Compromise Agreements – The End Of The Line?
The completion of a statutory compromise agreement is often seen as drawing a line under an employment relationship, the point where the employer can breathe a sigh of relief and turn its mind to better and brighter things. But is that view necessarily justified? In this article we consider the circumstances in which a completed compromise agreement may quite legitimately be challenged, circumvented or simply ignored.
In essence, and despite its statutory origins and the bells and whistles attached to it, a compromise agreement is just a contract. At common law, a contract may be invalidated if either party was induced to entered into it by misrepresentation, mistake or duress. As well as the transparent desire to save Government money by reducing ACAS's workload, part of the thinking behind the introduction of the statutory compromise agreement system (whereby the employee must receive independent advice) was to reduce the scope for just such arguments by dismissed employees. Certainly an advised employee's ability to claim that he made a mistake in signing up has been more or less extinguished. Nonetheless, misrepresentation remains a live issue and allegations of duress do raise their head from time to time. In addition, a compromise agreement will be invalid if it fails to satisfy any of the stringent conditions as to form and content set out in Section 203 ERA 1996, almost however technical the failure.
An employee is made redundant. The independent adviser acting on his behalf asks the employer whether any alternative positions exist which his client could have taken up, potentially the difference between a fair and unfair dismissal. The employer says no - on that basis the dismissals seems likely to be fair, the employee is advised accordingly and the compromise agreement is signed for a limited sum. The employee then discovers that the employer was wrong - there was a job he could and would have done. Had he known this when the question was asked, it would given him an unfair dismissal claim in excess of the settlement figure, and he would not have signed the compromise agreement. In academic circles it might matter whether that misrepresentation by the employer was fraudulent, negligent or innocent, but for present purposes it makes little difference - the remedies for all types of misrepresentation include rescission (the setting aside of the contract) and damages. If the employee discovered the misrepresentation within the 3 month Tribunal window then he could still sue in that forum. If he did so only later then despite the expiry of the normal deadline for bringing a claim, a Tribunal might consider allowing a late application in these circumstances. If it did not do so then the employee would be in a position to claim in the High Court damages for the loss of his right to bring (and presumed prospects of winning) an unfair dismissal claim.
Sadly this appears at least in theory to place a premium upon an employee continuing to poke about in the facts relating to his dismissal. If he comes across some tiny factual error or "gloss" by the employer which he can construe into a misrepresentation, then he can claim that he would not have signed the compromise agreement had he known about it. Even though the Court or Tribunal might disagree in the end, there is clearly the potential for considerable cost and inconvenience to the employer, not to mention embarrassment to the manager responsible.
Arguments based on "duress" have rarely been well received by the Courts. The Employment Appeal Tribunal has defined this as "a combination of pressure and the absence of practical choice". This is no doubt what many employees feel at the time of signing a compromise agreement, but the Courts will inevitably find that the availability of access to the Tribunal system does constitute a practical choice - if you don't like the deal, you can always sue. The fact that the process could take months and cost thousands appears irrelevant, mercifully for employers. Otherwise any compromise agreement reached by the common and entirely legitimate negotiation tactic of putting the individual between a rock and a hard place would be open to attack.
An employee is made redundant. The independent adviser acting on his behalf asks the employer whether any alternative positions exist which his client could have taken up, potentially the difference between a fair and unfair dismissal. The employer says no - on that basis the dismissals seems likely to be fair, the employee is advised accordingly and the compromise agreement is signed for a limited sum. The employee then discovers that the employer was wrong - there was a job he could and would have done. Had he known this when the question was asked, it would given him an unfair dismissal claim in excess of the settlement figure, and he would not have signed the compromise agreement. In academic circles it might matter whether that misrepresentation by the employer was fraudulent, negligent or innocent, but for present purposes it makes little difference - the remedies for all types of misrepresentation include rescission (the setting aside of the contract) and damages. If the employee discovered the misrepresentation within the 3 month Tribunal window then he could still sue in that forum. If he did so only later then despite the expiry of the normal deadline for bringing a claim, a Tribunal might consider allowing a late application in these circumstances. If it did not do so then the employee would be in a position to claim in the High Court damages for the loss of his right to bring (and presumed prospects of winning) an unfair dismissal claim.
Sadly this appears at least in theory to place a premium upon an employee continuing to poke about in the facts relating to his dismissal. If he comes across some tiny factual error or "gloss" by the employer which he can construe into a misrepresentation, then he can claim that he would not have signed the compromise agreement had he known about it. Even though the Court or Tribunal might disagree in the end, there is clearly the potential for considerable cost and inconvenience to the employer, not to mention embarrassment to the manager responsible.
Arguments based on "duress" have rarely been well received by the Courts. The Employment Appeal Tribunal has defined this as "a combination of pressure and the absence of practical choice". This is no doubt what many employees feel at the time of signing a compromise agreement, but the Courts will inevitably find that the availability of access to the Tribunal system does constitute a practical choice - if you don't like the deal, you can always sue. The fact that the process could take months and cost thousands appears irrelevant, mercifully for employers. Otherwise any compromise agreement reached by the common and entirely legitimate negotiation tactic of putting the individual between a rock and a hard place would be open to attack.
