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26 January 2024

Can a settlement agreement be used to validly settle future claims?

When entering into a settlement agreement with an employee, employers will want to ensure that the waiver of claims given by the employee provides the maximum level of protection possible. This is so as to provide certainty and finality in return for the settlement payment to the employee and allow the parties to move on. Understandably, an employer does not want to make a payment to an employee with the intention of drawing a line under any existing or anticipated dispute, only to find itself facing further complaints and threatened claims from the employee, who now has funds with which to pursue a claim.

An issue that arises from this is to what extent a settlement agreement can be used to waive future claims by an employee. This has been an area of much debate in case law.

Personal injury claims
The employer may well wish to obtain a waiver from the employee of any personal injury claims. Existing and latent (i.e. potential claims of which the employee is not aware but where no claim has been brought) can be waived under a settlement agreement. In such cases, the agreement should make clear the parties’ intention that personal injuries are covered. Clear and unambiguous wording should therefore be used.

Personal injury (usually psychiatric) arising as a result of unlawful discrimination or harassment in employment, under the Equality Act 2010 can also be waived, subject to the usual rules on waiver of statutory employment law claims under settlement agreements, and would normally be covered by waiving the right to bring discrimination and harassment claims.

By contrast, it is generally considered that ‘future personal injury claims’ (i.e. claims that have not yet arisen) cannot be validly waived under a settlement agreement since this would be contrary to public policy and the Unfair Contract Terms Act 1977.

But what is the position with respect to other types of future claims? Can these be validly waived under a settlement agreement? In order to consider this it is helpful to distinguish between ‘existing future claims’ and ‘unknown future claims’.

Existing future claims
In Arvunescu v Quick Release (Automotive) Ltd (2022), the Court of Appeal confirmed that an employee can waive a statutory employment law claim (in that case victimisation under the Equality Act 2010) which exists at the time a COT3 is signed, even if the claim is not discovered until afterwards, provided the wording of the waiver of claims is sufficiently clearly drafted to include the relevant claim. Although Arvunescu concerned a ACAS conciliated COT3, in the absence of any contrary authority, it is also likely to apply to settlement agreements – indeed, an employment tribunal applied Arvunescu to a situation concerning a settlement agreement in Clifford v IBM UK Ltd (2022).

Unknown future claims
So what then as to ‘unknown future claims’? By this we mean claims the parties are not aware of at the time the settlement agreement is signed and which only arise afterwards. With respect to common law claims, such as breach of contract, there is nothing to prevent an employee agreeing to waive such future claims. But what about future statutory employment law claims, such as for discrimination? The short (and rather unhelpful) answer has for quite some time been that it is not clear whether a waiver of claims in a settlement agreement can cover unknown future claims. However (and more helpfully), recent case law has shed some light on this question which will provide some comfort to employers.

But before we dive into the recent cases, it is first helpful to provide some background to the debate.

In the case of Lunt v Merseyside (1999), the Employment Appeal Tribunal (EAT) held that, since it is a statutory requirement for a settlement agreement to relate to a particular complaint or particular proceedings, a “blanket” or “kitchen sink” style waiver of claims covering all conceivable potential claims is not permitted. As such, a settlement agreement which purports to waive claims which have never been contemplated by the parties was not effective.

Even though a general waiver of all claims may not be effective, it remains common practice for employers to include “catch-all” wording in settlement agreement waivers. This is not unlawful, but employers must be aware that the wording is susceptible to challenge. Employers should therefore always list specific claims which are relevant to the employee alongside any catch-all wording.

