IMMEDIATE TERMINATION AND A NEW IMPLIED TERM

Transcription

1 IMMEDIATE TERMINATION AND A NEW IMPLIED TERM The Supreme Court has today handed down its decision in Societe Generale v Geys [2012] UKSC 63. This update will look at the two most significant points from the judgment, and how the Court reached its conclusions. Since this update is long, by way of summary the two significant points are that: 1. A repudiation of a contract of employment by the employer which takes the form of an express and immediate dismissal does not automatically terminate the contract. Rather, the normal contractual rule that the repudiation must be accepted by the other party applies, meaning that the contract continues in existence unless and until the employee expresses an intention to bring the contract to an end, or does something which is inconsistent with its continuation. 2. In order for an employer effectively to terminate a contract of employment pursuant to a contractual payment in lieu of notice clause, it is necessary that the employee actually receives his payment in lieu of notice and that he receive notification from his employer, in clear and unambiguous terms, that such a payment has been made and that it is made in the exercise of the contractual right to terminate the employment with immediate effect. There is an implied term to this effect. The facts Mr Geys (described by Lord Sumption as a lucky man ) had a highly paid job with Soc Gen with an entitlement to participate in a profit-sharing bonus scheme in addition to discretionary bonuses. Soc Gen were entitled to dismiss Mr Geys at any time upon three months written notice. Mr Geys contractual documentation also stated that Soc Gen reserves the right to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice. The termination payment provisions in Mr Geys contract meant that, if Mr Geys employment terminated after 31 December 2007, he would be entitled to a payment amounting to several million Euros more than if his employment terminated on or before 31 December On 29 November 2007, Mr Geys was called to a meeting and given a letter informing him that Soc Gen had decided to terminate his employment with immediate effect, and that the appropriate termination documentation would follow. In Lord Sumption s words: In accordance with the time-honoured ritual, he was then taken to clear his desk and escorted from the building by security staff. There could not have been the slightest doubt that his employment relationship with [Soc Gen] was at an end. He cannot have supposed that he had been dismissed for cause, for no cause was stated. The only reasonable inference was that [Soc Gen] was purporting to dismiss him summarily without cause 1

2 Mr Geys in fact received payment in lieu of notice on 18 December 2007, and he became aware of this payment at some point in late December Mr Geys solicitors reserved his rights in writing during December 2007, and then on 2 January 2008 they wrote to Soc Gen saying that he had decided to affirm his contract. On 4 January 2008, by letter deemed received on 6 January 2008, Soc Gen wrote to Mr Geys confirming that he had been paid in lieu of notice on 18 December 2007, and that he was given notice to terminate his employment with immediate effect in 29 November The majority of the Supreme Court (Lord Sumption dissenting) held that Mr Geys contract of employment did not terminate until 6 January 2008 (with the effect that he would be entitled to several million more Euros than if termination had taken effect in 2007). The repudiatory breach issue The critical question for the Court was whether a party s immediate and express repudiation of a contract of employment automatically terminates the contract (the so called automatic theory ), or whether such a repudiation terminates the contract of employment only if and when the other party elects to accept the repudiation (the elective theory ). That question was resolved at Court of Appeal level in favour of the elective theory by Gunton v Richmond-upon- Thames LBC [1981] Ch 448. However, it was open to the Supreme Court to decide in favour of either doctrine, and the elective theory has been controversial and generated much academic debate. The judgments are spirited: giving the leading judgment for the majority in favour of the elective theory, Lord Wilson endorses comments that the automatic theory is contrary to principle and undesirable in practice, and Lady Hale calls the automatic theory both impracticable and unprincipled, whilst Lord Sumption says of the majority decision Rarely can form have triumphed so completely over substance. The majority found that the critical points in favour of the elective theory were: 1. Cases where the employer has enforced certain obligations which subsist during the contract of employment, notwithstanding a purported resignation with immediate effect by the employee (e.g. Thomas Marshall v Guinle [1979] 1 Ch 227). It is trite that the Courts will not grant specific performance of a contract of employment, but the Courts will grant garden leave injunctions 1. The question might be posed as: given that the employee cannot unilaterally terminate the contract by purporting to resign with immediate effect in breach of contract, why should the employer be able to do so by purporting to dismiss with immediate effect? 2. The availability of an injunction to require an employer to comply with a contractual disciplinary procedure, notwithstanding a stated intention to 1 Whilst the best-known garden leave injunction cases are not referred to in the judgments, they are founded upon the same principle as the earlier cases referred to by the Supreme Court. 2

