The test to set aside a previous settlement agreement - State of New South Wales v LSR3

The New South Court of Appeal recently handed down its decision in State of New South Wales v LSR3 [2025] NSWCA 151.

The Court of Appeal upheld the finding of the primary judge that Part 1C of the Civil Liability Act 2002 (NSW) (CLA) does not require that the question of whether to set aside a prior settlement agreement for a historical abuse claim be determined separately and prior to the hearing of the underlying claim.

NSW legislative framework

In response to the recommendations made by the Royal Commission into Institutional Responses to Child Sexual Abuse in 2017, all states and territories enacted legislation that enables courts to set aside previous settlement agreements in historical child abuse claims.

In NSW, Part 1C of the CLA came into effect on 18 November 2021 and enables courts to set aside previous settlements of child abuse claims that are deemed to be an ‘affected agreement’.

Section 7C of the CLA defines an ‘affected agreement’ as an agreement that is:

• entered into before the removal of the limitation period in 2016 and the claim was subject to an expired limitation period, or
• entered into before the commencement of Part 1B of the CLA in 2016, which allowed a claim to be brought against an unincorporated organisation and involved an unincorporated organisation that would have been liable had Part 1B been in force, or
• entered into before the commencement of Part 1B and is not just and reasonable.

In determining whether it is ‘just and reasonable’ to set aside a previous settlement agreement, the courts can have regard to the amount paid to the survivor, the bargaining position of the parties (including if they were legally represented), the conduct of the defendants and their legal representatives, the defences raised by defendants and any other matter that the court considers relevant.

Background

The Plaintiff previously brought claims for compensation for child abuse against multiple defendants including the State of New South Wales (the State) and South Eastern Sydney Local Health District of Caringbah (SESLHD). Those claims were settled on terms that included the payment of money. Settlement agreements giving effect to the settlements were entered into in 2003 and 2017.

The Plaintiff subsequently sought to revisit these claims. In 2024, the Plaintiff filed a Statement of Claim in the Supreme Court of NSW seeking orders that included the setting aside of the prior settlement agreements under Part 1C of the CLA.

The State and SESLHD applied to have the question of whether the previous settlement agreements should be set aside determined separately and prior to the hearing of the Plaintiff’s underlying substantive claim.  

At first instance, Faulkner J refused to grant the application for separate questions noting several material difficulties, including that:

1. the scope of the controversy remained largely undefined in the lack of any defences having been filed by the State and SESLHD
2. there was a potential for prejudice against the Plaintiff, particularly if his credit was the subject of both the separate questions (for the Part 1C issue) and the final hearing, and
3. an order for separate questions would likely cause delay.

The State and SESLHD sought leave to appeal from the decision on the basis that the primary judge had misconstrued ss 7C and 7D of the CLA as permitting the Plaintiff to proceed with the cause of action prior to the setting aside of the previous settlement agreements, which had the effect of preventing the Plaintiff from maintaining the cause of action.

Decision of the NSW Court of Appeal

The NSW Court of Appeal dismissed the appeal finding that an order for a determination of separate questions is a matter of practice and procedure that involved the exercise of judicial discretion. Appellate courts are required to exercise caution and restraint when reviewing appeals from a decision of practice or procedure with the consequence that a ‘heavy burden’ lies on an applicant, in this case the State and SESLHD. In this instance, the Court held that no error of principle had been identified nor any convincing basis established warranting a grant of leave to appeal the primary’s judge’s decision.

Separately, the Court of Appeal noted Part 1C of the CLA does not mandate that an application to set aside an affected agreement be determined in advance of the hearing of an underlying claim. However, the Court acknowledged that there may be cases where a separate determination of questions is appropriate, citing EXV v Uniting Church in Australia Property Trust (NSW) [2024] NSWSC 490. In that matter the Church filed a Defence pleading the prior settlement deed as a complete bar to the plaintiff’s claim. The Plaintiff subsequently filed a Notice of Motion seeking to set aside the settlement deed under Part 1C. Justice Weinstein had allowed the Plaintiff’s application to determine the Part 1C issue as a preliminary point prior to the underlying claim (and in that matter declined to set aside the previous deed, the effect of which was that the Plaintiff was barred from proceeding with his claim against the Church).

The Court of Appeal also acknowledged with approval, the primary judge’s assessment of competing considerations in determining whether to order a separate determination of questions. Consideration was given to the degree of overlap between the evidence that would be adduced at the hearing of the separate question and at the hearing of the underlying claim.

Implications for insurers and health organisations

The Court of Appeal’s decision confirms that the exercise of the courts’ discretion to set aside an ‘affected agreement’ will not necessarily be determined separately and prior to the hearing of the underlying claim. Practically this may mean defendants will need to incur the costs of preparing the matter fully to a final contested hearing, on both the Part 1C issue and the substantive claim.

A defendant wishing to obtain an order for a separate determination of questions should first file a defence.  This is to ensure the proper identification of the issues in the proceedings and the potential degree of overlap between the evidence that would be adduced at the hearing of the separate question and at the hearing of the underlying claim.

In determining whether to grant an order for a separate determination of questions, the courts will continue to consider issues of delay resulting from the separate determination, any prejudice to the plaintiff in having to demonstrate the strength of their prospects before the final hearing and matters of credit. As Faulkner J held at first instance, in cases involving child abuse it is undesirable for plaintiffs to be required to give evidence and be cross-examined twice.

It is expected that plaintiff survivors will continue to come forward and reagitate their settled claims. If not already, it is recommended that organisations and insurers undertake a review of their closed claims to identify settlement agreements that could be set aside as an ‘affected agreement’.