When the claimant in Barden v Commodities Research Unit International was dismissed as CEO, he entered a severance agreement, including payment of a long-term incentive plan. When the LTIP was not paid, he issued proceedings, which were eventually settled after mediation. The settlement agreement, signed in the early hours of the morning, provided for a "settlement sum" of £1.35m to be paid to the claimant. The tax treatment of the sum was not mentioned in the agreement.
The company paid £676,822.84 into the claimant's bank account and the balance of £673,177.16 to HMRC for PAYE tax. The claimant argued that his entitlement was to a payment of £1.35m and that the tax should have been paid by the employer on top.
The Court decided that the construction argued for by the claimant, requiring the defendants to pay a £1.35m settlement sum and another £1.35m tax, was a "commercial absurdity". Alternatively, words could be implied into the contract so it would read "net of any PAYE due", or, as a last resort, the contract could be rectified to reflect the intention that the sum was inclusive of tax.
Even though the decision went the way of the employer, this is a classic cautionary tale. The tax position should be agreed up front to avoid a (costly) dispute later.