3 dismiss outside of that procedure (e.g. Edwards v Chesterfield [2012] IRLR 129). Lord Sumption describes the disciplinary and competition/garden leave type cases as relating to the enforcement of collateral obligations, rather than the fundamental work-wage obligations of a contract of employment, but the majority state that that analysis fails to engage sufficiently with their significance. 3. That the contract of employment is a special case in terms of the remedies available is clear not only from the unavailability of specific performance, but also from the fact that the readiness of an employee to resume work following a purported wrongful dismissal which he has declined to accept does not entitle him to sue for his salary or wages, but only for damages (subject to the usual duty to mitigate his losses). However, being a special case in terms of remedies should not affect the fundamental operation of the contract itself. Lord Wilson endorses the analysis that the automatic theory, which jumps from the absence of a remedy to the absence of all rights, heedless in particular of contractual rights other than to payment of wages or salary is a bastard doctrine which is difficult to reconcile with the general principles of contract law. 4. The automatic theory can operate to the disadvantage of the injured party in a way that enables the wrongdoer to benefit from his own wrong and (per Lord Hope): Where there is a real choice as to the direction of travel, the common law should favour the direction which is least likely to do harm to the injured party. 5. Particularly given that the elective theory approved in Gunton has held sway for 30 years apparently without evidence of practical difficulty or injustice, the usual contractual rule that a repudiatory breach is a thing writ in water, which does not operate to terminate the contract unless and until it is accepted, applies equally to a contract of employment. The majority disapprove the suggestion in Gunton that the Courts should easily infer acceptance of a repudiatory breach consisting of purported immediate termination what is required is real acceptance, i.e. a conscious intention to bring the contract to an end, or the doing of something that is inconsistent with its continuation. The difficulty for the employee who wishes to affirm the contract when has purportedly been summarily dismissed is that, since he cannot sue for his wages as a debt, but rather must seek damages, in practice he is required to mitigate his losses. If he mitigates his losses actually by obtaining new employment, that must in most circumstances be an act inconsistent with the continuation of his employment with his old employer. So he is in effect forced into accepting the repudiation. Be that as it may, the Supreme Court s decision puts to bed the automatic theory for good, and the result for Soc Gen was that its purported termination with immediate effect on 29 November 2007 was ineffective. The new implied term 3

4 Lady Hale gave the lead judgment on the issue of when Soc Gen succeeded in terminating Mr Geys contract in accordance with its terms, and the critical issue of whether payment of money in lieu by itself was sufficient to terminate the contract, or whether further notification was required. Her Ladyship distinguishes between two different kinds of implied terms: 1. Terms which are implied into a particular contract because, on its proper construction, the parties must have intended to include them; and 2. Those terms which are implied into a class of contractual relationship as a necessary incident of the relationship concerned, unless the parties have expressly excluded it. In relation to such terms, she endorses the following guidance rather than focus upon the elusive concept of necessity, it is better to recognise that, to some extent at least, the existence and scope of standardised implied terms raise questions of reasonableness, fairness and the balancing of competing policy considerations. In the critical parts of her Judgment, Lady Hale says this: [57] it seems to me to be 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. These are the general requirements applicable to notices of all kinds, and there is every reason why they should also be applicable to employment contracts [58] It is necessary, therefore, that the employee not only receive his payment in lieu of notice, but that he receive notification from the employer, in clear and unambiguous terms, that such a payment has been made and that it is made in the exercise of the contractual right to terminate the employment with immediate effect [59] It is not good enough to purport summarily to dismiss the employee without stating a cause and without making a payment, then to realise that there is no right to do that, but that there is the right to terminate under a PILON clause, and so decide to exercise that right without telling the employee that the right is being exercised and the payment has been made [60] Given that such a notice is a necessary incident of the relationship, a wise employer would take care to give it in writing. But if the contract does not require writing, it would be possible for an employer to hand over the correct money and clearly state at the same time that this brings the employment to an immediate end, in place of the notice period to which the employee would otherwise be entitled if payment is made direct to the employee s bank account, the employee s bank is his agent for the receipt of payment, but it is not without more his agent for the receipt of notification of what the payment is for. That notification has to be given to the employee. 4

5 This new implied term, particularly when combined with the elective theory, might well have significant consequences in practice. By way of example, it seems to me to give rise to the following legal conundrum: 1. An employer, in similar circumstances to Soc Gen, purports to terminate with immediate effect on 1 January, without clearly stating that the employee will be paid in lieu (or, perhaps, stating that the employee will be paid in lieu, but not stating when the payment will be made); 2. The employee then writes to the employer affirming the contract; 3. On 7 January, the employee receives payment in lieu of his three month notice period, running from 1 January, and written notification that that his contract has been terminated with effect from 1 January by the PILON; 4. Is the employee entitled to say that, since the termination could not take effect on 1 January in the absence of actual payment in lieu, he has still not been paid in lieu of his full three month notice period (because the 7 January payment is a week short), so the employer remains in (unaccepted) repudiatory breach of contract? 5. Can that situation continue unless and until the employee receives payment equivalent to three full months pay and notification (on the same day) that that full amount has been paid? 6. If so, why was Soc Gen s termination effective on and from 6 January 2008, when Mr Geys had not received payment in lieu of his notice period running from that date? 7. Answers on a postcard please! It is worth practitioners remembering that express words can exclude implied terms, so well advised employers going forward will wish to ensure that their PILON clauses are carefully drafted to make clear how notice of termination pursuant to the PILON clause may be given (perhaps by reference to the receipt of payment into a bank account?). Conclusion There is a lot to consider in this judgment, and no doubt it will spark considerable academic and practical debate, and much further writing. At this early stage, at a minimum it seems to me that: 1. Employers should ensure that their contractual PILON and notice provisions are reviewed in light of the judgment, to ensure that the effective contractual date of termination is clearly defined. 2. Employers should ensure that those writing termination letters are given clear guidance about the wording to be included in such letters, and the practicalities that need to be completed in good time. 3. Employees who wish to keep the contract of employment on foot for any reason should ensure that they write to the employer affirming the contract as soon as possible, to avoid a finding that they have impliedly accepted the employer s repudiatory breach. Craig Rajgopaul 19 December