Share it

dominic_holmes_phOn 19 December 2012, the Supreme Court handed down its judgment in Société Générale, London Branch v Geys [2012] UKSC 63, overturning the Court of Appeal’s decision ([2011] EWCA Civ 307) by a majority of four to one (Lord Sumption dissenting).

The Supreme Court was asked to consider four issues arising from a dispute between Société Générale (the “Bank”) and Mr Geys (a former employee of the Bank), primarily concerning the date upon which Mr Geys’ contract of employment terminated.  Two of those four issues were described by Lord Hope as “of general public importance“, with the majority finding that:

  • a repudiatory breach of an employment contract does not operate to terminate the contract automatically –  as with other types of contract, the innocent party is required to accept the repudiation to effect termination (the “repudiation issue”); and
  • a party seeking to terminate an employment contract is required to notify the other party that it is doing so in clear and unambiguous terms (the “termination issue”).

Background

Under the terms of his employment contract with the Bank, Mr Geys was entitled to receive three months’ written notice of termination.  His contract also incorporated the Bank’s employee handbook, which stated that “the Bank reserves the right to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice“.

On 29 November 2007, Mr Geys was called into a meeting and told that his employment was being terminated immediately.  He received a payment from the Bank on 18 December 2007 which was described on his payslip as “in lieu pay”.  On the evidence, the High Court found that Mr Geys probably become aware of the payment before the end of 2007.  It was not until 4 January 2008 that the Bank confirmed in writing that this payment was in lieu of notice.  Under the terms of the contract, Mr Geys was deemed to have received the letter on 6 January 2008, by which time he had sought to affirm his contract.

The Bank argued that the date of termination was either:

  • 29 November 2007 (on the basis that its repudiatory breach of contract terminated the contract automatically); or
  • 18 December 2007 (on the basis that the act of making a payment in lieu of notice into Mr Geys’ bank account was sufficient to terminate the contract).  This was the conclusion reached by the Court of Appeal.

Mr Geys argued that the contract did not terminate until 6 January 2008 at the earliest.  This was important in calculating the termination payment that Mr Geys was entitled to receive under the contract – if the contract terminated in 2008 (rather than 2007), the termination payment would be substantially higher.

The repudiation issue

The first issue was whether a repudiatory breach of an employment contract in expressly and immediately dismissing an employee automatically terminated the contract (the “automatic theory”), or whether the innocent party was required to accept the repudiation to effect termination, in accordance with normal contractual principles (the “elective theory”).

On this specific issue, the Court of Appeal in Geys had determined that it was bound by its previous decision in Gunton v Richmond upon Thames London Borough Council [1981] Ch 448, which supported the elective theory.  However, Gunton was only a majority verdict itself and had subsequently been called into question (see, for example, Boyo v Lambeth London Borough Council [1994] ICR 727).  Therefore, the Court of Appeal gave the Bank permission to appeal to the Supreme Court on this issue.

The majority of the Supreme Court determined that a party’s repudiation terminates a contract of employment only if and when the other party elects to accept the repudiation.  This applies whether it is the employer or the employee who is in repudiatory breach.  Accordingly, the “automatic theory” was rejected.  In particular:

  • Lord Hope and Lord Wilson focused on the potential injustice that the automatic theory may cause.  Specifically, they said it would allow the wrongdoer to benefit from his own breach of contract by choosing the most opportune moment to terminate the contract, beyond the control of the innocent party.  In contrast, Lord Hope determined that “under the elective theory it is for the innocent party to judge whether it is in his interests to keep the contract alive.  Manifest justice favours preferring the interests of the innocent party to those of the wrongdoer“;
  • although the principles established in Gunton were broadly approved, Lord Wilson disagreed with Buckley LJ’s view in Gunton that an election to accept a repudiatory breach should be easily inferred, saying that this statement should be treated “cautiously”.  His view was that there is no point in conferring a right upon the innocent party to choose whether or not to accept a repudiation if another legal principle is then applied so as to deprive it of real value; and
  • Lord Carnwath noted that the elective theory had stood for 30 years “apparently without evidence of practical difficulty or injustice”, notwithstanding the criticism directed at the reasoning in Gunton during that period.

In an interesting dissenting judgment, Lord Sumption took completely the opposite view and favoured the automatic theory.  He argued that:

  • employment contracts are governed by the same principles as other contracts, save where there are compelling policy considerations that require a different approach.  Employment relationships are especially liable to give rise to such policy considerations because they have “significant social and economic implications” and “when it comes to enforcing an unwanted relationship of employer and employee, there are altogether more sensitive considerations involved than those governing most other more contractual bargains”;
  • it was important to distinguish between “core”and “collateral” contractual obligations.  Core obligations are those which are fundamental to the continued existence of the employment relationship (the obligation of the employee to work and the obligation of the employer to continue to employ and pay him).  It was well-established that an order for specific performance will not be made in relation to core obligations in employment contracts – accordingly, Lord Sumption’s view was that “the innocent party cannot meaningfully be said to have a right to treat the contract as subsisting if he cannot perform it and the law will not allow him to enforce it”.  Conversely, he noted that collateral obligations can and have been specifically enforced by the courts (for example, contractual disciplinary procedures); and
  • the majority view that the elective theory was necessary to prevent the Bank from profiting from its own wrong (and negate the effect of that wrong on Mr Geys) should be rejected.  These, he said, “are proper functions of an award of damages”.

This reasoning did not find favour with the majority, who preferred the softer approach of ensuring that there was no injustice to the innocent party.  Lady Hale in particular disagreed with Lord Sumption’s distinction between “core” and “collateral” obligations – she said that “the automatic theory simply cannot work in cases of repudiatory breach which do not amount to express dismissal or resignation.  Distinguishing between these two types of repudiation is both impracticable and unprincipled.”

