The Court of Appeal reversed the decision of the High Court in April last year in the well-publicised case of Gibb v Maidstone & Tunbridge Wells NHS Trust, which had declared that a binding compromise agreement was void.

Under the terms of the agreement the claimant, chief executive of an NHS Trust that had been the subject of a damning report, received a total of £250,000 of which only £75,000 represented pay in lieu of notice. The Department of Health had instructed the Trust to pay the chief executive only her notice money.

The Court of Appeal found that the High Court was wrong to hold that, in the circumstances, the payment to the claimant of the balance of £175,000 was 'irrationally generous' and outside the Trust's powers (or ultra vires).

On the facts, the financial implications of whether to settle or not were not clear cut. It was not unreasonable for the Trust to assume that the claimant might be awarded the statutory maximum compensation for unfair dismissal if her claim were allowed to proceed; nor was it unreasonable for the Trust to have had regard to the claimant's earlier years of good service and the difficulties she might now have in obtaining other employment.

Points to Note –

  • It is good news for employers that a compromise agreement can take into account matters other than the employee's legal claims. The Court of Appeal is of the view that an agreement will only be declared void by the courts when 'the figures are inexplicable on their face'.
  • The ultra vires doctrine can only be applied to public bodies, trusts, and charities.
  • In the case of a company employer, there are rules in the Companies Act 2006 that require the board to obtain shareholder approval when making a severance payment to a departing director. If not, the payment will not be void but the board may be personally liable to the company for the amount paid.

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