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19 December 2012
Lord Hope, Lady Hale, Lord Wilson, Lord Sumption and Lord Carnwath
Dismissal without notice, in breach of contract, does not take effect until the employee ‘accepts' the breach; and termination under a ‘payment in lieu of notice' clause does not take effect until the employer informs the employee that it is terminating under that provision, even if payment is made earlier.
Mr Geys' bonus depended on whether his employment contract ended in 2007 or in 2008. His contract included a clause allowing his employer to dismiss with immediate effect by making a payment in lieu of notice (the ‘PILON' clause).
On 29 November 2007, he was told by letter that he was summarily dismissed. That letter did not mention the ‘PILON' clause. On 18 December, his notice pay was paid into his bank account. During December, Mr Geys discovered that the money had been paid. A letter to Mr Geys explaining that his contract had been terminated under the ‘PILON' clause was treated as reaching Mr Geys on 6 January 2008.
By a majority, the Court concluded that:
- the notification of summary dismissal on 29 November 2007 did not terminate his employment and would not have done so unless and until Mr Geys accepted the breach as terminating his employment, which he had never done. The Court acknowledged that, although the contract continued, Mr Geys could not have sued for his salary after the wrongful dismissal - he could only have sued for damages. It did not explain how that fits with the contract continuing;
- paying the money into Mr Geys' account did not activate the PILON clause: he had to be told that the bank was relying on that clause;
- therefore his contract of employment ended on 6 January 2008 and he was entitled to the higher bonus.
The minority judgment was that the summary dismissal was effective on 29 November 2007, when Mr Geys was told he was summarily dismissed.
The majority's decision relies on the rule that when a contract is fundamentally breached, the innocent party may choose either to let the contract continue despite the breach (ie affirm the contract) or may accept the breach and treat the contract as ended. So, the majority conclude, summary dismissal, being a fundamental breach, is only effective once the employee accepts it. But it is a fundamental breach because it terminates the contract without the required notice. If the majority is right and it does not in fact terminate the contract, then why is it a breach at all? Either a summary dismissal not permitted by the contract is ineffective so the employee can insist on continued payment of salary; or it is effective and the employee can only sue for damages. The majority view - that wrongful dismissal does not terminate the contract but somehow gives rise to a claim for damages not salary - seems self-contradictory.
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