The termination issue

In the light of the above, Mr Geys’ contract did not terminate automatically on 29 November 2007.  The question then was: when did it terminate?

The Court of Appeal had determined that the act of paying in lieu of notice was sufficient to terminate the employment contract on 18 December 2007.  By a majority of four to one, the Supreme Court overturned that decision.

Lady Hale gave the leading judgment on this issue, stating that:

  • it was “an obviously necessary incident of the employment relationship that the other party is notified in clear and unambiguous terms that the right to bring the contract to an end is being exercised, and how and when it is intended to operate”.  She emphasised the importance of both parties needing to know where they stand – it may affect contractual benefits (such as continuing medical and life insurance cover), eligibility for state benefits and “a good deal of money may depend upon it”; and
  • where a payment in lieu of notice was made, an employee was entitled to receive clear and unambiguous notice from the employer that such a payment has been made, in exercise of a contractual right to do so.  The employee should not be required to check his bank balance regularly – the bank was merely the employee’s agent for receipt of payment.

Again, Lord Sumption dissented on this issue.  He would have held that all that was required to terminate the contract was the making of the payment in lieu of notice in accordance with the relevant contractual term – he noted that Mr Geys had accepted in evidence that he knew in late-December that he had received the payment and he thought it probably would be a payment in lieu of notice.  He criticised the findings of the majority:

“although the employment relationship was dead for all practical purposes from 29 November, and Mr Geys contributed nothing to [the Bank’s] fortunes after that date, he is in a position to argue that technically the contract limped on as a formal ‘shell’ or ‘husk’ (to use the terms deployed in argument) into January 2008… although [the Bank’s breach] has caused Mr Geys no substantial loss, [it] will have brought him a windfall amounting to several million euros.  Rarely can form have triumphed so completely over substance.”

Other issues

In addition to the two main issues considered above, the Supreme Court was also asked to consider two other issues which turned upon the construction of the specific terms of Mr Geys’ employment contract.  On both issues, the Supreme Court’s decision was unanimous.

First, the Supreme Court considered whether there was a conflict between the provision in Mr Geys’ employment contract for termination on three months’ notice and the provision in the Bank’s employee handbook that gave the Bank a contractual right to terminate employment immediately at any time by making a payment in lieu of notice.

Lord Hope considered that it was not obvious that the two provisions were inconsistent with each other and the handbook provision could be read as qualifying the notice provision in the employment contract.  In any event, the court is under a duty to reconcile two provisions in a contract that seem to be inconsistent with each other, if that can be done conscientiously and fairly.  Therefore, it was open to the Bank to exercise the payment in lieu of notice clause in the handbook.

Secondly, the Supreme Court was asked to consider whether Mr Geys was entitled to maintain contractual claims or whether he was taken to have waived those claims.  Mr Geys’ employment contract stated (in summary) that if his employment was terminated without cause, the Bank was obliged to pay him a termination payment (comprising several elements and based on calculations set out in the contract) and Mr Geys was required to enter into a termination agreement under which he waived all statutory and contractual claims against the Bank.  Mr Geys had declined to sign the termination agreement when it was first presented to him on 10 December 2007.

Lord Wilson’s view was that the contract imposed mutual obligations binding on both parties – the Bank was required to make the termination payment and Mr Geys was required to enter into the termination agreement.  If he did not do so, he would be in breach of contract and the Bank may have a claim for damages.  However, this did not affect Mr Geys’ ability to challenge whether the termination payment he received was in fact correct and reflected the amount due to him under the contract.  Lord Carnwath expressed doubt about this conclusion and was not convinced that the obligations were mutual, although he did not go as far as dissenting.

Comment

This complex judgment raises some very interesting issues for lawyers regarding repudiatory breaches of contract.  Lord Carnwath concluded that Gunton had survived without apparent difficulty or injustice – however, there is no doubt that it caused uncertainty.  It was a split decision of the Court of Appeal that subsequent courts doubted was correct but were unable to overturn.  Now the Supreme Court has, in effect, confirmed the Gunton principles.  As Lord Wilson explained in his summary, the effect of the Supreme Court’s judgment is to “take this simmering issue off the hob”.

In practice, the lesson is clear for employers – if you want to terminate a contract of employment summarily, make sure that you do so in accordance with the terms of the contract and explain this to the employee clearly.

A failure to do so may allow an employee who affirms the contract to claim substantial damages based on contractual rights that accrue after the purported termination date – such as bonuses, share options, permanent health insurance cover or (as in this case) pre-agreed termination payments.  However, employees will not be able to claim contractual damages arising from their dismissal, beyond what would have accrued during their notice period – see Johnson v. Unisys Ltd [2001] UKHL 13 and, more recently, Edwards v. Chesterfield Royal Hospital Foundation Trust; Botham v. Ministry of Defence [2011] UKSC 58.

In relation to repudiatory breaches by employees – for example, where the employee resigns with immediate effect and refuses to work out his notice period – in practice, normally the employer will accept the breach (whilst reserving its rights).  The employee will no longer be in the workplace and the employer will not have to pay them.

However, in certain circumstances, it may be in the employer’s interests to seek to affirm the contract, particularly if it wishes to uphold the employee’s express or implied contractual duties (or, where applicable, fiduciary duties) for the duration of the notice period.  This could be useful, for example, where the employee seeks to join a competitor and there are concerns about the enforceability (or absence) of contractual post-termination restrictions.  The employer would be required to continue fulfilling its side of the bargain (by paying the employee), but commercially that may be an acceptable price if it can obtain an injunction on the basis that the employee’s contractual obligations continue, particularly if the employer has a contractual right to place the employee on garden leave.