What is the position if business owners employed by their own company award themselves substantially enhanced ‘golden parachute’ terms in advance of a TUPE transfer, confident in the expectation that those liabilities will be picked up by the unwitting transferee?

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1. The Supreme Court handed down its judgment in this case today; [2019] UKSC 32. It has not heralded quite the sea change in the law that some commentators had anticipated.

2. Ms Tillman had a contract that precluded her from being engaged, concerned or interested in a competing business (post termination), but omitted the conventional saving allowing her to hold a minority shareholding in a publicly quoted company. At first instance, the Judge (Mann J) held that properly construed, the restraint did not bite on a passive shareholding and made an injunction enforcing it.  The Court of Appeal set aside the injunction, on the basis that the prohibition on being ‘interested in’ a competing business plainly extended to a passive shareholding and that part of the covenant could not be severed or blue-pencilled, applying Attwood –v- Lamont [1920] 3 KB 571 (severance of an apparently unitary covenants only possible where as a matter of grammer/construction it comprised two or more discrete restrictions).

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As Lord Sumption observed in Societe Generale –v- Geys [2012] UKSC 63, Mr Geys is “a lucky man”.   He was dismissed from his employment with SocGen in late 2007 or early 2008.  The precise date of termination was critical.   If his contract of employment was properly regarded in law as determining on 29.11.07 (when SocGen gave him a letter terminating his contract with immediate effect and promising that “appropriate termination documentation” would follow, and escorted him from the building) or on 18.12.07 (when SocGen made a payment in lieu of notice into his bank account) the termination payment to which he was entitled was limited to about Euros 7 million.   If his contract did not in law determine until January 2008 (when he received the Bank’s notification that they had exercised their rights under the PILON clause), his entitlements moved comfortably into double figures (at least according to reports of the case that have featured in the popular press). 

It was common ground that had the Bank handed Mr Geys a cheque for his payment in lieu of notice on 29.11.07, his dismissal would have taken effect at once, in accordance with the PILON clause in his contract.   But the Bank made a mistake and did not make the PILON for about 3 weeks – and then paid it into Mr Geys’ bank account without giving him any direct notification.   It was accepted that the Bank had repudiated Mr Gey’s contract on 29.11.07, but (as Lord Sumption observed) this was a repudiation of the most technical kind, because there was no doubt about SocGen’s right to dismiss with immediate effect (i.e under the PILON clause) if they had gone about things in the right way, and SocGen’s mistake caused Mr Geys no loss.

The case raised two questions of “of general public importance” (Lord Hope at para 14) about the termination of contracts of employment.   First, did a repudiatory notice of instant dismissal (the letter of 29.11.07) operate automatically to bring the contract to an end, or was it a ‘thing writ in water’ unless and until accepted by Mr Geys?   And second, if Mr Geys’ contract was still on foot after 29.11.07, had it been determined by the making of the PILON on 18.12.07?   Read literally, all that the PILON clause required to bring about the termination of the contract was the making of the payment.   Was this enough, or was something more required?  These questions (and a couple of other questions of contractual construction specific to the case), were answered in Mr Geys’ favour; he will no doubt be enjoying some Christmas cheer.   This note addresses the two questions “of general public importance”.

Unilateral or Elective?  

Does a repudiation of an employment contract which takes the form of an express and immediate dismissal automatically terminate the contract or does the normal contractual rule that the repudiation must be accepted by the other party apply?   The Supreme Court addressed directly the debate between the elective and automatic theories of contract termination, when applied to contracts for personal service, and confirmed (Lord Sumption dissenting) that the elective theory was to be preferred, both on authority and on principle.  

Lord Wilson gave the principal judgment.   It was common ground that whichever theory was selected “it would apply equally to wrongful repudiations by employers (i.e. wrongful dismissals) and wrongful repudiations by employees (i..e wrongful resignations)” (para 63).   He referred to a number of categories of cases which could only be explained or understood on the basis of the elective theory: e.g. where provisions which did not survive the termination of the contract had been enforced against the repudiator (paras 69 to 72; the competition cases), or where the courts had obliged the repudiator by injunction to implement a contractual disciplinary procedure (paras 73 to 75; the disciplinary cases).   He was satisfied that the preponderance of authority favoured the elective approach.  He concluded that “[i]n proposing … the automatic theory, the Bank invites it [the court] to cause the law of England and Wales in relation to contracts of employment to set sail, unaccompanied, on a journey for which I can discern no just purpose and can identify no final destination.    We should keep the contract of employment firmly within the harbour which the common law has solidly constructed for the entire fleet of contracts in order to protect the innocent party, as far as practicable, from the consequences of the other’s breach” (para 97).

