‘Elective’ Theory Triumphs in the Supreme Court

 

By a majority of 4 to1, in Societe Generale, London Branch v Geys* the Supreme Court confirms that an employment contract, like any other contract, only comes to an end upon acceptance by the innocent party. 

 

For some time there has been a conflict of both academic and judicial opinion as to whether a contract of employment terminates automatically upon repudiation by either party or whether it only comes to an end upon acceptance by the injured party. In practice, this will often not matter a great deal but the facts of this case illustrate the difference between the two approaches. 

 

 

G was employed by Societe Generale as managing director of its European Fixed Sales, Financial Institutions Division. He was provided with a written contract of employment and a copy of the SGUK handbook and accepted the offer of employment in accordance with the terms of his offer letter. 

 

His contract provided that his employment could be terminated on three months notice by either side and that within 28 days of his employment being terminated, his employers would make a termination payment in accordance with the terms of the contract. The relevant formulae depended upon whether the employer terminated after 31 December 2006 but before 1 January 2008 or after 31 December 2007 but before 1 January 2009. If termination took place during the latter period, the termination payment was more generous. (For the purpose of this summary it is not necessary to set out the precise terms but the difference was substantial running to millions of euros). The staff handbook further stated that G was either entitled to the period of notice as stated in the contract or a payment in lieu of notice. Where written notice was given, it was deemed to be received two days after the letter was posted to the employee. 

 

On 29 November 2007, SG wrote to G advising him that his employment was terminated with immediate effect and was advised that in accordance with the terms of his employment he would receive “appropriate termination documentation” On 7 December 2007, G’s solicitors wrote to SG requesting further information about the sums which SG were proposing to pay by way of termination payments. G was then sent a severance agreement by the Bank’s legal department and was asked to agree the terms set out in the covering letter but declined to do so. On 18 December 2007, the Bank paid the sum of £31,899.29 into G’s Bank account. This was equivalent to his basic salary and flexible benefits for a period of three months and satisfied the monetary requirements of the compensation clause. G became aware that this payment had been made at some point before 2 January 2008. The bank then sent G a payslip accompanied by his P.45. He first saw this on the 7 or 8 January when he returned to London from his Christmas holiday in Belgium. Prior to this, G’s solicitors had written to the Bank acknowledging the receipt of the monies paid into G’s bank account but reserving his position until he understood what those payments constituted.

 

On 4 January 2008 the Bank’s HR Director wrote to G confirming the details of the payments made to the Claimant and apologising for the delay in sending the details to him. In accordance with the terms of the Bank’s Handbook, referred to above, he was deemed to have received that letter on 6 January. The Deputy High Court Judge (George Leggatt QC) held that this was the first occasion when the Bank properly notified G that it had exercised its right to terminate the contract under paragraph 8.3 of his contract.

 

 

It was the Bank’s position that G’s employment terminated automatically either at the time the original notice was received (29 November) or at the time the money was paid into G’s Bank account (18 December). If the Bank was in breach of the contractual termination requirements, this did not matter because his employment had terminated automatically as a result of the Bank’s repudiation of his contract. In either case, the contract had terminated before 31 December 2007 and therefore the less generous formula applied to the calculation of the compensation payment. The Bank also argued by accepting the amounts paid into his bank account G had waived his right to sue for additional payment and/or for damages arising from the obligation to pay the money in a tax efficient manner.

 

G’s position was that he was entitled to sue for damages for non-compliance with the terms of the termination provisions of his contract, that he had not waived his rights when the payments were transferred to his bank account and that termination of his employment only took place upon receipt of the letter from the Bank on 6 January 2008 which meant that he was entitled to be compensated on the basis of the more generous formula provided for in his contract. 

 

 

The Supreme Court upheld the Trial Judge’s ruling that G’s employment terminated on 6 January 2008 when he received the notification of terms and accepted that his employment had come to an end. 

 

In so doing, the Supreme Court majority (Lords Hope, Wilson and Carnsworth and Lady Hale) confirmed that an employment contract, like any other contract, only comes to an end when the repudiatory breach is accepted by the innocent party. Whilst a detailed analysis of the previous case law is to be found in the leading judgment of Lord Wilson, the essence of the Court’s reasoning was summarised by Lord Hope who observed that there are cases such as this one where “it really does matter which of the two theories is adopted” and that the “automatic theory can operated to the disadvantage of the injured part in a way that enables the wrongdoer to benefit from his own wrong. The law should seek to avoid such an obvious injustice. Where there is a real choice as to the direction of travel, the common law should favour the direction that is least likely to do harm to the injured party”. In other words, the wrongdoer should not benefit from its wrongdoing. 

 

The Court also rejected various technical arguments in relation to the construction of the contract (Lady Hale and Lord Hope) and held that G had not waived his rights when the monies were paid into his bank account and that his acceptance of those monies did not prevent him from suing for damages in respect of the term which entitled him to receive the payment in a tax efficient manner.

 

G’s appeal was allowed and the Bank’s cross appeal was dismissed. 

 

 

In the course of his judgment Lord Wilson approves previous case in which the “election” theory has been relied upon by an employee who has elected to keep the contract alive to enforce an employer’s disciplinary procedure (Irani v Southampton and South West Hampshire Health Authority [1985] IRLR 203, Dietman v London Borough of Brent [1987] ICR 737, Boyo v Lambeth Borough council [1994] ICR 727, Robb v London Borough of Hammersmith [1991] ICR 514) and an employee’s right to wages following an employer’s unilateral attempt to reduce pay (Rigby v Ferodo Ltd [1988] ICR 29) and cases where the elective theory has been relied on by employer to keep the contract alive to enforce restrictive covenants in the contract of employment (Thomas Marshall (Exports) Ltd v Guinle [1978] ICR 905). In general, Lord Wilson sees these authorities as supportive of the elective theory. 

 

The Supreme Court also confirms the need for acceptance by the employer where an employee repudiates the terms of the contract by overstaying leave and confirms that in such circumstances the employment contract terminates upon acceptance by the employer (London Transport Executive v Clark [1981] ICR 355). Similarly, the Supreme Court (Lord Wilson at paragraph 96) makes it clear that the elective theory also applies in potential constructive dismissal cases where the employer is in repudiatory breach of the contract of employment and that in those circumstances the contract will only come to an end where that breach is accepted by the employee.

 

Nonetheless, Lord Hope (and other members of the majority) endorse the view in Gunton v London Borough of Richmond [1980] IRLR 321 that in most cases acceptance will be readily inferred as it was in the present case when G received the letter of 6 January 2008. However, apart from this general statement, little guidance is given as to how and more particularly for how long either party may seek to keep the contract alive?

 

As stated above, the case also raised a number of technical issues regarding the construction of the Bank’s contract with Geys. The outcome largely turned on the wording of the particular terms in issue but the case shows that acceptance will not necessarily be inferred by payment into an employee’s bank account without more. 

 

Moreover, Lord Hope and Lady Hale, who gave the leading judgments on these issues, emphasised that, as a matter of interpretation, any ambiguity in the contractual provisions should be resolved in favour of the employee. 

 

*[2011] EWCA Civ 307