In previous issues of SMIB, we have highlighted some of the
pitfalls that need to be avoided when drafting compromise
agreements. A further warning comes courtesy of the case of
Palihakkara v British Telecommunications plc, Employment Appeal
Tribunal, 9 October 2006.
Ms Palihakkara had been employed by BT as a Finance
Manager/Finance Analyst from September 2001. It would appear that
her time with BT was not a happy one. She claimed to have been
subjected to a sustained course of bullying and racial harassment
and she had submitted various grievances. During the course of her
employment, her health deteriorated and in late March 2005, she
decided to apply for voluntary redundancy. A compromise agreement
was then entered into on 28 April 2005. In terms of the agreement,
Ms Palihakkara received a severance payment of £12,897.15.
Subsequently, Ms Palihakkara presented an application to the
Employment Tribunal. She sought to pursue a number of
discrimination and termination of employment related claims. BT
argued that the application should be struck out on the basis that
the claims that Ms Palihakkara sought to pursue had been
compromised by her. That argument was successful before the
Employment Tribunal but the EAT found against BT.
Two of the issues that the EAT required to consider were firstly
whether the agreement covered claims that were said to have arisen
during the course of Ms Palihakkara's employment (as opposed to at
its termination) and secondly whether the agreement was formally
valid in terms of the Sex Discrimination Act 1975 and the Race
Relations Act 1976.
With regard to the first issue, clause 2.2 of the compromise
agreement stated that the severance payment was being accepted
"in full and final settlement of all claims past or future
arising out of the termination of her employment". The EAT was
of the view that the meaning of this provision was clear. It meant
that the only claims compromised by Ms Palihakkara were those that
arose out of the termination of her employment. In other words,
claims of discrimination during the course of her employment had
not been compromised. BT's argument that the use of the word
"past" favoured their interpretation of the clause was
rejected by the EAT on the ground that, past or future, it was only
claims "arising out of the termination of employment" that
were compromised.
Insofar as the second issue is concerned, it is important to
bear in mind that, to be valid, compromise agreements require to
comply with certain conditions. The conditions are set out in the
various pieces of legislation that allow for complaints, such as
unfair dismissal or discrimination, to be compromised. The
conditions include that the agreement is in writing and that the
employee has received independent legal advice prior to entering
into it. They also include the requirement that the agreement must
state that the conditions regulating agreements under the
particular piece of legislation have been satisfied. Thus, in Ms
Palihakkara's agreement, there was a clause stating that the
"conditions regulating this Agreement in Section 203 of the
Employment Rights Act 1996 are satisfied".
The difficulty for BT was that there were no equivalent
provisions confirming that the conditions set out in any of the
discrimination legislation, and in particular Section 77 of the Sex
Discrimination Act 1975 and Section 72 of the Race Relations Act
1976, had been met. The EAT therefore had to decide whether the
absence of such provisions meant that the agreement was ineffective
in compromising Ms Palihakkara's complaints of sexual and racial
discrimination.
BT's argument before the EAT was that the policy behind the
legislation was to protect employees from entering into bad
agreements and that the failure to state that the necessary
conditions had been satisfied could be excused if, as a matter of
fact, the conditions had been satisfied. The EAT did however give
this argument fairly short shrift and concluded that the absence of
the necessary statements was fatal to the compromise agreement. Ms
Palihakkara was therefore free to pursue complaints that BT no
doubt assumed had been compromised in return for the severance
payment made by them.
This case again emphasises the importance of ensuring that
compromise agreements are properly drafted. It also makes clear
that clauses that may, at first blush, appear to be formulaic and
serving no obvious purpose may in fact be vital if the compromise
agreement is to achieve the aim intended for it.
