the employment tribunal but I will summarise it briefly here. On 17 July 2013 the claimant, who was employed as a teacher by the respondent, presented a claim against Glasgow City Council of direct discrimination, harassment and victimisation on grounds of the protected characteristic of race. The claims were resisted and proceedings were sisted pending internal procedures. On 5 June 2014 after a Preliminary Hearing it was agreed that the proceedings would remain sisted only until 7 July 2014. On 20 June 2014 the Tribunal was advised that settlement had taken place and that the claimant accordingly wished to withdraw his claim. Accordingly, employment judge MacLean issued a judgment on 24 June 2014 dismissing the claims under Rule 52 of the 2013 Regulations, the claim having been withdrawn by the claimant. On 9 July 2014 the claimant wrote to the Tribunal advising that he had lacked capacity to instruct his solicitor and to make decisions at the time of the purported settlement. He wished to apply for reconsideration of the judgment of 24 June 2014 if and when the settlement agreement was set aside. The respondent objected to the claimant's application, that led to a preliminary hearing to consider the Tribunal's jurisdiction to set aside the settlement agreement. The judgement appealed against was issued following that preliminary hearing.

Argument for the Appellant and Respondent

4. Mr Napier, QC confirmed that it was accepted on both sides that the settlement agreement in question was an ex facie valid settlement agreement in terms of sections 144 and 147 of the Equality Act 2010. It was a contract to settle the dispute between the parties, the claimant having had the benefit of advice. Accordingly the settlement agreement was on the face of it binding, subject to the claimant's assertion now that he agreed to withdraw his claim at a time when he lacked capacity. The content of the agreement involved the claimant agreeing to give up all claims arising from his contract of employment with the respondent, whether under statute or at common law, subject to exceptions in respect of (a) actions to enforce the agreement itself; (b) personal injury claims not apparent at the time of signing; and (c) pension entitlement claims. It was noteworthy that the breadth of the agreement extended not only to claims for unfair dismissal and discrimination but also to claims that could be made because of the employer's breach of implied duties of good faith within the employment context. The intention appeared to be to exclude all present and future claims arising from the employment relationship. That would include, for example, a claim brought against the respondent alleging breach of its duty of confidentiality. Thus there was potential exposure for the respondent to contract based claims that extended far beyond the matters that fell within the remit of the Employment Tribunal. The Employment Tribunal's jurisdiction is a statutory one. While there is contractual jurisdiction in respect of a breach of contract of employment, that contractual jurisdiction is limited to circumstances where a contract of employment has terminated. Other types of contractual claims arising from the employment relationship are specifically excluded by statute – section 3(3) Employment Tribunals Act 1996 ("ETA") and articles 3 and 5 of the Employment Tribunal Extension of Jurisdiction (Scotland) Order 1994.

5. Mr Napier submitted that there was a difference between the previous provision on settlement agreements in section 203 of the Employment Rights Act 1996 ("ERA 1996") and sections 144 and 147 of the Equality Act 2010. The issue about setting aside agreements on the basis of a lack of capacity to contract could only arise unto the 2010 Act. The 1996 Act required a settlement agreement to be in writing but did not specify a contract as such. It was possible to reach agreement with someone who is intoxicated or with a child but a contract could only be entered into by someone holding capacity to contract. The difference in the effect of a lack of capacity in Scots and English law was also noted although that was said not to be of the essence of the matter.

6. The development of the law in relation to the Employment Tribunal setting aside settlement agreements was said to be usefully summarised in Harvey on Industrial Relations and Employment Law, Division P1 at paras 704-725. The issue of jurisdiction to set aside such agreements had developed since the early case of Eden v Humphries & Glasgow Ltd [1981 ICR 183 in which the EAT had held that it had no power to set aside an agreement compromising an appeal and that the only way in which such an agreement could be set aside was by separate action. The current position is contained in the more recent decision of Industrious Ltd v Horizon Recruitment Ltd (in liquidation) and Vincent [2010] IRL 204 EAT in which Silber J, having reviewed the various authorities decided that there was nothing in the relevant legislation that precluded the Tribunal from performing the task of ensuring that any purported compromise agreement was valid. It was accepted on behalf of the respondent that, under the law as it now stands, the Tribunal has power, in certain circumstances, to set aside an agreement where there is an absence of consent of a party, because of misrepresentation, economic duress or mistake. That is the effect of the decision in Industrious Ltd. However, Mr Napier argued that the law had not and should not develop further than that. Save in so far as now accepted as exceptions, the jurisdiction of the Employment Tribunal was strictly limited to that given by statute. That was consistent with the decision in Eden v Humphries & Glasgow Ltd and also with dictum of Lord Johnson in Secretary of State for Scotland v Mann and Another [2001] ICR 1005. In the case of Industrious Ltd, Silber J had sought to explain the decision in Eden v Humphries & Glasgow Ltd partly on the basis that section 203 of the 1996 Act had not been in existence when the case was decided. However, as section 203 of the 1996 Act had no bearing on contractual capacity that was of no moment. What mattered was that the issue in Eden was that a party alleged medical reasons and a failure to understand the significance of the agreement in the set aside claim that was rejected beyond the powers of the EAT. In Mr Napier's submission, one should guard against extending such ability as the ET now had to set aside agreements to situations where it was being asked to make a finding on capacity. A capacity finding goes to status and potentially other areas of law. For example, it would be difficult for a court in a family matter to fail to take account of a finding of lack of capacity by the Employment Tribunal at the material time. Any argument that, because there is now jurisdiction to set aside agreements on the basis of misrepresentation, jurisdiction could be extended to situations of lack of capacity would be flawed. The test was a different one. In Dunhill v Burgin [2014] 1 WLR 933, albeit in a different context, Lady Hale in the UK Supreme Court had emphasised the importance of upholding agreements validly entered into.