Lord Hope added some observations on the issues of principle.   He considered that the automatic theory could operate to the disadvantage of the victim in a way which allowed the wrongdoer to profit from his own wrong, and the common law should favour the course likely to do the least harm to injured party (paras 15 & 17, 18).    And he expressly disapproved the suggestion (found in Gunton) that the court could more easily infer acceptance in the employment context than in other contractual settings; “[i]f the law requires acceptance of the repudiation, the requirement is for real acceptance –  a conscious intention to bring the contract to an end, or the doing of something inconsistent with its continuation” (para 17).

Lord Sumption’s Dissent

In Lord Sumption’s view, the employment relationship was dead for all practical purposes after 29.11.07.   Because there had been a technical repudiation on that date, Mr Geys could rely upon the elective theory to argue that “technically the contract limped on as a formal ‘shell’ or ‘husk’ … into January 2008 … [bringing] him a windfall amounting to several million euros.  Rarely can form have triumphed so completely over substance” (para 108).   However, the elective theory of contract repudiation was apt to mislead, because the innocent party to a repudiated contract could not treat it as subsisting if (i) performance on his part depended on the cooperation of the repudiating party and (ii) the contract was not capable of specific performance (para 116).   Employment contracts fell into this class.   Lord Sumption suggested that whilst the employee could not treat the contract of employment as subsisting after a repudiation which terminated the employment relationship de facto, the repudiation would not necessarily bring to an end “collateral obligations” which were not (of necessity) dependent on the existence of the relationship of master and servant (such as express or implied covenants against competition).   In his view “[w]hether collateral obligations of this kind bind after the termination of the contract or the underlying relationship will normally depend on the construction of the contract or the underlying nature of the implication if the obligation is implied … it is not necessary to prolong the life of a repudiated contract of employment in order to justify this body of law” (para 141).

What is required of an employer when giving notice?

The Supreme Court also gave consideration to the steps necessary to give notice of dismissal.    It was not enough to make the PILON (notwithstanding that the PILON clause seemed to stipulate that this was the terminating event).  According to Lady Hale (i) 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.   Both the employer and the employee need to know where they stand …. the exact date on which the employee ceases to be an employee” (para 57); (ii) in a PILON case ”[i]t is necessary …. 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 a contractual right to terminate the employment with immediate effect” (paras 58 & 59); and (iii) “[g]iven that such a notice is a necessary incident of the relationship, a wise employer would take care to give it in writing”, but whilst this was not required unless the contract so stipulated, simply making a PILON into the employees bank account was not enough, because whilst the employee’s bank might be his agent for the receipt of payment, “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” (para 60).  

Lord Carnwath expressed himself in similar terms on this question – “it was necessary for the employer to ensure that the payment was unequivocally identifiable as an exercise of power under [the PILON clause]” (para 103).

This question did not arise on Lord Sumption’s analysis, although he did draw attention to the difficulties created by “highly technical questions about the validity of notices” that can arise if the contract is regarded as subsisting after the employee’s exclusion from work (para 140).   He also said that if Mr Geys had been entitled to affirm the contract after 29.11.07, “then all that was required to satisfy [the PILON clause] was the making of the payment in lieu.   That seems to be more consistent with both the reality of the situation and the approach … in Abrahams -v– Performing Rights Society … and … in Cerberus Software Ltd –v- Rowley” (para 143).   The majority, however, were with Lady Hale on this issue.

Conclusion

These judgments would seem to put to bed the debate about the elective and unilateral theories of contract termination in the employment context, and (unless and until the question is revisited in the Supreme Court), Lord Sumption’s dissent is of largely academic interest (wherever one stands on its conceptual purity or practical validity).   Lady Hale’s judgment has revealed a new ‘implied incident’ of the employment relationship in exercising rights to give notice.  

There is some force in Lord Wilson’s view that the competition and disciplinary cases are inconsistent with the automatic theory and that to describe them as examples only of collateral obligations does not engage sufficiently with their significance (para 75).   By way of example, it is difficult to explain or rationalise the garden leave injunction (where the employer does not accept the employee’s repudiation but holds the employee to his good faith duty during a period of unexpired notice) with Lord Sumption’s theory of collateral obligations; the good faith duty is a central incident of the employment contract.   And as Lord Wilson points out, whilst the employment contract is a special case as regards remedies, the embargo on specific performance is not a hard and fast rule (e.g. where notwithstanding a repudiation, trust and confidence has not been forfeit; cf Hill –v- Parsons) and may need to be revisited given “nowadays the more impersonal, less hierarchical relationship of many employers with their employees” (para 77).     

