Records of Settlement and Capacity Issues

As we’ve noted in previous articles, once a Record of Settlement signed, it is sent to Employment Mediation Services to be certified by a mediator.

The mediator will contact (usually by phone) each party independently to explain the effect of the mediator’s certification. Essentially this is that the settlement is binding, cannot be cancelled and the matters covered by the settlement cannot be the subject of litigation.

Usually, no issues arise in respect of this process.

Supreme Court judgment

As demonstrated in a decision of the Supreme Court (released in June 2022) TUV v Chief of New Zealand Defence Force[1], however, difficulties can arise where an individual alleges that they lack the requisite capacity necessary for the Record of Settlement to be enforceable. TUV had raised concerns with the New Zealand Defence Force that she had been bullied and harassed in the course of her employment.

In that case, a mediator was asked to sign an agreement that had been reached between the parties, and the mediator spoke to TUV over the phone before later signing the Record of Settlement. Around 8 months after signing the Record of Settlement, TUV obtained a medical opinion, advising that it was more likely than not that she had been mentally incapacitated at the time she signed the Record of Settlement and when the mediator phoned her. TUV had been diagnosed as suffering from moderate to severe depression and anxiety.

In light of her view that the Record of Settlement was unenforceable, TUV sought to pursue a claim for unjustified dismissal.

The Employment Relations Authority, Employment Court, Court of Appeal and Supreme Court all recognised that a Record of Settlement signed pursuant to section 149 of the Employment Relations Act 2000 (the Act) can be set aside for medical incapacity, undue influence, unconscionability and/or duress.

All Courts held that the test set out in O’Connor v Hart[2] applies in the employment context. O’Connor v Hart is a foundational contract law case dealing with the concept of an unconscionable bargain. This is where a party obtains a benefit in their favour through actively seeking to contract with a weaker party. Under the test in O’Connor v Hart, for a contract to be set aside for capacity, two elements must be established, namely:

The contracting party lacked the mental capacity to enter into the transaction; and

The other party knew or ought to have known of that lack of capacity.

When a Court holds that there has been an unconscionable bargain, a Court will hold that a contract is voidable.

In TUV v Chief of New Zealand Defence Force, as the Employer neither knew, or ought to have known about TUV’s mental health concerns, the claim for unpicking the settlement agreement (and unjustified dismissal) failed.

Practical tips

When an employer is entering into a Record of Settlement, it is worth pausing and considering if the employee has:

  • any known medical conditions and how that may impact their capacity; and/or
  • is showing obvious signs of distress or confusion regarding the process (which are out of scope with the normal stress and anxiety that comes with being the subject of an employment-related process).

If either or both of the above applies, then employers should pause to consider the severity and whether it is necessary to seek medical advice certifying the employee’s capacity to understand and enter into a Record of Settlement. If capacity is in doubt, one fairly safe option is to offer to pay for an employee’s medical appointment and sign-off from their GP.

Matters involving medical capacity can be very difficult to deal with. If there are any concerns with an employee’s capacity when a Record of Settlement is being negotiated and signed, we highly recommend getting in touch with us for assistance.


[1] [2022] NZSC 69

[2] [1985] 1 NZLR 189

Meet the team that makes
things simple.

Joseph Harrop
Tamsin Woolf

Let's Talk

"*" indicates required fields

Lane Neave is not able to provide legal opinion or advice without specific instructions from you and the completion of all formal engagement processes.