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Employment Law

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03 OCT 2012

Signing on Payments, Termination Without Cause and Repayment Conditions: a rare victory for the Collateral Warranty

In its recent judgment in Thinc Group-v-Armstrong [2012] EWCA Civ 1227, the CA has upheld a rare victory for that endangered species beloved of Lord Denning - the Collateral Warranty.

The CA upheld a finding at first instance that an oral assurance given to the respondents when they were recruited by the appellant to join it as financial advisers overrode subsequent express written terms.

Thinc sought to recruit the Armstrongs as independent financial advisers and take over their existing client base. In oral negotiations, Thinc offered the Armstrongs an upfront payment based on 50% of their last year's gross income and assured them that the only condition attaching to this payment was that the Armstrongs stayed with Thinc for 3 years.

Subsequently, the parties entered into written agreements including a supplemental contract which provided for the Armstrongs to receive as a "disturbance allowance" or "supplemental payment" the sum based on 50 per cent of their last year's gross income. The supplemental contract provided that this payment would become repayable if a repayment event occurred within three years of payment. The definition of repayment event included termination of the contracts with Thinc for whatever reason. The principal written contract gave Thinc the right to terminate without cause at any time.

Thinc terminated the Armstrongs' contracts within 3 years and demanded repayment of the upfront payment.

The CA upheld the judge's finding that the oral assurance amounted to a collateral warranty that as long as the Armstrongs did not terminate within 3 years, they were entitled to keep the upfront payment.

As a matter of construction, that collateral warranty overrode the inconsistent signed written contracts because its effect was to misrepresent the primary contract. Relying on Mendellsohn-v-Normand Ltd and J. Evans & Son (Portsmouth) -v-Andrea Merzario (both printed condition cases), Rix L.J. found that:

"It would be illusory for Thinc to say: "The only condition for our recovery of the supplemental payment is if you do not stay with us for 3 years" and then for its printed contract to enable it to reclaim the money at will within that period by mere dint of terminating the contract without cause."

"Ultimately the question of construction, therefore, is whether the "no other

conditions" assurance meant that Thinc could recover the supplemental payment

because, even though the Armstrongs were willing to stay, they had been told to

go: or whether the words of the assurance "as long as they remained with [Thinc]

for 3 years there would be no other conditions" ...entailed that the decision to go or stay was the Armstrongs'. In my judgment, in a choice between those two alternatives, there is no contest: the latter alternative must prevail. A construction that would permit Thinc to recover the supplemental payment on a whim (or, as bad, for lack of performance when the Armstrongs had been assured that there were no minimum performance requirements, and there were none) would be absurd. It would undo the very basis on which the Armstrongs were willing to join Thinc. It would, in the words of Devlin J, approved in subsequent cases in this court, make the assurance wholly illusory. Such a construction is so unreasonable, so uncommercial, that it is to my mind impossible."

Notable points are that:

  • The written contracts did not contain an "entire agreement" clause though they did contain a "no reliance" clause regarding prior representations. It was said to have been conceded that this did not exclude the possibility of a collateral warranty. There was a finding of reliance.
  • The court could not address whether the Interfoto onerous clauses rule could apply to the case of the signed written contract because it was not a part of the appeal.
  • The CA considered that the court was entitled to have regard to the business sense of the arrangements as a whole and was influenced by the facts that the supplemental payment was in effect the price for the goodwill of the Armstrongs' business brought to Thinc and that the written agreements did not address the transfer of commission rights so that they could not in fact represent the whole agreement.
  • The Supplemental Agreement contained an unusual term that if there was a conflict between its terms and any other agreements between the parties, Thinc had the right to determine reasonably which terms should prevail. Dismissing the contention that this entitled Thinc to say that the written terms prevailed over the collateral warranty, Rix L.J. found Thinc's reliance on the clause to be an "own goal" because the term itself contemplatred the existence of collateral contracts and it would be impossible for Thinc to "reasonably" determine that the written terms prevailed over the collateral warranty.
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