However, the judgments of the majority leave a number of questions unanswered, many highlighted in Lord Sumption’s judgment.  Is the employee entitled to wages after he has been wrongfully sacked and excluded from the workplace, but has declined to accept his sacking?    Is he under any obligation to mitigate?  Conceptual orthodoxy would suggest that the answers to these two questions are (respectively) yes and no.    The contract subsists so he is entitled to the sums he is due pursuant to it, and how (to paraphrase Lord Sumption at para 139(5)) can the employee “be compelled … to mitigate the loss of his bargain when in law it has not been lost”.  However, this is not the result advocated in some of the leading elective theory cases (such as Gunton, suggesting that only damages will be recoverable after an exclusion from work and that the employee must mitigate).  Take the paradigm example of the employee (wrongly) dismissed for gross misconduct.   Can he decline to accept his dismissal and keep the contract alive?   Must the parties await the determination of the court on the gross misconduct question before they know whether the employment contract has been effectively brought to an end?   What is the employee to do in the meantime?   Mitigate (as suggested in Gunton)?   Even if that is right, where does this leave the employer – faced (per Lord Sumption at para 139(5)) with “a penumbral contractual liability, the duration of which is uncertain and the extent of which depends on the inherently uncertain question of whether he can show that the employee has failed to satisfy the relatively light burden of mitigating his loss”.   These questions have considerable practical implications and are not satisfactorily addressed in the judgments of the majority.    Much remains to be worked out.   

In Imam-Sadeque –v- Bluebay Asset Management (Services) Ltd Popplewell J had to consider the scope of an employee’s duty of fidelity.    He was referred to nearly all of the recent cases, but found them of “limited assistance” because whilst they provided “helpful guidance as to the application of the principles to particular cases …. the precise scope and content of the duty … and whether it has been breached, is a question of fact which depends upon the particular circumstances of the case” (para 132).   That said, his judgment is an example of the recent direction of travel in the authorities, which as Hadden-Cave J observed in QBE (covered in an earlier post) has seen a tightening of the standards expected of an employee.

Simplifying the facts somewhat, the claimant was a senior employee with BlueBay, an asset management company.   As at July 2011, he had been granted Fund Units (under a bonus plan) that vested between January and March 2012.   Under the plan, he forfeited those fund units if he left before the vesting dates as a “Bad Leaver”, and he was a bad leaver if he left voluntarily.    In July 2011, the parties made a compromise agreement under which the claimant was placed on garden leave until 31.12.11, but would be treated as a “Good Leaver” (and thus entitled to his Fund Units) provided that he was not in repudiatory breach of his employment contract as at the date of the agreement and had not acted in repudiatory breach of that contract whilst on garden leave.   Unknown to BlueBay, the claimant had agreed to join a new start up asset management company (Goldbridge) at the date of the compromise agreement, and he started working for Goldbridge after 31.12.11.   BlueBay contended that the claimant was not entitled to his fund units because (i) he had assisted Goldbridge in planning and launching its competitive business and had failed to disclose to BlueBay that Goldbridge had the funding, resources and infrastructure in place to launch, (ii) he had encouraged and assisted Goldbridge to recruit one of his BlueBay colleagues, and (iii) he had disclosed various other pieces of information to Goldbridge (such as details of an internal restructuring, the terms of the compromise agreement and  the terms of BlueBay’s employee handbook and bonus plan) whilst on garden leave.

In dealing with the law, Popplewell J rejected three principal submissions made by the claimant:-

1. First, that the duty of fidelity required in essence no more than a duty to act honestly  – rejected because “an honest but misguided disloyalty is no less a breach than a dishonest one” (para 126).
2. Secondly, that the claimant’s duty of good faith was attenuated when he was placed on garden leave – rejected because “one of the common purposes of putting an employee on garden leave is to secure his loyalty to the current employer during the notice period, and to delay the transfer of his loyalty to a new employer until after its expiry.  An employer may thereby legitimately seek to restrict the impact of any competitive activity by the employee, and protect the integrity of the employer’s workforce.  There is no reason in principle, or authority, why the aspects of the duty of loyalty which touch upon competitive activity, or the enticing away of employees, should be attenuated so as to interfere with these legitimate purposes of garden leave” (para 145).
3. Third, that the claimant was not obliged to disclose or report things told to him in confidence by a prospective new employer when exploring the possibility of moving employment – rejected because”if a senior employee, who is seeking to join what he knows to be a potential rival, learns of a competitive threat from that source, of which he would otherwise be under a duty to warn his employer, he can not relieve himself of that obligation by virtue of having entered into a contractual duty towards the rival not to fulfil it.  If he could, the duty of fidelity in such cases could be bypassed or severely emasculated by the expedient of entering into an NDA with the competitor.  It is not unusual for parties to undertake mutually inconsistent contractual obligations.  The existence of one does not excuse non performance of the other” (para 148).

