A recent Court of Appeal case raises issues about how to document settlements in the employment law context. The New Zealand Law Society’s Employment Law Committee has prepared this article, drafted by John Hannan, to give guidance to practitioners.

The Court of Appeal decision, JP Morgan Chase Bank NA v Lewis [2015] NZCA 255 highlights a number of important issues that need to be considered by practitioners who are settling employment related claims or disputes.

Significant adverse consequences can flow from wrong choices about documenting and drafting settlements. Careful decision-making is needed; the alternatives being what is popularly referred to as a Record of Settlement signed off by the Mediation Service under s 149 of the Employment Relations Act 2000, or a contract or deed of settlement.

Decisions on appropriate settlement methods will be driven by the nature of the issues to be settled and of the settlement obligations taken on. The forums in which those settlement obligations can best be enforced need careful consideration. JP Morgan Chase Bank exemplifies the problems.

Mr Lewis had been employed for a period as the Chief Executive Officer of JP Morgan’s New Zealand branch. A dispute arose. Mr Lewis raised a personal grievance.

Settlement agreement

The parties entered into a “settlement agreement” (not a s 149 Record of Settlement) to resolve the grievance. This provided that Mr Lewis would resign. It stipulated what internal announcements would be made. These included an announcement stating “the Bank wishes to thank Mr Lewis for serving as its CEO in New Zealand …” There was a “nondisparagement’ clause in the usual terms. The settlement was a full and final settlement of all claims. It also provided for the payment of various sums.

After the settlement agreement was signed, Mr Lewis was told by the JP Morgan Human Resources Department that the bank’s records did not show he had been the CEO. He emailed the bank’s Head of Human Resources emphasising that he was making approaches to potential employers and that his ability to secure further employment would be damaged if the bank failed to confirm he had been the CEO of the New Zealand branch.

He subsequently applied for a position with another bank, telling the prospective employer that he had been JP Morgan’s CEO in New Zealand. When that employer made inquiry of JP Morgan, JP Morgan denied that he had been its CEO. As a result Mr Lewis lost that employment opportunity.

He then lodged a claim in the Employment Relations Authority alleging breach of the settlement agreement, and seeking damages.

The Employment Relations Authority decided it did not have jurisdiction to grant a compliance order or any other remedy since the settlement agreement did not fall within s 151 of the Employment Relations Act, not being a Record of Settlement under s 149. It also could not be the subject of a compliance order under s 137(1)(a)(i) because it was not an employment agreement.

Mr Lewis progressed his claim to the Employment Court. His statement of claim ultimately alleged that the settlement agreement was effectively a variation of the employment agreement. The claim was recast to allege that the employment agreement, as varied, had been breached.

JP Morgan applied to strike out the claim. Among other things it said that the Court could not award damages for breach of the settlement agreement, because it was not an employment agreement.

Chief Judge Colgan dismissed the strikeout application, stating that he considered it was arguable that the settlement agreement constituted at least in part a variation to Mr Lewis’s employment agreement. The Employment Court also referred to the Authority’s (and Court’s) exclusive jurisdiction to make determinations about employment relationship problems generally, under s 161(1)(r) of the Act: “Any other action (being an action that is not directly within the jurisdiction of the Court) arising from or related to the employment relationship … (other than an action founded on tort).”

JP Morgan appealed.

Court of Appeal decision

The Court of Appeal concluded that the settlement agreement could not be characterised as a variation of the Employment Agreement. The Court concluded that the settlement agreement was a new agreement, intended by the parties to replace the employment agreement and to operate as a standalone statement of their obligations to each other after Mr Lewis ceased to be employed.

The Court’s reasons for this conclusion were as follows. First, the intention of the settlement agreement was to bring Mr Lewis’s employment to an end. Second, the settlement agreement contained provisions that were plainly intended not to operate as terms of employment, but as terms to apply once the employment relationship had ended. Third, there was no doubt that the settlement agreement could be “sued upon” alone. Finally, there was an “entire agreement” clause which provided that the settlement agreement superseded any and all prior agreements. It would be artificial to describe the situation as one involving the ongoing performance of both contracts.

It followed that the settlement agreement could not be regarded as an “employment agreement” under the Employment Relations Act. The Authority and Court therefore did not have jurisdiction to deal with a dispute over its operation.

The Court of Appeal then considered whether the Authority or Court had jurisdiction under s 161(1)(r). It considered a number of cases from both the High Court and the Employment Court. It concluded that the matter before the Authority was not one that arose from or was related to the employment relationship. It was a claim under the settlement agreement and concerned the alleged breach of postemployment obligations.

Notably, the Court discussed the High Court decision The Hibernian Catholic Benefit Society v Hagai [2014] NZHC 24 where Associate Judge Bell took an expansive view of paragraph (r), finding that it would embrace claims based on breach of fiduciary duty and for money had and received.

The Court of Appeal disagreed. It considered that this would be to treat all issues arising between employer and employee as exclusively within the Authority’s jurisdiction because of the existence of that relationship. It considered that the problem must be one that “directly and essentially concerns the employment relationship”.

So neither the Authority nor the Employment Court had jurisdiction to award damages for breach of the settlement agreement, or indeed to deal with any breach of such a settlement agreement.

Practical issues

This case highlights significant practical issues that need to be thought about in achieving effective, binding and enforceable settlement of claims arising out of an employment relationship. In particular, it raises issues for settlements where there has been an “agreed parting of the ways” with promises on the part of the employer about what it will say to any inquirers about the employee. Issues for consideration are:

• If the settlement is documented as a “Record of Settlement” under s 149 of the Employment Relations Act, the enforcement processes available will be limited to compliance orders (s 151(2)(b)(i)), penalty (s 149(4)) and registering it in the District Court, where it can be enforced as a judgment of that court (s 151(2)(b)(ii)). These enforcement processes deal adequately with failure to pay sums expressly stipulated in the Record of Settlement. But damages will not be available for breach of obligations such as nondisparagement clauses. Practitioners need to carefully assess what is appropriate to their client’s requirements.
• Settlements of complex matters where there are major issues of protection of reputation, of confidentiality or intellectual property, and possibly restraints of trade or similar, should potentially be documented as settlement agreements or deeds of settlement so that they can be enforced in the ordinary courts.
• Settlement agreements or deeds of settlement (if that is the decision) need to be drafted in such a way that they cannot be characterised as a variation of an employment agreement. The key point is to avoid drafting the settlement agreement in a way that amounts to merely providing modified terms for continuing employment that will come to an end by agreement at a later date. The settlement agreement should replace rather than supplement the employment agreement.
• JP Morgan Chase Bank also clarifies a number issues about the exclusive jurisdiction of the Authority and Employment Court relative to the High Court and District Courts. This will be the subject of a further article.