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Important Supreme Court decision on termination and PILONS

By: Amanda Steadman

Submitted by Firm:
Addleshaw Goddard
Firm Contacts:
Michael Leftley, Sarah Harrop
Article Type:
Legal Update
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The Supreme Court has handed down its decision in Société Générale, London Branch v Geys which confirms that: (i) an employment contract is not terminated by way of a repudiatory breach unless and until that breach is accepted by the innocent party; and (ii) where a party to an employment relationship wishes to lawfully terminate the contract, it must notify the other party in "clear and unambiguous" terms that the right to bring the contract to an end is being exercised.  Where an employer wishes to effect immediate termination by relying on a payment in lieu of notice (PILON) clause, it must, in addition to making the payment itself, give clear and unambiguous notice to the employee that the contract is being terminated with immediate effect in accordance with the PILON provision.

Background

The Claimant was employed by Société Générale (SG) under a written contract of employment containing a provision that the employment could be terminated on 3 months' notice.  The contract also incorporated further terms set out in SG's Staff Handbook, including a provision which allowed for immediate termination "by making a payment [to you] in lieu of notice".  Where this provision was exercised, the contract also required SG to make a termination payment, which included a "compensation payment" calculated by reference to the date the employment terminated.  Where the date was after 31 December 2007, the Claimant was entitled to a compensation payment reflecting awards made to him in 2006 and 2007 (circa €12.5 million).  Where the date was before 31 December 2007, the compensation would reflect awards made to him in 2005 and 2006, which were significantly lower (circa €8 million).

The following events took place towards the end of 2007:

  • On 29 November 2007 the Claimant was summarily dismissed in breach of the terms of the employment contract.  SG did not notify the Claimant that it was terminating immediately in accordance with the PILON.
  • On 7 December 2007 the Claimant's solicitors wrote to SG asking for further information about the sums that it was offering to pay and also reserving all of the Claimant's rights.
  • On 10 December 2007 SG sent the Claimant a draft severance agreement together with a letter listing the payments that it proposed to make to him.  The Claimant was asked to agree the terms set out in the letter by returning a signed copy, but he did not do so.
  • On 18 December 2007 SG paid approximately £32,000 into the Claimant's bank account.  This money represented the sums due under the PILON clause.  SG did not notify the Claimant that this payment had been made or what it represented.
  • SG then sent a payslip (and a P45) to the Claimant which set out the various elements of the payment made on 18 December 2007.  The Claimant did not see this payslip until either 7 or 8 January 2008 (having been away from the UK over the Christmas period).  The Claimant said in evidence that he assumed the payment was intended to represent the PILON but he was not sure.
  • On 21 December 2007 the Claimant's solicitors responded to SG asking for further information, including on how the proposed payments had been calculated.  They confirmed that the Claimant's rights remained reserved.
  • On 2 January 2008 the Claimant's solicitors wrote to SG stating that the Claimant had decided to "affirm his contract of employment".  They also confirmed that the Claimant reserved his position in respect of the monies paid on 18 December 2007 until he understood what they represented.
  • On 4 January 2008 SG wrote to the Claimant confirming details of the termination of his employment, which stated that the PILON payment was credited to his bank account on 18 December 2007.  Under the deemed notice provisions of the Staff Handbook, this letter was deemed received on 6 January 2008.

The Claimant subsequently brought a claim in the High Court for wrongful dismissal and breach of contract.  The High Court held that the employment contract terminated on 6 January 2008. This was because the letter of 4 January 2008 was the first time that SG had notified the Claimant that it had exercised the right to terminate immediately in accordance with the PILON provision.  This letter was deemed received on 6 January 2008, hence this was the termination date.

SG appealed to the Court of Appeal arguing that the repudiatory breach of contract on 29 November 2007 automatically brought the contract of employment to an end and it was not open to the Claimant to accept or reject that breach.  In the alternative, SG argued that if the contract did not terminate on 29 November 2007, then it terminated on 18 December 2007 when the PILON payment was credited to the Claimant's bank account.  The Court rejected the argument that the repudiatory breach automatically ended the contract and it was open to the Claimant to affirm the contract (which he did),  However, the Court agreed that the contract terminated on the date that the PILON payment was made.  This was decided on the basis that the Staff Handbook was clear that all SG needed to do was make the payment. 

Decision of the Supreme Court

The Claimant appealed to the Supreme Court and SG cross-appealed on the "automatic termination" point.  By a majority, the Court upheld the Claimant's appeal and rejected SG's cross-appeal.  It was held:

  • A wrongful repudiation terminates the contract only if and when it is accepted by the innocent party.  The automatic termination approach would reward a wrongful repudiator by allowing him to choose a termination date which suits him.  In this case, this meant that it could not be said that the contract terminated on 29 November 2007.
  • The employment relationship requires that the other party be notified in "clear and unambiguous terms" that the right to end the contract is being exercised and how and when it is intended to operate.  This is necessary so that both parties know where they stand as there may be rights (such as insurance benefits and entitlements to bonuses) which depend upon the employment continuing.  In this case, clear and unambiguous notice was not given to the Claimant until 6 January 2008.  Therefore, this was the termination date.

Comment

On the repudiation issue, this case confirms that:

  • Where the employee commits a repudiatory breach, the employer should consider whether it wishes to accept the breach or affirm the contract.  There may be cases where an employer would wish to affirm the contract (e.g. if the employee resigned without giving full notice and the employer wished to hold the employee to his notice period - although in practice, it is likely that an employee who wished to escape his notice period would seek to argue that the employer had committed a repudiatory breach and he was resigning in response to the breach).  In either case, the employer should ensure it communicates its decision to the employee.
  • Where the employer commits a repudiatory breach, the employer should be mindful of the fact that this will not bring the contract to an end unless and until the employee accepts the breach.  Accordingly, if the employer is concerned to bring the contract to an immediate end, then it must ensure that it complies with the terms of an immediate termination provision in the contract (e.g. a PILON provision or another provision entitling summary dismissal).

On the notification issue, this case confirms the importance of clearly notifying the employee that the right to end the contract (whether by way of a PILON or otherwise) is being exercised and how and when it is intended to operate.  Where the contract is to be ended by way of a PILON, the Court noted that a "wise employer" would give such notification in writing but that it would be possible to do this verbally when handing over a payment. 

Société Générale, London Branch v Geys