Collidge v Freeport plc (High Court)
Mr Collidge founded Freeport and had been its Chief Executive and Chairman but, following a board meeting at which various allegations against him were considered, Freeport and Mr Collidge agreed his employment should be terminated subject to negotiated terms of settlement.
Under the terms of the resulting compromise agreement Freeport’s obligation to pay compensation was subject to and conditional on a warranty by Mr Collidge that there were no circumstances of which he was aware or which he ought to have been aware that might constitute a repudiatory breach on his part of his employment contract, that would entitle or would have entitled Freeport to terminate his employment without notice.
Prior to the date when payment under the compromise agreement was due to be paid, Freeport informed Mr Collidge that it had continued its investigations into the allegations that had been made against him and found that he was in breach of the warranty in the compromise agreement.
The High Court held that on the proper interpretation of the agreement, it had been a condition of the obligation to pay that the facts were as they were warranted. Accordingly, if the facts were not as set out in the warranty clause, Freeport was under no obligation to pay.
Many standard compromise agreements include a provision requiring departing employees to confirm (or warrant) that there are no circumstances of which they are aware, or ought to be aware, that would entitle the employer to dismiss summarily. Although not always possible, a practical step would be for employers to complete any investigation of possible misconduct before completing a compromise agreement. If such an investigation can be completed before entering into a compromise agreement then this increases the bargaining power of the employer, perhaps to the point where they may not actually wish to enter into an agreement.
If the terms of the compromise agreement are agreed and signed off before an investigation can be completed a warranty clause is useful if the investigation can be continued, as in the current case, so that payment to the employee can then be stopped in reliance on the warranty clause. If facts which would constitute a breach of the warranty are discovered after payment has been made then the employer can seek recovery of the payment made. However, this may involve court action. If an employer is to seek recovery in such circumstances it is best if the compromise agreement states that repayment as a result of breach should be made as a debt upon demand.