Harmonisation of Doctrine of Repudiation and its Effect on the Determination of a Contract

The UK Supreme Court has by a majority decision (Lord Sumption dissenting) in Societe Generale, London Branch v Geys [2012] UKSC 63 put to bed the so-called automatic theory of repudiation in contracts of employment. Instead, the Supreme Court affirmed the elective doctrine of repudiation in which the innocent party may elect to either accept the repudiation or affirm the contract. So long as the employment contract is affirmed, the contract subsists and has not been terminated. This is consistent with other types of contracts.

In this particular case, the date of the termination mattered as it affected the amount due to Mr Geys as contractual termination payment in the order of several million euros (see paragraphs [2], [6] and [110]).

The Facts

On 29 November 2007, Mr Geys was called to a meeting and given a letter informing him that Soc Gen had decided to terminate his employment with immediate effect and that the “appropriate termination documentation” would follow (see paragraph [9]). Mr Geys then consulted with his solicitors who wrote to Soc Gen on 7 December 2007 to obtain further information on the amounts that Mr Geys was to be paid as well as to reserve his position.

Soc Gen replied on 10 December 2007 and prepared a severance agreement along with a list of proposed payments that it would make in consideration for the severance agreement being signed by Mr Geys. The agreement was never signed. Instead, on 21 December 2012, Mr Geys’ response was to request for further information as to how Soc Gen had calculated those amounts in its letter of 10 December 2007.

In the interim, on 18 December 2007, Soc Gen paid the equivalent of 3 months salary and benefit as per the payment in lieu of notice (“PILON“) clause found in Mr Geys employment contract. However, Mr Geys only became aware of the payment sometime towards the end of December. On 2 January 2008, Mr Geys’ solicitors wrote to Soc Gen stating that Mr Geys had decided to affirm his contract and that with respect to the monies of 18 December 2007, his position was reserved until confirmation of what those monies were for.

On 4 January 2008, Soc Gen wrote to confirm, amongst others things, that the payment on 18 December 2007 was the PILON payment. Mr Geys was deemed to have received that letter on 6 January 2008.

Court Proceedings Below

Soc Gen argued that the contract was terminated on 29 November 2007 when it summarily dismissed Mr Geys.

The High Court held that the employment contract terminated on 6 January 2008 on the basis that this was the first time that Soc Gen notified Mr Geys that it had exercised its right to terminate the contract by way of the PILON clause. Soc Gen appealed.

On appeal, the Court of Appeal held that the employment had been determined on 18 December 2007 when the PILON sum was paid into Mr Geys’ account. It rejected Soc Gen’s argument that the contract was determined on 29 November 2007 on the basis that it was bound by its previous decisions in Gunton v Richmond-upon-Thames London Borough Council [1981] Ch 448 and Boyo v Lambeth London Borough Council [1994] ICR 727, in which the Court applied to employment contracts, the principle that a repudiatory breach must be accepted before the contract is determined (see paragraph [13]).

The Issue

The Supreme Court identified four issues (see paragraph [14]):

(1) Does a repudiation of a contract of employment by the employer which takes the form of an express and immediate dismissal automatically terminate the contract or – as was held in Gunton v Richmond-upon-Thames London Borough Council [1981] Ch 448 and Boyo v Lambeth London Borough Council [1994] ICR 727 – does the normal contractual rule that the repudiation must be accepted by the other party apply equally to that case? [the repudiation issue]

(2) When, in the events that happened and having regard to the terms of paragraph 8.3 of the Handbook, was the contract of employment terminated? [the termination issue]

(3) Is there any conflict, within the meaning of paragraph 17 of the Contract, between the provision for termination on three months’ notice in paragraph 13 of the Contract and the provision in paragraph 8.3 of the Handbook which gives the Bank the right to terminate the employment at any time with immediate effect by making a payment in lieu of notice? [the conflict issue]

(4) On a proper construction of paragraph 5.16 of and Schedules 1 and 2 to the Contract, is the employee entitled to maintain a claim for damages for wrongful dismissal and an alleged breach of the tax efficiency provision in paragraph 5.5 or is he to be taken to have waived those claims? [the paragraph 5.16 issue]

For the purposes of this post, we shall only be looking at the first two issues, which were primarily dealt with in the Supreme Court by Lord Wilson (on the repudiation issue) and Lady Hale (on the termination issue).

