The law gives tribunals the power to decide whether a settlement agreement is valid or not. In Glasgow City Council v Dahhan the Employment Appeal Tribunal (EAT) held that this included the power to set aside an agreement on the ground of invalidity if one of the parties to the agreement did not have the requisite capacity to enter into it at the time of signing.

Basic facts

Mr Dahhan, a teacher, lodged claims of direct discrimination, harassment and victimisation on grounds of race against his employer, the Council. However, before the claims were heard the tribunal was informed that the parties had reached a settlement and Mr Dahhan had withdrawn his claim. It was subsequently dismissed by an employment judge on 24 June 2014.

However, on 9 July Mr Dahhan informed the tribunal that he had lacked capacity to instruct his solicitor and to make decisions at the time the settlement was reached with his employer; and asked for the judgment of 24 June to be reconsidered. The Council objected to his application, arguing that the tribunal did not have jurisdiction to set the agreement aside.

Tribunal decision

The tribunal decided that it did have jurisdiction on the basis that the agreement was invalid because Mr Dahhan did not have capacity to enter into the contract at the time of signing.

The Council appealed on the basis that the position set out in the case of Industrious Ltd v Horizon Recruitment Ltd (in liquidation) and Vincent meant that the tribunal’s jurisdiction did not extend to agreements where the alleged invalidity was due to capacity.

EAT decision

The EAT first considered the relevant statutory provisions (section 203 of the Employment Rights Act 1996 along with sections 144 and 147 of the Equality Act 2010), holding that if a settlement agreement is valid in both form and substance, then tribunals generally do not have jurisdiction to hear a claim relating to it.

Given that tribunals have the power to ensure that purported settlement agreements are valid, however, the EAT held that the effect of the decision in Industrious meant that they could, in certain circumstances, set aside an agreement involving an absence of consent by one of the parties because of misrepresentation, economic duress or mistake.

Rejecting the Council’s argument that the EAT should not extend that power to situations of incapacity as both “artificial, and unsound, it could see no good reason to make a distinction between invalidity on the ground of misrepresentation on the one hand and invalidity on the ground of lack of capacity on the other,”. Indeed, the EAT held that it would be illogical if a tribunal had to refuse to give effect to a contract entered into through misrepresentation that was otherwise valid but could not refuse to enforce a contract that was a nullity from the outset.

It therefore upheld the tribunal’s decision that it had jurisdiction to consider and determine the issue of the validity or otherwise of this agreement and dismissed the appeal.

The EAT also held that where a challenge is being made to the validity of the contract itself, the whole contract is challenged. Where the contract is said to be a nullity, its component parts will stand and fall together, i.e. if a tribunal finds that an agreement is not valid, this could extend beyond the specific issues being litigated in the tribunal. It would then be open to either party, in appropriate circumstances, to take a res judicata point (i.e. to argue that the matter had already been adjudicated on and could not be pursued further) in any subsequent litigation which would have to be dealt with on its own merits.