Puplampu v Pathfinder Mental Health Service NHS Trust

An innocent third party may remain bound where fraud vitiates the agency contract between principal and agent, provided the agent retains continuing ostensible authority. Champerty raises a distinct public-policy issue where the agent’s interests may conflict with the client’s interests. The unresolved question was whether that policy could justify unravelling a settlement made under ostensible authority, despite prejudice to an innocent opposing party. The permission application was adjourned for specialist advice, with no final determination on the merits.

The applicant had been dismissed for alleged sexual harassment and instructed Direct Legal Limited to conduct employment tribunal proceedings. He wanted his name cleared, rather than simply compensation. Direct Legal negotiated an ACAS settlement of £1,750, but was then made subject to a public-interest winding-up petition under section 124A of the Insolvency Act 1986 because its standard client arrangements were alleged to be champertous.

The Employment Tribunal and the Employment Appeal Tribunal held that they had no power to proceed because a binding settlement had been reached and the arrangement escaped the restriction on contracting out in section 203 of the Employment Rights Act 1996. The applicant sought permission to argue that public policy required the settlement to be unravelled because Direct Legal had exceeded its actual authority and may have acted in its own interest. The central issue was whether champerty could affect a settlement entered into under continuing ostensible authority.

1. Application adjourned. The Court of Appeal did not determine permission to appeal or the substantive validity of the settlement. The application was adjourned as directed in the judgment.
2. The court accepted that the Employment Appeal Tribunal’s central agency principle was right in principle. An innocent opposing party is not affected by fraud that vitiates the contract of agency between principal and agent where the agent retains continuing ostensible authority.
3. Lord Justice Sedley distinguished the public-policy objection arising from champerty from ordinary fraud. A champertous arrangement may create a conflict in which the client’s interests are sacrificed to the agent’s interests. The objection is particularly acute because the conduct occurs within the administration of justice.
4. The applicant also relied on the possibility that Direct Legal had exceeded its actual authority. The more substantial question was whether giving public policy proper effect required the court to unravel not only the client-agent arrangement but also a settlement made by the agent while exercising ostensible authority. That question had to be balanced against the prejudice to an innocent third party.
5. No authority directly addressing that issue had been identified. The court therefore adjourned the application so that specialist advice could be obtained. If a viable appeal existed, the matter would return before a two-judge court; otherwise the applicant would be advised to rely on the compensation already agreed.

• Court of Appeal (Civil Division): The permission application was adjourned. No final appellate determination was made.
• Employment Appeal Tribunal: Took the same view as the Employment Tribunal, holding that it had no power to proceed after the binding settlement.
• Employment Tribunal: Held that the settlement escaped the restriction on contracting out in section 203 of the Employment Rights Act 1996.