SUPREME COURT REITERATED SANCTITY OF EMPLOYMENT SETTLEMENT AGREEMENTS

Posted by Tony Sung on October 28 2022 in News

In TUV v Chief of New Zealand Defence Force [2022] NZSC 69, TUV claimed she was bullied and harassed whilst employed by the New Zealand Defence Force resulting in unjustified dismissal. TUV accepted that she had entered into a settlement agreement with the New Zealand Defence Force in respect of those claims, however, argued that the settlement agreement should be set aside because she lacked capacity to enter into that agreement at the relevant time.

During the settlement negotiation, TUV’s lawyer had several interactions with TUV’s son, who took an active role in communicating advice and instructions between the lawyer and TUV. TUV’s son did this because he was concerned about his mother’s ability to comprehend what was going on and to process information.

The Employment Authority found that TUV did not lack capacity to enter into the settlement and, in any case, there was nothing to put the respondent on notice of her capacity. On appeal to the Employment Court and then to the Court of Appeal, both Courts agreed that TUV did not have capacity at the time she entered into the agreement, but the agreement was not set aside because the Courts concluded that New Zealand Defence Force did not know and was not put on notice as to her capacity. Both the Employment court and the Court of Appeal applied the test in O’Connor v Hart that a contract is not voidable for mental incapacity unless the other contracting party has actual or constructive knowledge of the incapacity, or equitable fraud is established.

After hearing the appeal, the Supreme Court considered it was necessary to address whether section 108B of the Protection of Personal and Property Rights Act 1988 in fact governed the position. Section 108B, requiring approval of court to settle claims of a person who is incapable of managing his or her own affairs, is a type of provision commonly known as a “compromise rule”. It protects incapacitated parties from being bound by agreements to settle certain claims unless the agreement has been approved by the court.

After considering the issues, the majority of the Supreme Court’s view was that when the scheme of the Employment Relations Act 2000 is considered, there is an incompatibility between the Employment Relations Act 2000 and section 108B of the Protection of Personal Property Rights Act 1988.

The majority’s view was that, to apply section 108B to the TUV case would undermine the efficacy of the Employment Relations Act 2000’s dispute resolution processes. In particular, it would be inconsistent with the thread of good faith running through the Act and the protection provided for the integrity of individual choice. It would also not fit at all well with the Employment Relations Act 2000’s focus on promoting mediation as the primary problem-solving mechanism and promoting the speedy and inexpensive resolution of employment disputes. Nor would it fit well with the emphasis in the Employment Relations Act 2000 on reducing the need for judicial intervention and the roles of the institutions established under the Act.

Supreme Court also noted that applying section 108B to settlement agreements entered into under the Employment Relations Act 2000 may incentivise employers to take steps to protect themselves which may exacerbate, not resolve, employment relationship problems. In those situations, an employer may face difficulty in suggesting to its troubled employee that they may lack capacity, so an assessment by a specialist is required. TUV case provided a good illustration in that TUV’s union representative commented adversely on New Zealand Defence Force’s request that TUV undergoes a neuropsychological assessment.

Further, applying section 108B to set aside mediator-certified settlement agreements is inconsistent with the way the Employment Relations Act 2000 treats mental disability in other contexts, namely the bargaining for and entering into of an individual employment agreement as set out in section 68 of the Employment Relations Act 2000. The majority’s view was that section 68 adopts the O’Connor v Hart approach because it is premised on making provision to set aside the employment agreement for unfairness where one party has actual or constructive knowledge of the incapacity of the other.

Lastly, the majority of the Supreme Court’s view was that it would run counter to the scheme of the Employment Relations Act 2000 if either party to the certified agreement could have it set aside under section 108B at some point in the future on the ground of mental incapacity. The majority felt that the mediator certification process would provide the forum in which the issue of any mental disability could be addressed, and would allow appropriate steps to be taken to facilitate decision-making by the relevant person.

The majority of the Supreme Court found that the Courts below were correct not to set aside the settlement agreement between TUV and New Zealand Defence Force because O’Connor v Hart applies and the question of whether or not the agreement should be set aside was governed by the Employment Relations Act 2000, not by section 108B of the Protection of Personal Property Rights Act 1988.

TUV's decision demonstrates how difficult it is to set aside a settlement agreement entered into under the Employment Relations Act 2000. It is even more important to think long and hard before signing a settlement agreement relating to an employment relationship problem.

If you would like more information regarding the above, or have any questions, please contact us.

Kalev Crossland | Partner | Kalev.Crossland@shieffangland.co.nz

Tony Sung | Associate | Tony.Sung@shieffangland.co.nz