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Employment Law

Legal guidance - compliance - software

03 JAN 2013

Societe Genrale –v- Geys [2012] UKSC 63; how to dismiss an employee – orthodoxy confirmed?

As Lord Sumption observed in Societe Genrale -v- Geys [2012] UKSC 63, Mr Geys is "a lucky man". He was dismissed from his employment with SocGen in late 2007 or early 2008. The precise date of termination was critical. If his contract of employment was properly regarded in law as determining on 29.11.07 (when SocGen gave him a letter terminating his contract with immediate effect and promising that "appropriate termination documentation" would follow, and escorted him from the building) or on 18.12.07 (when SocGen made a payment in lieu of notice into his bank account) the termination payment to which he was entitled was limited to about Euros 7 million. If his contract did not in law determine until January 2008 (when he received the Bank's notification that they had exercised their rights under the PILON clause), his entitlements moved comfortably into double figures (at least according to reports of the case that have featured in the popular press).

It was common ground that had the Bank handed Mr Geys a cheque for his payment in lieu of notice on 29.11.07, his dismissal would have taken effect at once, in accordance with the PILON clause in his contract. But the Bank made a mistake and did not make the PILON for about 3 weeks - and then paid it into Mr Geys' bank account without giving him any direct notification. It was accepted that the Bank had repudiated Mr Gey's contract on 29.11.07, but (as Lord Sumption observed) this was a repudiation of the most technical kind, because there was no doubt about SocGen's right to dismiss with immediate effect (i.e under the PILON clause) if they had gone about things in the right way, and SocGen's mistake caused Mr Geys no loss.

The case raised two questions of "of general public importance" (Lord Hope at para 14) about the termination of contracts of employment. First, did a repudiatory notice of instant dismissal (the letter of 29.11.07) operate automatically to bring the contract to an end, or was it a ‘thing writ in water' unless and until accepted by Mr Geys? And second, if Mr Geys' contract was still on foot after 29.11.07, had it been determined by the making of the PILON on 18.12.07? Read literally, all that the PILON clause required to bring about the termination of the contract was the making of the payment. Was this enough, or was something more required? These questions (and a couple of other questions of contractual construction specific to the case), were answered in Mr Geys' favour; he will no doubt be enjoying some Christmas cheer. This note addresses the two questions "of general public importance".

Unilateral or Elective?

Does a repudiation of an employment contract which takes the form of an express and immediate dismissal automatically terminate the contract or does the normal contractual rule that the repudiation must be accepted by the other party apply? The Supreme Court addressed directly the debate between the elective and automatic theories of contract termination, when applied to contracts for personal service, and confirmed (Lord Sumption dissenting) that the elective theory was to be preferred, both on authority and on principle.

Lord Wilson gave the principal judgment. It was common ground that whichever theory was selected "it would apply equally to wrongful repudiations by employers (i.e. wrongful dismissals) and wrongful repudiations by employees (i..e wrongful resignations)" (para 63). He referred to a number of categories of cases which could only be explained or understood on the basis of the elective theory: e.g. where provisions which did not survive the termination of the contract had been enforced against the repudiator (paras 69 to 72; the competition cases), or where the courts had obliged the repudiator by injunction to implement a contractual disciplinary procedure (paras 73 to 75; the disciplinary cases). He was satisfied that the preponderance of authority favoured the elective approach. He concluded that "[i]n proposing ... the automatic theory, the Bank invites it [the court] to cause the law of England and Wales in relation to contracts of employment to set sail, unaccompanied, on a journey for which I can discern no just purpose and can identify no final destination. We should keep the contract of employment firmly within the harbour which the common law has solidly constructed for the entire fleet of contracts in order to protect the innocent party, as far as practicable, from the consequences of the other's breach" (para 97).

Lord Hope added some observations on the issues of principle. He considered that the automatic theory could operate to the disadvantage of the victim in a way which allowed the wrongdoer to profit from his own wrong, and the common law should favour the course likely to do the least harm to injured party (paras 15 & 17, 18). And he expressly disapproved the suggestion (found in Gunton) that the court could more easily infer acceptance in the employment context than in other contractual settings; "[i]f the law requires acceptance of the repudiation, the requirement is for real acceptance - a conscious intention to bring the contract to an end, or the doing of something inconsistent with its continuation" (para 17).

Lord Sumption's Dissent

In Lord Sumption's view, the employment relationship was dead for all practical purposes after 29.11.07. Because there had been a technical repudiation on that date, Mr Geys could rely upon the elective theory to argue that "technically the contract limped on as a formal ‘shell' or ‘husk' ... into January 2008 ... [bringing] him a windfall amounting to several million euros. Rarely can form have triumphed so completely over substance" (para 108). However, the elective theory of contract repudiation was apt to mislead, because the innocent party to a repudiated contract could not treat it as subsisting if (i) performance on his part depended on the cooperation of the repudiating party and (ii) the contract was not capable of specific performance (para 116). Employment contracts fell into this class. Lord Sumption suggested that whilst the employee could not treat the contract of employment as subsisting after a repudiation which terminated the employment relationship de facto, the repudiation would not necessarily bring to an end "collateral obligations" which were not (of necessity) dependent on the existence of the relationship of master and servant (such as express or implied covenants against competition). In his view "[w]hether collateral obligations of this kind bind after the termination of the contract or the underlying relationship will normally depend on the construction of the contract or the underlying nature of the implication if the obligation is implied ... it is not necessary to prolong the life of a repudiated contract of employment in order to justify this body of law" (para 141).

