Under the law of contract, there are certain defined circumstances whereby a settlement agreement may be invalid and can be set aside. These include (but are not limited to):
- Where a party to the settlement agreement lack capacity (for example, the party has a mental disability which rendered them incapable of understanding or consenting to the agreement)
- Where there is no valid or complete agreement;
- Where there has been duress or undue influence;
- Where the settlement agreement is illegal as a result of statute or the general law;
- Where a mistake has been made about a fundamental matter or which makes it impossible to perform the settlement agreement; and/or
- Where there has been a misrepresentation of a material fact in certain circumstances
We will look briefly at each of the above points briefly in this article today – we’ll then look at each point in-depth in further articles in the future (note: I explored the effect of a fraudulent misrepresentation in this post).
Where a party to the settlement agreement lack capacity
A contracting capacity must have capacity to enter into a settlement agreement (or, indeed, any form of contract). Although the law presumes that every person has capacity to contract there are three categories of individuals who may lack person contractual capacity:
- People lacking the requisite mental capacity
- People who are drunk at the time of entering into the contract
With regards to corporate entities, company directors have the power (free of any limitation under the entity’s constitution) to enter into contracts with third parties, as do other persons authorised by directors. It is not incumbent upon a third party dealing with a corporate entity to make inquiries as to whether a director has the power to bind the company or authorise others to do so.
Where there is no valid or complete agreement
If the settlement agreement has not been properly completed then it may be possible to set aside the agreement.
Where there has been duress or undue influence
Where a party’s consent to a contact has been induced by duress, the contract is voidable by the ‘aggrieved party’. A threat sufficient to constitute duress could be actual or threatened violence, unlawful restraint to the person or property, or it could be an economic threat (such as a threat to terminate a contract). If there has been such a threat then this may invalidate the terms of a settlement agreement.
Where the settlement agreement is illegal as a result of statute or the general law
Illegality could arise if the terms of an agreement contravene established statutory or common law principles or, alternatively, if the terms are contrary to public policy. For example, contracts that fix prices are prohibited under the Competition Act 1988.
If a court becomes aware of illegality the it may have the right to set aside the agreement and refuse to award any remedy (in the event of an alleged breach).
Where a mistake has been made about a fundamental matter or which makes it impossible to perform the settlement agreement
If there has been a mistake in a settlement agreement then the effect of this mistake depends upon the circumstances: depending upon various factors, a party could be bound by the mistake or, alternatively, the settlement agreement could be declared void. Whether a party will succeed in such an argument depends to a great extent on whether the mistake (if any) renders the contract impossible to perform or radically different from what it actually is.
Where there has been a misrepresentation of a material fact in certain circumstances
If there has been a misrepresentation of a material fact (whether this representation was fraudulent, negligent or innocent) then it may be possible to set aside the settlement agreement.
If you have entered into a settlement agreement with your employer and believe that the agreement should be set aside then please don’t hesitate to contact us to explore what action you could potentially take.