7. Mr Napier submitted further that it was important that the terms of the settlement agreement in this case went far beyond the matters in respect of which the Employment Tribunal has jurisdiction. The employment judge in this case acknowledges (at paragraph 45 of her judgment) that if the settlement agreement were to be set aside it would not be possible to restrict that consequence to areas in which it had jurisdiction. It was submitted that such a conclusion was correct but militated against accepting jurisdiction to set aside an agreement of this sort. It was noted that in Greenfield v Robinson [1996] UKEAT 811 Mummery J rejected the proposition that the tribunal had no jurisdiction to set aside an agreement disposing of proceedings "... over which it alone has jurisdiction". Those views were specifically endorsed by Silber J in Industrious. Accordingly, one could distinguish a situation where an agreement related solely to matters over which the Tribunal had jurisdiction and were all encompassing agreement such as that involved in the present case. As a fall-back position, Mr Napier argued that even if there was the power argued for by the claimant in this case a possible restriction would be available of setting aside the agreement but only in so far as the matters over which the Employment Tribunal had jurisdiction were concerned. The fact that no other proceedings are contemplated between the parties to this dispute should not drive the decision on jurisdiction.

8. It was also argued that the employment judge had misunderstood the position by finding that the Tribunal had jurisdiction to consider the validity of the settlement agreement "under common law" (paragraph 47). As already submitted, the jurisdiction of the Employment Tribunal is entirely dependent upon statute. The appeal should be allowed and an order substituted that the Employment Tribunal has no jurisdiction to set aside this contract.

Argument for the Claimant and Respondent

9. Mr Hay, advocate, suggested that the question to be addressed in this case was the source of the jurisdiction for the Employment Tribunal to consider the validity of an agreement. That source was initially section 203 of the Employment Rights Act 1996, which provision was headed "settlement agreements". From the coming into force of that provision, "settlement agreement" was treated as a term of art sufficient to embrace every aspect of validity. While it was accepted that the Employment Tribunal, as a creature of statute, has no inherent common law jurisdiction, it has jurisdiction conferred upon it to consider whether or not it should give effect to a settlement agreement through the wording of section 203 of the 1996 Act and now section 144 of the Equality Act 2010. That position was supported by decisions of the Court of Appeal and Employment Appeal Tribunal in England. In Greenfield v Robinson 1996 UKEAT 811 the power to set aside an agreement was expressed by Mummery J in general terms. No distinction was made between the different classes of validity. No distinction could properly be drawn between an agreement under section 203 of the 1996 Act and a contract under sections 144 and 147 of the 2010 Act. The jurisdictional impact was the same. Further, while the effect of lack of capacity to contract differed as between Scotland and England that mattered little as the issue was jurisdiction to explore challenges to an agreement or contract compromising an action before the Tribunal.

