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Getting Settlement Agreements Right

The following article was written by Mary Crimp.

Serious employment disputes are often settled by written agreement, frequently on terms stating that the employee’s employment will terminate from an agreed date and that the employer will make a payment to the employee.  Often, settlement is stated to be in full and final settlement of all matters arising out of the employment relationship.  Settlement agreements are also commonly executed by a mediator from the Ministry of Business, Innovation and Employment (MBIE) under s149 of the Employment Relations Act 2000 (the Act).  Such agreements are only enforceable by the Employment Relations Authority (the Authority) and the Employment Court (EC) and they provide the parties with little scope with which to subsequently challenge their validity. 

The recent Court of Appeal case of JP Morgan Chase Bank NZ v Robert Lewis [2015] NZCA 255 has highlighted the importance of getting both the content and format of settlement agreements right at an early stage in the settlement process. 

In JP Morgan the parties had signed a settlement agreement providing, amongst other terms, that Mr Lewis would resign as CEO from JP Morgan, that he would receive various payments, that neither party would make disparaging comments about the other and that the agreement was a full and final settlement of all claims.  The settlement agreement was not executed by a mediator under s149 and a dispute subsequently arose regarding compliance with its terms. 

If the agreement in JP Morgan had been executed pursuant to s149, the Authority would have had jurisdiction to deal with the dispute.  However, as the agreement was not, the Court of Appeal considered whether the Authority still had jurisdiction under the Act given that the dispute arose out of either an employment agreement or an employment relationship problem.  The Court concluded that neither the Authority nor the EC could deal with the dispute as the settlement agreement was a new stand-alone agreement, intended by the parties to replace the employment agreement and to govern the terms that were to apply to the parties after the employment relationship had ended. Therefore, the dispute arose out of a breach of a post-employment obligation and did not fall within the ambit of the Act.  The Court of Appeal also confirmed that neither the Authority nor the EC have the power to award damages for breach of a settlement agreement. 

In light of the Court of Appeal’s decision in JP Morgan, there could be significant ramifications for both employees and employers alike if sufficient care is not taken when negotiating and recording settlement agreements.  In particular, careful consideration must be given to: 

  1. What terms are to be included in a settlement agreement.  This is because any term not documented in a settlement agreement, whether executed under s149 or not, is likely to be unenforceable.  This is especially important for employers who wish to rely on protective clauses contained in their employment agreements such as restraints of trade or confidentiality clauses which are intended to survive termination of the employment relationship.  To ensure that such clauses remain enforceable post termination, employers will need to make sure that they are adequately recorded or referred to in the settlement agreement.
     
  2. What remedies will likely be sought if the settlement agreement is breached.  As noted above, while the Authority and EC have jurisdiction to enforce s149 agreements, they cannot award damages for any loss suffered as a result of a breach.  Conversely, while damages are available for claims brought in the District or High Court, there is more scope for a party to have such agreements set aside by the Court under the general principles of contract law.  However, neither the District nor the High Court have jurisdiction to deal with s149 agreements.   

In light of the above, if you are looking to settle an employment dispute whether as an employer or an employee we recommend that legal advice be sought at the earliest possible opportunity to ensure that you and/or your business are aware of the ramifications of the decisions you are making and are adequately protected. 

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