The Repudiation Issue

The choice facing the Supreme Court was whether to adopt the automatic theory of repudiation or the elective theory instead. This issue had been decided in the lower courts in favour of the elective theory, see Gunton. However, this was a controversial decision which had generated much academic debate (see David Cabrelli and Rebecca Zahn, The Elective and Automatic Theories of Termination at Common Law: Resolving the Conundrum? (2012) 41 Industrial Law Journal 346).

The issue was summarised by Lord Wilson at paragraph [63] as follows,

“In the absence of any direct authority of real weight at this level, the court is required to make a difficult and important choice between a conclusion that a party’s repudiation (albeit perhaps only an immediate and express repudiation) of a contract of employment automatically terminates the contract (“the automatic theory”) and a conclusion that his repudiation terminates the contract of employment only if and when the other party elects to accept the repudiation (“the elective theory”). It is common ground that, whichever theory be chosen, it should apply equally to wrongful repudiations by employers (i.e. wrongful dismissals) and wrongful repudiations by employees (i.e. wrongful resignations); and it is only for convenience, and because it is reflective of the facts of the present case, that I will, at times, refer to the wrongful repudiator as the employer and to the innocent party as the employee.”  

It is important to note that these theories of repudiation and deciding when the contract comes to and end do not apply in cases where parties are contractually entitled to determine the contract immediately e.g. express dismissal or resignation (see paragraph [42]).

(i) Which would create greater injustice?

One of the main determining factors was the issue of injustice, and in particular, which doctrine would create more injustice. Lord Sumption, in dissent, considered that the elective theory created more injustice in this case (see paragraph [110] and [140]),

“The result [wa]s that although the employment relationship [had been] dead for all practical purposes from 29 November, and Mr Geys [had] contributed nothing to SG’s fortunes after that date, he [wa]s in a position to argue that technically the contract [had] limped on as a formal “shell” or “husk” (to use the terms deployed in argument) into January 2008. The financial consequences of this, if it is right, [were] considerable. The effect of paragraph 5.15(b)(iii) and (iv) of the contract is that if Mr Geys’ “employment terminates” after 31 December 2007, he [wa]s entitled to a “Compensation Payment” assessed by reference to the aggregate of his bonus awards for the calendar years 2006 and 2007, whereas if it terminate[d] on or before that date, it [would] be assessed by reference to his awards in 2005 and 2006, which [had been] substantially lower. The figures [were] disputed, but the result [wa]s likely to be that SG’s breach, although it ha[d] caused Mr Geys no substantial loss, [would] have brought him a windfall amounting to several million euros. Rarely [could] form have triumphed so completely over substance”.

The remaining 4 members of the Supreme Court considered that the automatic theory created more injustice not simply in this case, but also as a general principle. Lord Wilson considered at paragraph [64] that this was because of the so-called least burdensome principle as applied to the damages recoverable by the innocent party.

In light of the fact that a central incident of the automatic theory is that, upon the automatic termination of the contract, the innocent party has a right to damages, the first question must be whether it matters that the contract is terminated forthwith upon repudiation or, instead, survives until some further, terminating, event? The answer is that sometimes it does matter. It depends on the terms of the contract. The date of termination fixes the end of some contractual obligations and, sometimes, the beginning of others. An increase in salary may depend on the survival of the contract until a particular date. The amount of a pension may be calculated by reference to the final salary paid throughout a completed year of service or to an aggregate of salaries including the final completed year. An entitlement to holiday pay may similarly depend on the contract’s survival to a particular date. In some cases an award of damages will compensate the employee for any such loss. But often it will fail to do so. Such failure flows from application of the “least burdensome” principle, namely that damages should reflect only the losses sustained by the employer’s decision to repudiate the contract unlawfully rather than by his having hypothetically proceeded, in the manner “least profitable to the plaintiff, and the least burthensome to the defendant”, to terminate the contract lawfully: see Cockburn v Alexander (1848) 6 CB 791, 136 ER 1459, at pp 814 and 1468, (Maule J), and McGregor on Damages, 18th ed (2009) para 8-093. So, where under the terms of the contract it had been open to the wrongfully repudiating employer to have taken a course which would have terminated the contract quickly as well as lawfully, the damages will be small“.