10. It was submitted further that the task facing a tribunal under these provisions was conceptually similar to the defensive exception that was available in the sheriff court using the general plea of ope exceptionis at a time when reduction was an incompetent remedy in the sheriff court and fell within the exclusive jurisdiction of the Court of Session. A party in sheriff court proceedings was entitled to plead invalidity (nullity) as a defence to an aspect of proceedings founded upon an unenforceable writing. In such proceedings the court would apply the common law of Scotland to the effectiveness or validity of the document in question. The situation was much the same here. While the expression used by the employment judge in relation to common law was to some extent inapposite, what mattered was the power of the Tribunal, emanating from statute, to address the validity or otherwise of a document put before it. Such an approach was entirely consistent with the line of reasoning adopted by Silber J in Industrious Ltd v Horizon Recruitment Ltd (in liquidation) and Vincent. In particular the word "agreement" in section 203 (or "contract" in section 144) must mean a valid agreement. The Employment Tribunal has to ensure that any purported settlement agreement is valid. It would be a curious and undesirable result if a document that was void in terms of the law of Scotland and thus a nullity would nonetheless require to be enforced by the Employment Tribunal here provided it complied with the statutory requirements of sections 144 and 147 of the 210 Act. Further, it would be unsatisfactory for the claimant to be able to argue lack of mental capacity to contract in the English Employment Tribunal without objection on the basis that such a contract would be considered voidable rather than void there, but be unable to do so in the Employment Tribunal in Scotland. There was no limitation or qualification to the categories of invalidity that could be considered by the Tribunal. There was no sound reason for so limiting the field of potential invalidities. There was no basis for the suggestion that any limitation should operate so as to permit the Tribunal to consider questions of voidable contracts but not contracts that were purportedly void. A voidable contract is valid until rescinded – McBride, The Law of Contract in Scotland 3rd edition paras 13-21 to 13-23. In contrast, a void contract is null ab initio – Gloag on Contract at page 531. It would seem strange for the Tribunal to require to give effect to a contract which is enforceable in law until rescinded by one of the parties but be unable to acknowledge that a void contract was a nullity. It could be argued that greater judicial interference on the part of a tribunal was required to decline to give effect to an otherwise valid contract than to acknowledge that a contract never had the status of a binding obligation from the outset. The legal systems of both Scotland and England recognise the concepts of void and voidable contracts and it would be artificial to differentiate between the two in a way that would demand Scottish Tribunal to depart from the reasoning of Industrious. It was acknowledged that Underhill J had sounded a warning note as to the wariness of tribunals embarking down the road of trying to investigate a party's mental capacity to litigate in Johnson v Edwardian International Hotels Ltd [2008] UKEAT 0588, but that observation must be seen in the context of the ratio of the decision which was whether it was appropriate for an employment tribunal to investigate a party's capacity to litigate before it. No issue of the invalidity of written contracts arose in that case and the dictum in question was accordingly of limited assistance.

11. Turning to the respondent's argument that the Tribunal erred in its conclusion given that the terms of this particular settlement agreement included bases of action not justiciable in the Employment Tribunal, it was accepted that the conclusion of the Tribunal finding that such a settlement agreement was unenforceable for want of mental capacity would not result in a decree or other order formerly revoking the document. Such a conclusion could nonetheless found a plea of res judicata in another forum. Much would depend on whether the issue litigated and decided upon in the Employment Tribunal was the same as that litigated in subsequent proceedings in another forum in accordance with the requirements for a plea of res judicataEsso Petroleum v Law 1956 SC 33. However, it was contended that such consequences did not give rise to any difficulties in the course proposed on behalf of the claimant. It was important to recognise that in appropriate circumstances the plea of res judicata would be available to either party involved in the litigation. The single action rule in Scots law would appear to exist in employment related proceedings – British Airways v Boyce 2001 SC 510.

12. Mr Hay contended that the respondent's approach was flawed in so far as it sought to distinguish capacity to contract from other matters such as error or misrepresentation that could lead to an agreement being set aside. The issue of capacity had to be judged in relation to the decision or activity in question and not globally – Dunhill v Burgin 2014 1 WLR 933 at paragraph 13.

Discussion

13. It is instructive first to consider the relevant statutory provisions concerning settlement agreements in the context of disputes before the Employment Tribunal. The provision in force at the time of the relevant cases culminating in that of Industrious Ltd v Horizon Recruitment Ltd was section 203 ERA 1996. In so far as material, it provided that:

"(1) Any provision in an agreement ... is void in so far as it purports;

...

(b) to preclude a person from bringing any proceedings under this Act before an Employment Tribunal ...

(2) Sub-section (1) does not apply to any agreement to refrain from instituting or continuing any proceedings ... if the conditions regulating compromise agreements under this Act are satisfied in relation to the agreement."

14. In broad terms the conditions referred to in sub-section (2) were that that agreement had to be in writing, relating to particular proceedings and following independent advice being given to the employee with the agreement carrying a statement to that effect.

15. The provision now in force, section 144 of the Equality Act 2010 provides, in so far as material, as follows:

"(1) A term of a contract is unenforceable by a person in whose favour it would operate in so far as it purports to exclude or limit a provision of or made under this Act ...

(4) This section does not apply to a contract which settles a complaint within section 120 if the contract –

(a) is made with the assistance of a conciliation officer, or

(b) is a qualifying settlement agreement."

(The term "settlement agreement" was substituted by the (Enterprise and Regulatory Reform Act 2013) section 23(5)).

16. The term "qualifying settlement agreement" is defined in section 147 of the 2010 Act. In essence, again the contract requires to be in writing, relating to the particular complaint, signed following independent advice received by the employee with the contract stating in terms that such advice has been received.

