In a significant case this week, the Supreme Court has considered whether the mere making of a payment in lieu of notice, without an express provision to do so within the contract of employment, can result in the effective, immediate end to the contract.

The importance of the Supreme Court’s decision, as to the effects of payments to employees in lieu of notice, should not be underestimated. For one thing, many employers might have assumed that actually making a payment in lieu of notice, even if done in breach of contract, would be sufficient to conclude the contract straight away. However, the case brought against Société Generale Bank by Mr Geys has challenged that assumption, potentially resulting in the extension of contracts and triggering performance and service-related benefits an employer may have thought they had avoided; in this case eligibility for a bonus payment of some £2 million.

Background

The Bank purported to summarily dismiss Mr Geys on 29 November 2007. The date was significant since, had his contract been terminated on notice, he was entitled to three months' written notice which would have extended his employment to the following year, potentially giving rise to a large termination and compensation payment under a bonus scheme. On 18 December 2007 the Bank made a payment in lieu of notice into Mr Gey’s bank account but written confirmation of this was not sent until 4 January 2008 and not received by him until 6 January.

Although the employment contract made no mention of an ability to make a payment in lieu of notice, an employee handbook did include such a term. Both the High Court and, subsequently, the Court of Appeal, found that the contractual omission was not fatal as the relationship must be looked at in the round, including with reference to documents such as the handbook. The Supreme Court agreed. It seems, therefore, that an employer can still make payments in lieu of notice lawfully in such circumstances.

However, an interesting debate followed as to whether, in the event of a termination of contract by the employer which is a repudiation of the contract, the employee must accept the repudiation for the termination to be effective. The High Court found it must, and that telling Mr Geys he was summarily dismissed and making a subsequent payment into his bank account was not sufficient. The Court of Appeal found otherwise, and held that Mr Geys’ lawyers’ affirmation of his contract was ineffective in the circumstances.

The decision of the Supreme Court

Overruling the Court of Appeal, the Supreme Court reviewed earlier case law which supported the automatic termination of a contract, notwithstanding an unaccepted repudiatory breach, most notably Sanders v Ernest A Neale Limited [1974] ICR 565 and Gunton v Richmond-upon-Thames London Borough Council [1981] Ch 448.

Rejecting this “automatic theory” of termination, the majority of the Supreme Court concluded that normal contractual principles should apply to the termination of an employment contract: what they termed the “elective theory”. In other words and as is the case in the event of a repudiatory breach of contract in any other circumstances, the innocent party must elect to accept the breach before it is effective.

In support of this conclusion, Lord Wilson gave a number of examples which call the legitimacy of the “automatic theory” into question. Cases which have enforced restrictive covenants and other such provisions intended to survive the termination of employment would be unjustifiable, he found, and the remedy of injunctive relief in the context of a dismissal resulting from an unfair disciplinary procedure would be irrelevant. Even so, he did not go so far as to say that automatic termination may never be assumed. If, for example, a wrongful dismissal or resignation was “express and immediate” or “outright”, as reflected in Gunton, there may be scope for assuming acceptance of the repudiation. Even so, the general view remained that any such exception is “contrary to principle, unsupported by authority binding on this court and undesirable in practice”. 

Determining the date of termination

Having determined the appropriate contractual principles by which it was bound, the Supreme Court was obliged to determine when, if at all, termination of Mr Geys' contract had occurred.

The Court concluded that, within an employment relationship, it is a necessity that a 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 that termination is intended to operate. As such, it was necessary that Mr Geys not only receive his payment in lieu of notice, but also clear, unambiguous notification from the Bank that such a payment had been made and that it had been made so as to exercise its contractual right to terminate his employment with immediate effect. An employee should not be required to check his bank account regularly in order to discover whether he is still employed. If “he does learn of payment, he should not be left to guess what it is for and what it is meant to do“, Lady Hale stated.

On the facts of Mr Geys’ case, it could not be said that the Bank had validly exercised its right to terminate until he was deemed to have received the Bank’s letter of 4 January 2008. Accordingly, even had he accepted the repudiation of contract at that stage, this was the earliest date on which his employment could have ended.

Practical effects

As end of year approaches and the trigger date for holiday accrual or bonus entitlements for many looms close, this week’s Supreme Court ruling provides an important message for employers. Termination of employment and the terms on which it is effected must be clearly and unambiguously communicated, preferably in writing.

Whilst this is the norm in practice, the case provides a salutary lesson. Mr Geys was aware of his dismissal and, shortly thereafter, of the fact that he had received a lump sum payment from his employer. However, poor communication from his employer left too much scope for doubt. The case may take on even greater significance in light of the Government’s proposals to facilitate candid conversations between employers and their staff in the context of settlement agreements

It is also relevant to note that this case also aligns contractual terminations with the general principles of unfair dismissal. Case law concerning the ending of the employment relationship is unequivocal in deciding that dismissal must be communicated clearly to the employee in order for it to be effective.

Societe Generale v Geys