Furthermore, to allow the automatic theory of repudiation would be to allow the wrongdoer to determine the contract for his own convenience, per Lord Wilson at paragraph [66],

“… Before I consider the detail of the authorities, I find it helpful to stand back and to remind myself of the overall effect of the automatic theory. It is to reward the wrongful repudiator of a contract of employment with a date of termination which he has chosen, no doubt as being, in the light of the terms of the contract, most beneficial to him and, correspondingly, most detrimental to the other, innocent, party to it. We must, I suggest, be very cautious before turning basic principles of the law of contract upon their head so that, in this context, breach is thus to be rewarded rather than its adverse consequences for the innocent party negatived. It is, says Professor Freedland in The Personal Employment Contract, 2003, at p390 “a matter of concern if the common law of wrongful dismissal functions so as to invite opportunistic breach of contract. …”.  

Lord Hope held at paragraph [18] that “[t]he fact that an application of the automatic theory [might] produce an injustice is, for me, the crucial point“. And later at paragraph [19],

“The essential difference between the two theories may be said to be that under the automatic theory the decision as to whether the contract is at an end is made beyond the control of the innocent party in all circumstances, whereas under the elective theory it is for the innocent party to judge whether it is in his interests to keep the contract alive. Manifest justice favours preferring the interests of the innocent party to those of the wrongdoer. If there exists a good reason and an opportunity for the innocent party to affirm the contract, he should be allowed to do so: London Transport Executive v Clarke [1981] ICR 355, 367, per Templeman LJ“.

(ii) the long standing law argument

Lord Canwath pointed to the fact that the law in Gunton had stood for over 30 years “apparently without evidence of practical difficulty or injustice” (see paragraph [100]).

However, Lord Sumption’s dissent is worth noting. He dismissed the long standing law argument on the basis that it was an appropriate way of dealing with Gunton. This was because Gunton “[had] always been a controversial decision [and] was the decision of a divided court” and in this instance gave rise to injustice. Furthermore, “it [was] always dangerous to allow the law to part company with reality in this way [as it would] lead to unexpected and highly technical results, which businessmen and employees [were] unlikely to anticipate unless they [were] particularly well advised“. Finally, the elective doctrine does not lead to a clear result or certainty as to when the contract determines, whereas “if the contract ends when the employment relationship ends, the position is clear” (see paragraph [140]).

(iii) Core or Collateral Obligations

Lord Wilson considered that the automatic theory could not be reconciled with the ability of the courts to issue injunctions post repudiation of employment contract. The learned law lord specifically cited the ability of the court to issue an injunction to compel a company to follow its disciplinary procedure notwithstanding its repudiation of the employment contract by failing to follow such procedure when dismissing the employee. At paragraph [73] he held,

“[i]nto a different, yet equally significant, category fall cases in which an employer wrongfully repudiates a contract of employment in circumstances in which its terms require him to have implemented a disciplinary procedure. The law is clear that an injunction may issue so as to enforce the requirement; and the absence of a right to claim damages for breach of a duty to follow a disciplinary procedure (see Edwards v Chesterfield Royal Hospital NHS Foundation Trust [2011] UKSC 58, [2012] 2 AC 22) makes the availability of the injunction particularly precious. But it is self-evident that, had the wrongful repudiation already automatically terminated the contract, an injunction would not issue so as to require observance of a procedure designed to determine whether the employer was entitled to terminate it“.  

