Employment Update June 2009: Compromise agreements

10 June 2009

Compromise agreement declared void

The well-publicised case of Gibb v Maidstone & Tunbridge Wells NHS Trust concerned the chief executive of an NHS Trust where the outbreak of a hospital ‘superbug’ had caused a significant number of deaths. Her employment contract was terminated by consent and, under the terms of a binding compromise agreement, she received a total of £250,000 of which only £75,000 represented pay in lieu of notice.

A report was then published into the outbreak which was highly critical of the leadership of the Trust. The Department of Health instructed the Trust to pay the chief executive only her notice money. She brought a claim in the High Court arguing that she was contractually entitled to the balance. The High Court has held that, under the circumstances, the payment to her of the balance of £175,000 would have been ‘irrationally generous’ and held that it would have been outside the Trust’s powers (or ultra vires). Her claim for the rest of the payment failed.

Points to note –

  • It is very rare that the terms of a binding compromise agreement will be declared void by the courts. The ultra vires doctrine can only be applied to public bodies, trusts, and charities.

  • In this case, Ms Gibb argued that the net result was that the Trust had been ‘unjustly enriched’. There had been no disciplinary or grievance procedures followed and there was a value to any unfair dismissal claim she might have had. The High Court was not impressed by this argument. As soon as she was notified that the Trust would not be paying her under the agreement, she should have filed an unfair dismissal claim to protect her position. This is a reminder that, especially with it now being harder to obtain any extensions of time for filing, dismissed employees who are still negotiating terms for their departure must keep one eye on the three-month limit for filing a tribunal claim. 

  • Where the employer is a private sector company, the Companies Act 2006 requires the Board to obtain shareholder approval when making a severance payment to a departing director. If there is no approval, the payment will still be payable to the ex-employee but the Board may become personally liable to the company for any excessive amounts agreed.