Mrs Cain will receive an undisclosed payment.
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Devon County Council said, this week, that all parties recognise that it is in the best interests of the children, staff and governors of the school to have resolved the matter.
The parties have agreed to disagree as to whether Mrs Cain has been discriminated against on the grounds of her religion by either staff at the school or the Local Authority.
All parties jointly acknowledge that all faiths, including Christianity, must be treated equally and with sensitivity.
All parties also recognise the freedom of individuals to hold, talk and write about their beliefs.
The claim arose following a Landscore Primary School pupil's comment, in February 2009, to a classmate that had been told she would "go to hell" if she did not believe in God.