However, Lord Sumption thought that this drew insufficient distinction between core and collateral obligations in an employment contract and could not justify adopting the elective doctrine (see paragraph [141]).

A good deal of attention was devoted in the course of argument to the implications for other contractual obligations of concluding that an employee cannot treat the contract of employment as subsisting after a repudiation which terminates the employment relationship de facto. In my opinion, this question has very little bearing on the present issue, once it is appreciated that we are concerned only with those obligations which go to the continued existence of the employment relationship. … In many contracts of employment, and perhaps in most modern ones, there is a large number of obligations which do not depend on the existence of the employment relationship. … Whether collateral obligations of this kind continue to bind after the termination of the contract or the underlying relationship will normally depend on the construction of the contract, or the exact nature of the implication if the obligation in question is implied. This is not the place for a general review of the kind of obligations which survive termination of the contract and are sufficiently collateral to warrant specific enforcement. What is clear is that it is not necessary to prolong the life of a repudiated contract of employment in order to justify this body of law. It follows that it will not be affected one way or the other by the outcome of this appeal“.

Where the Supreme Court departed from Gunton was in holding that the English courts should not “easily infer” that in the case of wrongful dismal, the innocent party has accepted the repudiation (see paragraph [17] and [92]). Instead “the requirement is for a real acceptance – a conscious intention to bring the contract to an end, or the doing of something that is inconsistent with its continuation” (see paragraph [17]).

The Termination Issue

It was an implied term of the employment contract that clear and unambiguous notice must be given to the employee for the PILON clause to be effective. In this respect, the employee must receive his PILON along with a 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 the contractual right to terminate the employment with immediate effect (see paragraph [57] and [58]) per Lady Hale).

Whether such a term was implied in law or implied in fact was irrelevant in this case (see paragraph [56] and [57]) as it is “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. These are the general requirements applicable to notices of all kinds, and there is every reason why they should also be applicable to employment contracts. Both employer and employee need to know where they stand“.

Conclusion

Gunton appears to have been followed in Singapore, most recently in the case of Aldabe Fermin v Standard Chartered Bank, [2010] 3 SLR 722; [2010] SGHC 119, but for the least burdensome principle (called the “minimum obligation rule” here).

In this respect, there does not appear to be any Singapore decision dealing explicitly with which theory of repudiation applies to employment contracts and/or the ease with which the Singapore courts should infer that the employee has accepted the repudiation on the part of the employer.

Although exact statistics are unavailable, anecdotally employment arbitrations are becoming more prevalent – a trend no doubt driven by the increasing use of arbitration clauses in employment contracts as well as the Singapore courts’ promotion of the Law Society Arbitration Scheme.

The take-away point for commercial parties is that they should be aware that the elective theory of repudiation applies across all kinds of contracts. If there is a contractual provision to terminate the contract immediately then a party who wishes to terminate the agreement should rely on those provisions and follow them strictly. The notice of termination must be brought clearly and unambiguously to the other party’s attention for such termination clause to operate effective. If the termination clause provides for payment of certain monies, then the payment and the fact of the payment must be brought to the notice of the other party.

Conversely, where the innocent party is faced with a repudiatory breach on the part of the guilty party, it has to make an election as to whether it (i) accepts the repudiation and treats the contract as having come to an end or; (ii) affirms the contract and treats it as subsisting. The innocent party should communicate its decision to the guilty party in clear and unambiguous terms. This avoids creating uncertainty as to the status of the contract and also prevents the innocent party from inadvertently compromising its preferred position.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
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2 Responses to Harmonisation of Doctrine of Repudiation and its Effect on the Determination of a Contract

  1. Pingback: Singapore Law Gazette Article | Singapore International Arbitration Blog

  2. TAJI & REKAN says:

    Thank you for your very informative insights. We are currently compiling relevant information pertaining to Singapore law on employment. Thank you again.

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