In Hilton UK Hotels Ltd v McNaughton (2005), a differently constituted EAT summarised the principles relating to the waiver of future claims in settlement agreements as follows:

  • The statutory requirement that a compromise agreement “must relate to the particular complaint” does not limit its cover to complaints that have already been presented to an employment tribunal. Lunt did not determine that, as a matter of general law, an employee can never contractually compromise a future claim of which they have no knowledge.
  • A “blanket agreement” simply signing away all an employee’s tribunal rights, will not do. The “actual or potential” claim being waived must be identified by a generic description or a reference to the section of the statute giving rise to the claim.
  • Whilst parties may agree that a settlement agreement is to cover future claims of which an employee does not and could not have had knowledge, to do so effectively, the terms of their agreement must be “absolutely plain and unequivocal”. Or, to quote from another case referred to in that judgment, “If the parties seek to achieve such an extravagant result that they release claims of which they have and can have no knowledge whether those claims have already come into existence or not, they must do so in language which is absolutely clear and leaves no room for doubt as to what it is they are contracting for. We can see no reason why as a matter of public policy a party should not contract out of some future cause of action. But we take the view that it would require extremely clear words for such an intention to be found.” – Royal National Orthopaedic Hospital Trust v Howard (2002)

Howard and Hilton therefore suggest that it might be possible to waive unknown future employment claims in a settlement agreement provided the wording of the waiver of claims makes it absolutely clear that this was the intention. All very uncertain – so where to next?

Back to the future (or the recent past at least) – Bathgate v Technip Singapore PTE Ltd (2023)
Then in 2022 along came the Scottish EAT decision in Bathgate. The case concerned a Mr Bathgate who was made redundant and left employment under a settlement agreement. After the settlement agreement had been signed, the employer decided that they did not need to make an additional payment to Mr Bathgate under a collective agreement since he was over 60 years old. Mr Bathgate brought a claim for age discrimination in relation to that decision. The issue arose as to whether he was precluded from bringing his claim by the waiver of claims in the settlement agreement he signed, which purported to cover claims irrespective of whether or not, at the date of the agreement, Mr Bathgate was or could be aware of such claims or have such claims in his express contemplation (including such claims of which he subsequently became aware after the date of the agreement in whole or in part as a result of new legislation or the development of common law).

The EAT found that Mr Bathgate had signed away his right to claim for age discrimination before he knew whether he had a claim or not. The EAT held that, whilst it may be possible to waive future common law claims, the requirements for settlement agreements waiving statutory employment claims – in particular, that the settlement must “relate to a particular complaint” – precluded the possibility of such unknown future claims being effectively waived. The EAT acknowledged that this may be inconvenient where there is a mutual desire to avoid future claims and a wish to end the employment relationship permanently, but it found that this had been the intention of Parliament when drafting the provisions. This was all very concerning and understandably caused consternation for employers.

However, the EAT decision was appealed and went to the Court of Session. In the judgment handed down in December 2023, the Court of Session decided differently than the EAT, allowing the employer’s appeal and held that a future claim of which an employee does not and could not have knowledge may be covered by a waiver where it is plain and unequivocal that this was intended. The settlement agreement in Bathgate listed various types of claims, including age discrimination, and it was clear that the agreement was intended to cover claims of which the parties were unaware and which had not accrued.

Points for future reference
So relief all round for employers, with confirmation that they can use settlement agreements to waive future statutory employment law claims? Well, yes, the decision is reassuring to employers as it confirms that a well drafted settlement agreement which sufficiently identifies potential future statutory employment law claims and meets the requirements for settlement agreements in the relevant legislation will be effective in compromising future statutory employment law claims.

A note on Scottish decisions… This was a decision of the Scottish Court of Session (equivalent to the Court of Appeal in England), so is it binding on employment tribunals south of the border? It should be noted that while an employment tribunal or EAT in either jurisdiction will ordinarily expect to follow decisions of the higher appeal court in the other jurisdiction, they are not bound to do so by the common law rules of precedent. So it is not absolutely the case that tribunals in England must follow this decision, but the decision is still highly persuasive authority and should provide a healthy dose of reassurance to employers.

A recurring theme in this article has been to stress the need for the waiver of claims in settlement agreements to be clearly drafted to identify the particular claims the parties intend to be covered by the settlement. There are further steps that can be taken to ensure the employer is protected, including a warranty from the employee confirming that the claims listed are the only claims that they have, and an indemnity and/or repayment provision which will be triggered if the employee breaches the agreement or attempts to bring a claim against the employer despite having agreed to enter into the settlement agreement.

We recommend that specific advice is sought when preparing and negotiating a settlement agreement with an employee and would be happy to assist.

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Chris Weaver
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