Can settlement agreements be set aside for reasons of "economic pressure"?

The settlement of an employment tribunal claim must take one of three forms:

1. The terms of settlement are set out in the body of a tribunal judgment or in a schedule/annex to that judgment
2. An ACAS conciliated settlement, known as a COT3, or
3. A settlement agreement, formerly known as a compromise agreement, which satisfies certain legal conditions including confirmation that the employee/worker received independent legal advice before signing the agreement.

Only in rare circumstances will an agreement to settle be set aside, but the Court of Appeal said in the case of Hennessey v Craigmyle in 1986 that the doctrine of economic duress could avoid an agreement where the employee was under pressure to such an extent that his or her entering into the agreement was not a voluntary act.

The Court of Appeal recognised that the instances of such economic pressure would be very rare indeed.  It also said that cases where an employee’s choice of accepting a lump sum settlement or drawing Social Security benefits while pursuing an unfair dismissal claim did not amount to economic duress.

The Employment Appeal Tribunal (EAT) in Sphiks v Porter in 1996 defined economic duress as a combination of pressure and the absence of practical choice. In that case the claimant pressed ahead with an unlawful deduction of wages claim despite an earlier settlement agreement purporting to settle it. The claimant persuaded a tribunal that his employer had withheld payment prior to the settlement negotiations and that the consequent “economic inducement” to accept a sum less than his full entitlement was sufficient to amount to duress and thereby invalidated the settlement agreement.

However, the EAT considered the Tribunal’s decision to be wrong. It said that not all pressure will amount to duress, that it was inevitable that during the course of negotiations one side would seek to exploit the other’s apparent weakness and that the availability of cheap and quick procedures to employees (employment tribunals) was an important antidote to the inequality of bargaining power inherent in an employment relationship.

The EAT said that tribunal proceedings provided an employee with a practical alternative to settling a claim so there was no “absence of practical choice” in this case and he was not entitled to rely on a plea of economic duress.

However, the assertions by the EAT in Sphiks, that the tribunal provided a “cheap and quick procedure to employees” and was “an important antidote to the inequality of bargaining power inherent in an employment relationship.” are no longer sustainable. Since July 2013 employees are required to pay an issue fee and a hearing fee (up to £1,200) before they can enforce their individual rights against an employer.  Nowadays it is not unusual for an employee to have to wait over 12 months before a case is heard by a tribunal and he receives judgement - hardly “cheap” or “quick”!

This may mean that employees are more likely to succeed in an argument of unequal bargaining power if they challenge the validity of settlement and COT3 agreements. This is an interesting point that, sooner or later, will be run as a test case challenging the introduction of fees and the unreasonable delays in bringing a claim to the employment tribunal. 

Reggie Lloyd
01206 217347
[email protected]