Keep the job going?

Repudiatory breach in relation to an employment contract, and the rights available to an “innocent” party in such a scenario, is an issue which has attracted some important rulings in recent years, including the majority decision of the Supreme Court in Société Générale, London Branch v Geys [2012] UKSC 63, and more recently Sunrise Brokers LLP v Rodgers [2014] EWHC 2633 (QB) decided in July 2014. These cases offer useful guidance to practitioners as to the way courts (including those in Scotland) can look at such situations, as well as some of the tactical steps that clients can be advised to take to best protect their position.

Geys brought clarity to the debate as to whether a contract was automatically brought to an end by a repudiatory breach (the “automatic theory”), or whether in such circumstances the wronged party could choose instead to affirm the contract meaning that it continued (the “elective theory”). The Supreme Court ruled that the latter approach was appropriate.

The reason that this was so important in Geys was that the date upon which Mr Geys’ employment terminated had an effect on what termination payment he would be entitled to. In this case, the difference between what the bank believed he was due and Mr Geys’ calculation amounted to €4.5 million. Mr Geys’ solicitor reserved his client’s position at key moments and indicated that his client was affirming his contract of employment. This meant that when the bank subsequently clarified its position and followed the correct contractual process, the courts deemed that Mr Geys’ employment had not been terminated properly until January 2008, thereby entitling him to the enhanced sum in respect of his termination payment.

Geys reminds practitioners of the key strategic decisions that are open to parties when faced with a repudiatory breach. Pay in lieu of notice (PILON) clauses are commonplace in contracts of employment, and can be a useful weapon in an employer’s arsenal in many circumstances. The case highlights the importance of careful drafting of such clauses in the first place so that a party can exercise their desired rights without falling foul of unnecessary procedural complexities. Crucially any PILON clause should specify when it will be paid. Coupled with this point is that practitioners should always make sure that employer clients actually follow their own contractual procedures and use clear unambiguous language when communicating and exercising any such rights.

Obligation to stay

While in Geys the employee was the “innocent” party, in Sunrise Brokers the wronged party was the employer. Mr Rodgers was a broker involved in the trading of precious metals, the majority of his clients being based in the US. His contract of employment, entered into in October 2011, was for an initial period of three years and he had the right to terminate it thereafter by giving 12 months’ notice. His employer could terminate his employment at any point (after the expiration of an initial six month probationary period) by giving him three months’ notice. The contract also contained relatively standard restrictive covenants having effect during Mr Rodgers’ employment and for a period after termination. The employer had the right to exercise a garden leave provision after either party served a notice of termination.

Mr Rodgers became disillusioned with his work and on a trip to the US in early 2014, met with and eventually signed a contract with a competitor to his existing employer. He agreed to start his new job in January 2015. Following his return to the UK, he spoke to one of the directors of his employer on 27 March 2014 and indicated that he wished to leave “now”. He was told to go back to work and no decision would be taken until certain relevant personnel were back in the office. Mr Rodgers promptly left his workplace and, other than attending a meeting (with Sunrise’s lawyer) in early April 2014, never returned. At that meeting, Rodgers was asked to return to work so that a termination plan could be agreed. He refused and indicated that he was leaving for New York imminently but would not start any new job until September 2014. He did not mention that he had already signed a contract with the rival business.

Given that Rodgers was not attending work, Sunrise stopped paying Rodgers’ salary with effect from April 2014. Sunrise’s lawyers wrote to Rodgers in late April highlighting that his purported resignation, as it was a repudiatory breach of contract, was not accepted. He was asked to return to work, failing which their client reserved the right to terminate his employment summarily. Mr Rodgers was also reminded of the applicable contractual notice provisions in his contract and asked to confirm whether he had been offered another job. Correspondence was then exchanged between solicitors, with Sunrise holding to their position that the contract was continuing and indicating that were Mr Rodgers to return to work he would be paid his salary. His lawyer in turn reiterated that his client had resigned on 27 March with immediate effect and in any case the failure to pay his salary was a repudiatory breach of contract by Sunrise. The fact that Rodgers had accepted the new job in the US was eventually disclosed by his solicitors.

Sunrise instituted injunction proceedings in May 2014 and Mr Rodgers (with the support of his prospective employer) defended the action. The court was asked to decide as a preliminary matter whether Rodgers was still employed or not.

Continuing contract

Following the position set out in Geys, the court indicated that Sunrise was entitled to refuse to accept Rodgers’ breach if there was a good reason to do so, and therefore the contract did not end in March 2014. Resignations, given in accordance with a contractual right, are unilateral acts and do not need an acceptance by the other party to be effective. A resignation in breach of a contractual provision, as seen here, is different and generally is therefore not effective unless the other party agrees.

The court went on to consider the issue of whether Sunrise’s failure to pay Rodgers’ salary amounted to a repudiatory breach in itself. The court rejected this suggestion, holding instead that the willingness to work and the payment of wages are mutual obligations. In the absence of the fulfilment of one of those obligations, the other did not require to occur either. However, such a situation did not necessarily mean that the underlying contract ceased. Rather, one obligation was suspended pending the performance of the corresponding obligation. This latter point is an interesting analysis and may well reflect a court focused on obtaining an end goal and interpreting the law accordingly. If it were however followed in other cases, it would illustrate a useful tool an employer could deploy when an employee refuses to work but an employer wants to keep the contract alive. It would nevertheless be advisable for such a right to be expressly stated in a contract so as to avoid debate.

Mr Rodgers was not willing to return to work and Sunrise was not willing to put him on garden leave. The court acknowledged that it could not force Mr Rodgers to return to work, as such an order could well be statutorily prohibited (Trade Union and Labour Relations (Consolidation) Act 1992, s 236), and previous judicial decisions had expressed reticence at such an approach in any case. The court therefore granted a limited injunction deeming that the contract continued until a date in October 2014 (which Sunrise’s lawyers had in earlier correspondence offered as a compromise) and Rodgers was bound by the obligations therein (other than having to actually perform work). If Mr Rodgers attended work he would get paid, but if he did not Sunrise were not obligated to pay him. The court also indicated that the restrictive covenants would be enforceable to a date in later January 2015 (i.e. a few weeks after the date Rodgers had intended to start with the rival).

Look at all the options

This case of course turns on its specific facts, and is not binding, but it does illustrate the tactical advantages that can be achieved by solicitors on behalf of their “wronged” clients should a repudiatory breach arise. Importantly in Sunrise, the court emphasised that the employer should have good reason for not accepting the employee’s repudiatory breach and for affirming the contract. The employer was not wholly successful in establishing in this case that their purported motivation (that a return to work was necessary so as to effect a proper handover of clients) was still a good reason due to the passage of time. However, by asserting such a desire initially, the employer was able to establish a stronger position. By affirming the contract and taking a tough line on which contractual rights they were therefore pursuing, Sunrise’s lawyers protected their client’s rights. While either accepting his breach or dismissing Mr Rodgers (given his refusal to attend work) were options, the alternative approach was better for the client.

These cases therefore serve to highlight that practitioners should keep all options in mind when advising clients faced with a repudiatory breach, whether by employee or employer.