A recent decision from a federal court in Richmond should serve as a reminder to employers and employees that, even though they may think that they put a dispute behind them with a settlement agreement, in fact, the dispute can be resurrected like a zombie on Halloween. At stake in the Richmond case is a $5,000 settlement payment and fairly serious allegations about sexual harassment by a supervisor at a car washing business. However, the court’s ruling on basic principles of rescission of contract , could have relevance for the Vikram Pandits and Citigroups of the world.
After Brooke Hoke filed charges against her former employer, Car Pool LLC, for Title VII violations relating to alleged sexual harassment on the job, the parties entered into a settlement agreement. Car Pool alleges that, during the negotiations leading to the settlement, it sought and received assurances from Hoke that she had told no one about the prospect of her settling with Car Pool. Car Pool further alleges that Hoke expressly represented in the confidentiality provision of the final settlement agreement that she had not disclosed to anyone the facts or circumstances relating to the matter. Three days after Hoke and Car Pool finalized the settlement, a former colleague of Hoke (represented by Hoke’s lawyer) charged Car Pool with discrimination. Car Pool then sued Hoke, alleging that Hoke had told the former colleague about her settlement agreement with Car Pool and that, therefore, the settlement agreement should be rescinded.
Courts may rescind contracts – even carefully negotiated contracts settling a contentious employment dispute – if they find that one of the parties to the contract was induced by a material misstatement or omission of the other party to enter into the contract. The effect of rescission is that the agreement is unwound and the parties are effectively put back to their original, pre-contract positions. That means, for example, that Hoke would have to return the $5,000 that Car Pool apparently paid as part of the settlement. But it also means that Hoke would no longer be bound by her agreement not to pursue her Title VII claims against Car Pool or the confidentiality provisions of the agreement.
In light of this, when employers and current or former employees negotiate a settlement, severance, or any other kind of agreement, they should consider spelling out in the agreement key representations by the other side that they are relying on in entering into the agreement. That way, if the truth of those representations is later thrown into doubt and the employer or employee wants a do-over, the case for rescission will be easier to make.