In November 2024, an ex-employee making a discrimination claim argued the deed of settlement she entered into should be set aside because, during the settlement conference at which she agreed to enter into the deed, she lacked capacity by reason of her mental condition.

How to determine whether a person has capacity

The validity of a deed of release or settlement will be in question if the employee, at the time of signing the deed, lacks capacity by reason of mental infirmity.

Capacity requires that the employee be capable of:

• understanding and processing the information with which they are presented about the arrangement from the employer and/or their legal representatives;
• making a decision based on that information; and
• communicating their decision to the employer (either directly or through their legal representatives).

The ultimate test is whether the employee would have understood the nature and effect of entering into the release agreement if an explanation had been given to them. This ordinarily requires that the employee be capable of understanding something of their prospects of success, that any claims against the employer would be resolved and end if the release agreement was made, that the matter would not proceed to a hearing and they would receive the benefits provided in the agreement.

The focus is on the person’s capacity to reason and make a rational decision or choice about the steps to be taken, or avoided, to achieve an appropriate outcome or otherwise give effect to or implement a transaction. This requires a capacity to:

• understand, absorb and retain information, whether numerical, language or spatially based;
• process that information rationally;
• balance risk and need in context; and
• appreciate consequence as opposed to the immediate.

Capacity to understand a transaction is not dependent upon demonstration that the relevant person actually understood the transaction. However, evidence of actual understanding shows a capacity to understand.

What did the Court decide in the November case?

In Rossi v Qantas Airways Limited (2024), the employee entered into a deed of settlement with her employer to settle workers’ compensation proceedings. The ex-employee later sought to bring discrimination proceedings against her ex-employer. The deed provided that the ex-employee released the employer from all claims arising from her employment. The ex-employee argued the deed should be set aside because, during the settlement conference at which she agreed to enter into the deed, she lacked capacity by reason of her mental condition.

The Court concluded the employee had the capacity to understand the settlement process she was engaging in, and the general effect of the deed and settlement.

The Court found that at various points during the settlement conference, the employee felt upset, anxious and angry, and had a sense of distress and being under a degree of pressure. She was nonetheless engaged in the settlement process, and understood the issues involved. At the settlement conference, the employee’s lawyers advised her to accept the employer’s revised offer. The employee knew there were difficulties with her claim, and conveyed a willingness to accept the terms of settlement and enter into the deed, despite her obvious disappointment in that outcome. When she signed the deed, the employee had regard to the consequences if she did not sign, including that there might be costs consequences.

The deed provisions involved no particular or unusual complexity. The fact the lawyers only explained the effect of the release provision in general terms was not considered an issue. The validity of the deed was not affected by the fact the lawyers did not give advice about the range of hypothetical causes of action that would cease to be available if the deed were executed.