February 1, 2013

Repudiatory breach must be accepted to end contract

The Supreme Court decision of Geys v Societe GeneraleLondon Branch considered the situation of whether or not a repudiatory breach of contract had to be accepted by the other party to bring the contract to an end (the elective theory), or whether the contract terminated automatically on the happening of the repudiatory breach (the automatic theory).

Common law principles have historically dictated that a repudiatory breach will only terminate a contract where the innocent party accepts that breach. Latterly some doubt has been thrown on this principle, with suggestions by some judges that the repudiatory breach automatically brought the contract without the need for acceptance. This case, decided in the Supreme Court, has brought the debate to a conclusion.

The facts were these. The Claimant had a contract and additional terms in the staff handbook which respectively provided for a 3 month period of notice and a PILON clause reserving the right for the employer to terminate the contract “at any time with immediate effect by making a payment to you in lieu of notice”. If this happened, the Claimant was entitled to a payment in lieu of his notice period. If this happened after 31st December 2007 i.e. in 2008, the Claimant’s PILON calculation would take into account bonus awards made in the two preceding years (2006 and 2007). If the termination took place before 31st December, the previous 2 years (2005 and 2006) were taken into account, in which case the calculation would have been lower because the bonuses that year were lower than the subsequent years. These facts set the scene for a debate over the actual termination date.

In November 2007 the Claimant was summoned to a meeting and handed a letter stating that his employment was terminated “with immediate effect”. He was escorted from the building. A few weeks later the employer paid into his bank account a sum representing the PILON. He only became aware of this shortly before the end of December. In January his solicitor wrote to the employer stating that he was affirming his contract i.e. not accepting the breach, and requesting further details on the compensation and associated payments. The employer’s response, received by the Claimant’s solicitors on 6th January, stated that the bank was purporting to dismiss using the PILON clause and this was the reason for the payment.

The Claimant issued proceedings for damages for breach of contract disputing the amount of the termination payment owned to him. This was on the basis that the termination date being prior to 31st December would mean his payment would be far less than if the termination date was after 31st December because of the amount of the bonuses paid in the years to which the calculation would be referable. The issue then turned on the actual termination date.

The case went up through the High Court and Court of Appeal to the Supreme Court which held by a majority that the elective theory, whereby the innocent person had to elect to accept the repudiatory breach, applied. The Supreme Court held that application of the automatic theory would allow the wrongdoer to benefit from the repudiatory  breach to the detriment of the innocent employee on the basis that, in this case, the calculation of PILON would be much less because of taking into account the lower bonuses awarded for the years in question. If the elective theory required, which it does, the employee to accept the repudiatory breach, the Claimant had not done this. The employer had not terminated the contract in clear and unambiguous terms until the letter of 6th January 2007 when it explained clearly that the employment was terminated and a payment in lieu of notice was being made. The letter on the 29th November when the Claimant was sacked merely stated that his employment was terminated with immediate effect and made no mention of paying him in lieu of notice. Hence the repudiatory breach of contract because the Claimant was not told, at the time the employer purported to terminate, that the discretion to pay in lieu of notice was being exercised (which, if it had done, would have meant there was no repudiatory breach of contract). The Supreme Court held that the employer could not advocate that it had properly operated the PILON clause merely by paying the monies into the Claimant’s bank account - because he was totally unaware of this except by chance.

Consequently the Supreme Court held that the repudiation of the contract in November did not terminate the Claimant’s contract because he had not elected to accept the repudiatory breach. The point which the Supreme Court made was that just because in practice the employee may have no option but to accept the repudiatory breach, it should not be assumed that in law he had no alternative but to do so. Under the elective theory, where the employee has to elect to accept the breach, he can make an informed decision as to whether it is in his interests to do so. The automatic theory, where the breach brings the contract automatically to an end, does not give the employee this option. It was clear in this situation that the Claimant would have a very obvious reason not to accept the repudiatory breach, because of the difference which doing so before 31st December would have on his payment in lieu of notice.

The interesting point about this case is the effect on the statutory effective date of termination in relation to unfair dismissal claims. Here, the date of termination is crucial because the clock starts running with effect from the effective date of termination so it is possible that an employee who gets the date wrong might be out of time for bringing a claim. The Supreme Court did not address this point, but the Court of Appeal did: stating that although the repudiatory breach which was not accepted in November did not terminate the contract, it would have constituted the effective date of termination for these purposes.

So the lesson here is that the time limit for unfair dismissal claims may start to run before the contract even comes to an end.

While this case may be very fact specific, it nonetheless demonstrates the importance for employers of making sure that they are clear in terminating and paying in lieu of notice if they have the discretion to do so.

This legal update is provided for general information purposes only and should not be applied to specific circumstances without prior consultation with us.

For further details on any of the issues covered in this update please contact Gemma Ospedale, Partner in Employment on 020 7583 2222.

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