Recent changes to discrimination law can also allow an employee to side-step a compromise agreement. The discrimination regime now allows claims in some cases in respect of matters taking place post-termination (and potentially post-compromise agreement) if they arise out of and are closely connected with the employment relationship. A failure to provide a reference or the negative exercise of a discretion applicable post-termination (e.g. in respect of bonus or windows for the exercise of stock options) could be alleged to be discriminatory. Even though connected with the employment relationship such claims would not be validly waived by an earlier compromise agreement. There is a partial answer – to the extent that the form of the reference, the amount of the bonus or the exercise window could be incorporated within the compromise agreement at the outset then would no claim would lie. There is clearly a benefit to the employer in tying down such matters at the earliest opportunity.
Slightly different issues arise in relation to compromise agreements completed any material length of time before the termination date. Often an employer will want this for the certainty it appears to bring. In reality the employee cannot meaningfully waive claims in respect of things which have not yet happened, so the employer remains exposed to some real or imagined slight (for example, a discriminatory remark) made after completion of the compromise agreement. The agreement could in effect be ignored by the employee and yet the employer would still be bound by its terms. A failure on its part to make the payment provided for simply because the employee had brought a discrimination claim arising from a subsequent event would clearly risk a finding of victimisation.
In Lunt –v- Merseyside TEC <1999> IRLR 458, the EAT considered whether a compromise agreement containing a blanket waiver of claims would be effective. Section 203 ERA 1996 provides that a compromise agreement "must relate to a particular complaint". However, it cannot seek to exclude potential complaints that have not yet arisen on the off-chance that they may be raised in future. So even if the agreement refers specifically to sex discrimination, for example, it may not be valid to kill off a later sex claim if at the time the agreement was completed no such allegation had been raised. It also seems unlikely that a statement to the effect that the employee has alleged everything, just to be able to waive it, would get round this if challenged. As a result, a compromise agreement will be ineffective in respect of an issue which was not in dispute when it was entered into, because there is no complaint about that issue extant. Some commentators have suggested that the employee should be asked to warrant that he has no further claims, but that may lead to his seeking a warranty of full disclosure of all relevant circumstances from the employer, which in turn brings us back to the risks of misrepresentation referred to above.
The practical answer may be to hope that even if the compromise agreement is re-opened on technical grounds and a claim is brought, a Court or Tribunal would rely upon the principles in Courage Take Home Trade Ltd –v- Keys <1986> IRLR 427. Here the EAT concluded that even though an applicant who had signed a non-binding settlement agreement could not be prevented from bringing his claim, he should not be awarded any compensation for it because it would not be just and equitable that he should in the light of the waiver wording he had signed. There is a caveat to this – that Mr Keys knew about the basis for that claim when he signed. Had the relevant facts only come to his attention after completion of the settlement agreement it is likely that the Tribunal would have taken a different view.
The conclusion must be that a signing of a compromise agreement does not necessarily represent the end of the matter, and that a lack of care in the negotiation or drafting processes could come back to bite the employer from an unexpected quarter.
Slightly different issues arise in relation to compromise agreements completed any material length of time before the termination date. Often an employer will want this for the certainty it appears to bring. In reality the employee cannot meaningfully waive claims in respect of things which have not yet happened, so the employer remains exposed to some real or imagined slight (for example, a discriminatory remark) made after completion of the compromise agreement. The agreement could in effect be ignored by the employee and yet the employer would still be bound by its terms. A failure on its part to make the payment provided for simply because the employee had brought a discrimination claim arising from a subsequent event would clearly risk a finding of victimisation.
In Lunt –v- Merseyside TEC <1999> IRLR 458, the EAT considered whether a compromise agreement containing a blanket waiver of claims would be effective. Section 203 ERA 1996 provides that a compromise agreement "must relate to a particular complaint". However, it cannot seek to exclude potential complaints that have not yet arisen on the off-chance that they may be raised in future. So even if the agreement refers specifically to sex discrimination, for example, it may not be valid to kill off a later sex claim if at the time the agreement was completed no such allegation had been raised. It also seems unlikely that a statement to the effect that the employee has alleged everything, just to be able to waive it, would get round this if challenged. As a result, a compromise agreement will be ineffective in respect of an issue which was not in dispute when it was entered into, because there is no complaint about that issue extant. Some commentators have suggested that the employee should be asked to warrant that he has no further claims, but that may lead to his seeking a warranty of full disclosure of all relevant circumstances from the employer, which in turn brings us back to the risks of misrepresentation referred to above.
The practical answer may be to hope that even if the compromise agreement is re-opened on technical grounds and a claim is brought, a Court or Tribunal would rely upon the principles in Courage Take Home Trade Ltd –v- Keys <1986> IRLR 427. Here the EAT concluded that even though an applicant who had signed a non-binding settlement agreement could not be prevented from bringing his claim, he should not be awarded any compensation for it because it would not be just and equitable that he should in the light of the waiver wording he had signed. There is a caveat to this – that Mr Keys knew about the basis for that claim when he signed. Had the relevant facts only come to his attention after completion of the settlement agreement it is likely that the Tribunal would have taken a different view.
The conclusion must be that a signing of a compromise agreement does not necessarily represent the end of the matter, and that a lack of care in the negotiation or drafting processes could come back to bite the employer from an unexpected quarter.
