When an employer and an employee come to an agreement regarding the termination of an employment contract, the terms and conditions of such termination will be laid down in a settlement agreement. According to section 7:900 Civil Code, a settlement agreement seeks to conclude or prevent any uncertainty or dispute.
To prevent parties from instituting claims after signing a settlement agreement, a final discharge clause is usually added to the contract, under which the parties are no longer entitled to institute claims or disputes regarding the settled issues after the signing of the settlement agreement. The final discharge clause usually provides that after the signing of the settlement agreement, the parties shall exercise no rights against each other in connection with the employment agreement and the termination thereof or on any other basis, other than the rights and obligations under the settlement agreement.
A body of case law exists in respect of the scope of final discharge clauses. The question is often whether a specific issue falls under the scope of such clause. Employers will claim that the final discharge clause relates to any rights in connection with the employment agreement, including, for example, pensions and options. However, case law shows that this argument does not always stand up in court.
An example is a 2004 High Court judgment regarding full and final settlement of pension loss. The settlement agreement concluded between the parties did not explicitly mention pension loss. The court decided that due to the fact that this issue was not explicitly covered in the contract, it could not be determined that the intention of the parties was to cover pension loss in the contract and encompass it under the scope of the final discharge clause. Whether an issue falls under the scope of the clause must be decided by the actual facts and circumstances.
In 2012 the High Court had to consider whether a dispute, which arose after signing a termination agreement, fell under the scope of the clause. The court found that whether a dispute falls under the scope of the final discharge depends on the meaning that the parties have reasonably attributed to the clause in the given circumstances and on the parties’ reasonable expectations. The dispute regarded the removal of options from a securities deposit, one year after signing the termination agreement. Since the options had not been discussed between the parties during the negotiations, the employee – who held the rights – was correct in understanding that these right were not covered by the full and final settlement clause.
One month later, the Arnhem Court of Appeal decided that a full and final settlement clause with a general character was insufficient to cover the litigious dispute, since the employee’s claim was not an issue that the parties had attempted to conclude or prevent in their settlement agreement.
Final discharge clauses are not always construed to the employer’s disadvantage. For example, on July 7 2013 the Arnhem-Leeuwarden Court of Appeal decided in respect of a fraud case that only if the employer suspected that the employee was guilty of fraud at the moment that the settlement agreement was entered into, the final discharge clause should be understood also to cover the fraud committed by the employee.
Although final discharge clauses do have effect, parties must be precise as to which issues or disputes are settled in the contract, and consequently fall under the scope of the final discharge clause. In order to successfully invoke such a clause, the dispute at hand must have been discussed during the negotiations and/or entered into the contract with the goal of ending the dispute or uncertainty in respect thereof. Therefore, it is advisable to discuss all special arrangements, such as pensions and options, with the employee and include these in the final discharge clause. Further, it is desirable to add to the clause that the final discharge granted by the employee shall also relate to any claims concerning the legal entities affiliated with the employer’s undertaking.