Applying these principles, Popplewell J concluded that the claimant’s duty of fidelity (i) required that prior to 31.12.11 he should not have provided any assistance to Goldbridge in setting up and launching its business beyond agreeing to join, negotiating terms and making and cooperating in the legal, administrative and regulatory arrangements to enable him to start when free to do so, and (ii) obliged him to tell BlueBay that Goldbridge intended to launch a competitive business in October 2011, and had the infrastructure in place to enable it to do so (paras 150 and 151).  

In the Judge’s view “[a]ny discussion about ‘how the business might develop,’ or its ‘philosophy’ would likely be a breach of duty because it would assist Goldbridge in the formation of the shape and direction of the business” (para 155).   On the Judge’s findings of fact, the claimant’s involvement in the Goodbridge launch went much further than this, and this may well have coloured his conclusions on the law, but how realistic is this extremely restrictive approach?   Senior employees are obviously entitled to look for work elsewhere or to respond to approaches from head hunters.    In any employment interview the candidate will have to sell himself to the prospective employer – to identify how he might fit in and what he is likely to bring to the table.   Applying the conclusions expressed in this judgment, that might of itself place the employee in breach of his duty of fidelity, and he would be required to report the competitor’s interest to his employer.   In the Tullett Prebon case, Jack J accepted the validity of an express clause obliging the employee to disclose offers of alternative employment made to him, but this judgment comes close to saying that such an obligation will frequently arise by implication, as an incident of the duty of fidelity.   And if an employee cannot legitimately give a prospective employer some assurances of confidentiality in relation to their discussions, doesn’t this impose a practical inhibition on his ability to seek alternative work – at least without resigning first and placing himself on the open market?      

The claimant also argued that the terms of the compromise agreement that provided for him to forfeit his Fund Units in the event of a breach of the compromise agreement was unenforceable as a penalty clause – the effect of the compromise agreement was to provide for the forfeiture of existing contractual rights (dependent upon performance of contractual obligations) on the occasion of any breach, however trivial, and did not constitute a genuine pre-estimate of loss.   The Judge rejected that the doctrine was even engaged, because (i) “[t]he Compromise Agreement did not provide for forfeiture of his interest in his 2012 Fund Units upon breach of that Agreement, either in form or in substance.  It conferred a conditional benefit in relation to his interest in the Units which never accrued because he failed to fulfil the condition, namely performance of the Agreement” (para 208), (ii) “even if the forfeiture were to be treated as occurring by reason of breach of the Compromise Agreement, what was forfeit were contingent future interests in the 2012 Fund Units.  These are not to be treated as equivalent to the payment of a money sum by Mr Imam-Sadeque upon breach so as to come within the doctrine” (para 210), and (iii) “[t]here is a distinction between contingent rights and accrued rights.  I would not extend the doctrine to apply to such [i.e contingent] rights in the light of the authority I have cited which dictates that because the doctrine is an interference with freedom of contract its application is not to be expanded more widely than its current limits”.  

 In any event, the Judge found that even if the penalty doctrine was engaged, “it would [not] be right to categorise the terms of the Compromise Agreement, taken as a whole, as using the possibility of the Units not vesting in a way which is predominantly intended as a deterrent against breach.  Their treatment is one element of a bundle of rights and obligations which must be viewed as a whole and is commercially justifiable” (para 232).    The Judge was clearly impressed by the fact that the compromise agreement was negotiated at arms length by parties of equivalent bargaining power with legal advice.   His approach echoes that taken by Nelson J in another penalty case (Tullett Prebon –v- El Hajjali [2008] IRLR 760 at patra 74) that “[w]here a bargain has been struck by two parties of equal bargaining power, with each party legally represented, a court should consider long and hard before permitting one of the parties to resile from that agreement.”