17. What is immediately apparent is that the scheme of the provisions in both pieces of legislation is to impose a rule that a contract is either void or simply unenforceable unless certain specified conditions are satisfied. Only if those conditions are satisfied will the Employment Tribunal be released from the responsibility to determine a claim before it. The significance of that, in my view, is that, absent a qualifying settlement agreement being valid in both form and substance, the Employment Tribunal cannot dismiss the claim on the basis that it has settled.

18. It has to be acknowledged that both the Employment Tribunal and the Employment Appeal Tribunal are bodies created by statute and that their powers are therefore limited to those bestowed by the legislation. The decision in the case of Eden v Humphries & Glasgow Ltd was that in the absence of a specific statutory power to set aside an agreement compromising an appeal before the Employment Tribunal, no such setting aside order could be made. Mr Napier argued that the explanation given by Silber J in Industrious Ltd, that Eden v Humphries & Glasgow Ltd had been decided before section 203 of the 1996 Act was enacted did not assist in determining the approach to be taken to contracts to which the Equality Act 2010 applies. However, standing the scheme of the provisions both in the 1996 Act and now in the 2010 Act, the distinction made by Silber J is in my view a valid one. Until such time as the Employment Tribunal was required to consider the terms of a settlement agreement and decide whether it was sufficient effectively to oust jurisdiction of an ongoing complaint on the basis of a compromise settlement, there was no statutory power to set aside such an agreement. The power to set aside such agreements arises from the statutory requirement upon the Tribunal to consider its validity. As Silber J put it in Industrious Ltd:

"...s.203(2) of the ERA permits the parties to make valid compromise agreements but the word 'agreement' must mean a valid agreement and the Employment Tribunal has to ensure that any purported compromise agreement is valid."

19. Both sides accepted in argument before me that following the cases of Greenfield v Robinson and Industrious Ltd v Horizon Recruitment Ltd (in liquidation) and Vincent the Employment Tribunal does have jurisdiction to set aside agreements at least in relation to matters over which it has jurisdiction. The real issue in this case is whether what the claimant seeks to do in this case is an extension of that power. If so, standing that the Employment Tribunal's powers are limited to those conferred by statute, is such an extension permissible?

20. In my view, the distinction proposed by Mr Napier in this case is artificial and unsound. Once it is accepted that the analysis of Silber J in Industrious Ltd is correct to the extent that the obligation on the Tribunal when presented with a proposed settlement agreement is to consider whether it is valid, there is no sound basis for drawing a distinction between invalidity on the ground of, say, misrepresentation on the one hand and invalidity on the ground of lack of capacity to contract on the other. Both sides were agreed that the distinction between Scots and English law rendering contracts entered into through lack of capacity void in the former but voidable in the latter were not material to determination of this issue. It is of course the case that none of the decided cases have required to address the particular question of whether the Employment Tribunal has jurisdiction to set aside an agreement said to have been entered into where one party to the contract lacked legal capacity. However, I agree with the submission made by counsel for the respondent that it would be a strange, even illogical result if a Tribunal was required to decline to give effect to the contract entered into through misrepresentation that was otherwise valid but could not refuse to enforce a contract that was a nullity (at least in Scots law) from the outset.

21. It may be that the Employment Judge in this case misunderstood the position to some extent when she suggested that the power of the Tribunal to set aside the contract somehow emanated from the common law. The power, indeed the obligation, to consider the validity or otherwise of a qualifying settlement agreement emanates from the statute itself. It seems to me that that was the general principle articulated by Silber J in Industrious Ltd v Horizon Recruitment Ltd. Where a claim is made that one party to an otherwise ex facie valid agreement had no capacity to contract, the duty of the Employment Tribunal to examine that issue and refuse to acknowledge as enforceable the agreement, if on the evidence led a lack of capacity is proved, is all part of the exercise laid down first in the 1996 Act and now in the 2010 Act.

22. So far as the res judicata point is concerned, there are of course one or two aspects of the contract involved in the present case which go beyond the specific issues being litigated before the Employment Tribunal. But where a challenge is being made to the validity of the contract itself, whether through misrepresentation or as in this case a lack of capacity, it is necessarily the whole contract that is challenged. I do not regard the dictum of Mummery J in Greenfield v Robinson as restricting the power to set aside such agreements to those parts of the contract that specifically relate to the enumerated claims before the Tribunal. Where the contract is said to be a nullity, its component parts will stand or fall together. It would then be open to either party, in appropriate circumstances, to take a res judicata point in any subsequent litigation which would have to be dealt with on its own merits.

23. For these reasons I consider that the Employment Judge was correct in the conclusion that she reached and did not err in law in deciding that the Tribunal had jurisdiction to consider and determine the issue of the validity or otherwise of this agreement. The appeal is dismissed.