What is required of an employer when giving notice?

The Supreme Court also gave consideration to the steps necessary to give notice of dismissal. It was not enough to make the PILON (notwithstanding that the PILON clause seemed to stipulate that this was the terminating event). According to Lady Hale (i) it was "an obviously necessary incident of the employment relationship that the other party is notified in clear and unambiguous terms that the right to bring the contract to an end is being exercised, and how and when it is intended to operate. Both the employer and the employee need to know where they stand .... the exact date on which the employee ceases to be an employee" (para 57); (ii) in a PILON case "[i]t is necessary .... that the employee not only receive his payment in lieu of notice, but that he receive notification from the employer, in clear and unambiguous terms, that such a payment has been made and that it is made in the exercise of a contractual right to terminate the employment with immediate effect" (paras 58 & 59); and (iii) "[g]iven that such a notice is a necessary incident of the relationship, a wise employer would take care to give it in writing", but whilst this was not required unless the contract so stipulated, simply making a PILON into the employees bank account was not enough, because whilst the employee's bank might be his agent for the receipt of payment, "it is not without more his agent for the receipt of notification of what the payment is for. That notification has to be given to the employee" (para 60).

Lord Carnwath expressed himself in similar terms on this question - "it was necessary for the employer to ensure that the payment was unequivocally identifiable as an exercise of power under [the PILON clause]" (para 103).

This question did not arise on Lord Sumption's analysis, although he did draw attention to the difficulties created by "highly technical questions about the validity of notices" that can arise if the contract is regarded as subsisting after the employee's exclusion from work (para 140). He also said that if Mr Geys had been entitled to affirm the contract after 29.11.07, "then all that was required to satisfy [the PILON clause] was the making of the payment in lieu. That seems to be more consistent with both the reality of the situation and the approach ... in Abrahams -v- Performing Rights Society ... and ... in Cerberus Software Ltd -v- Rowley" (para 143). The majority, however, were with Lady Hale on this issue.

Conclusion

These judgments would seem to put to bed the debate about the elective and unilateral theories of contract termination in the employment context, and (unless and until the question is revisited in the Supreme Court), Lord Sumption's dissent is of largely academic interest (wherever one stands on its conceptual purity or practical validity). Lady Hale's judgment has revealed a new ‘implied incident' of the employment relationship in exercising rights to give notice.

There is some force in Lord Wilson's view that the competition and disciplinary cases are inconsistent with the automatic theory and that to describe them as examples only of collateral obligations does not engage sufficiently with their significance (para 75). By way of example, it is difficult to explain or rationalise the garden leave injunction (where the employer does not accept the employee's repudiation but holds the employee to his good faith duty during a period of unexpired notice) with Lord Sumption's theory of collateral obligations; the good faith duty is a central incident of the employment contract. And as Lord Wilson points out, whilst the employment contract is a special case as regards remedies, the embargo on specific performance is not a hard and fast rule (e.g. where notwithstanding a repudiation, trust and confidence has not been forfeit; cf Hill -v- Parsons) and may need to be revisited given "nowadays the more impersonal, less hierarchical relationship of many employers with their employees" (para 77).

However, the judgments of the majority leave a number of questions unanswered, many highlighted in Lord Sumption's judgment. Is the employee entitled to wages after he has been wrongfully sacked and excluded from the workplace, but has declined to accept his sacking? Is he under any obligation to mitigate? Conceptual orthodoxy would suggest that the answers to these two questions are (respectively) yes and no. The contract subsists so he is entitled to the sums he is due pursuant to it, and how (to paraphrase Lord Sumption at para 139(5)) can the employee "be compelled ... to mitigate the loss of his bargain when in law it has not been lost". However, this is not the result advocated in some of the leading elective theory cases (such as Gunton, suggesting that only damages will be recoverable after an exclusion from work and that the employee must mitigate). Take the paradigm example of the employee (wrongly) dismissed for gross misconduct. Can he decline to accept his dismissal and keep the contract alive? Must the parties await the determination of the court on the gross misconduct question before they know whether the employment contract has been effectively brought to an end? What is the employee to do in the meantime? Mitigate (as suggested in Gunton)? Even if that is right, where does this leave the employer - faced (per Lord Sumption at para 139(5)) with "a penumbral contractual liability, the duration of which is uncertain and the extent of which depends on the inherently uncertain question of whether he can show that the employee has failed to satisfy the relatively light burden of mitigating his loss". These questions have considerable practical implications and are not satisfactorily addressed in the judgments of the majority. Much remains to be worked out.

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