The Court of Appeal has today handed down judgement on the appeal against Slade J’s decision in Hunter –v- McCarrick  [2012]EWCA Civ 1399.   The Court of Appeal confirmed that the statutory concept of service provision change requires “the same client throughout” the change in service provider.   This was the natural consequence of the words used and there was no need to import a purposive construction in domestic legislation that did not seek to give effect to EU law; paras 37 & 38.

 The appellant had also argued that there had been a business entity (old style) transfer.   This was rejected for a number of reasons that do not really advance the jurisprudence (paras 42 to 47), but does contain one point of interest.    At the conclusion of his judgment, Elias LJ noted (para 48) that the appellant assumed that “if he could show that there was a regulation 3(1)(a) transfer, it would not matter that there had been a change in the client receiving the service”.   Whilst Elias LJ thought that this may be right, he said that the point was arguable and not covered by any authority.   He ventured the observation that “it may be that where the business is in the nature of a service provided to a particular client, the identity of the client is an essential element in description of the undertaking”, with the result that if the post transfer service was carried on for a new client, there could not be an old style transfer either.    However, according to Elias LJ that was “an argument for another day”, so watch this space.

As Julian Wilson’s earlier post on  Force India F1 Team -v- 1 Malaysia F1 Team [2012] EWHC 616 mentioned, in this case Arnold J had to consider the correct approach to the computation of damages (or equitable compensation) in cases of breach of contractual (or equitable) obligations of confidence.     His judgment gives some encouragement to employment lawyers seeking to use Wrotham Park (and similar cases) to recover what Arnold J chose to style as “negotiating damages”.  After an extensive review of the authorities, he concluded that such damages were available for breaches of both contractual and equitable obligations of confidence.   He summarised the availability for damages or equitable compensation for breaches of obligations of confidence in terms as follows (para 424):-

 “Where the claimant exploits confidential information by manufacturing and selling product for profit, and his profits have been diminished as a result of the breach, then he can recover his loss of profit.   Where the claimant exploits his confidential information by granting licences to others, and his licence revenues have been diminished as a result of the breach, he can recover his lost revenue.   Where the claimant would have ‘sold’ the confidential information but for the breach, he can recover the market value of the information as between a willing seller and a willing buyer.   Where the claimant cannot  prove he has suffered financial loss in any of these ways, he can recover such sum as would be negotiated  between a willing licensor and a willing licensee acting reasonably as at the date of the breach for permission to use the confidential information in the manner in which the defendant has used it [Emphasis Supplied]”.

The Judge also made some general observations about the basis of assessment.   He said that (i) the assessment should be made as at the date of the breach, (ii) where nothing like a negotiation had taken place between the parties, it was reasonable to look at the eventual outcome and to consider whether or not that was a useful guide to what the parties might have thought at the time of their hypothetical negotiation, and (iii) the court could take into account delay by the claimant in asserting his rights (para 386).   Moreover, in assessing the licence fee, “the availability or otherwise of the information from an alternative, lawful source was a highly material consideration … The more inaccessible the information, and thus more difficult it would have been for the defendant to obtain it by lawful means, then the higher the fee that will be payable, other things being equal” (para 426 & 427).

Arguably, this shows a more permissive approach to the availability of such damages that taken in the QBD in conventional post termination restrictive covenants cases (see, e.g., Jack J’s judgment in BGC –v- Rees), and accords with the approach taken in Jones –v- Ricoh (another recent Chancery Division case).   Both these cases are considered in earlier posts.   Given that Arnold J applied his analysis to contractual and equitable obligations of confidence without distinction, it is hard to see why (in principle) it should not be adapted to (say) breach of a conventional non-compete clause designed to protect confidential information or police observance of obligations of confidentiality.

It seems to remain the position, however, that even where Wrotham Park or “negotiating” damages are awarded, they are likely to be conservatively assessed.   In Vercoe -v – Rutland Fund Management Ltd [2010] EWHC 424 (Ch) Sales J had said (at para 292) that what was required from the Court was an assessment of a fair price for the release or relaxation of a contractual restriction, having regard to (i) the likely parameters given by ordinary commercial considerations bearing on each of the parties; (ii) any additional factors affecting the just balance to be struck between the competing position of the parties; and (iii) “the Court’s overriding obligation to ensure that an award of damages for breach of contract … does not provide relief out of proportion to the real extent of the Claimant’s interest in proper performance judged on an objective basis by reference to the situation which presents itself to the Court …”.   In Force India –v- I Malaysia, the claim was that Lotus had misused some of Force India’s confidential information in the development of its car.    The negotiating damages were said to run into millions.   The Court awarded Euros 25,000.