This is the apparently simple issue which was considered by the Supreme Court in the recent case of Société Générale, London v Geys . The question for the Supreme Court was whether a fundamental breach of contract by a party, in this case the employer, needed to be accepted by the employee in order for the contract to be terminated.
Mr Geys was employed as the Managing Director, European Fixed Income Sales, Financial Institutions at Société Générale. His contract could be terminated by either party giving 3 months’ notice, or by the bank “at any time with immediate effect by making a payment to him in lieu of notice (or, if notice had already been given, the balance of his notice period)”.
On 29 November 2007, Mr Geys was told that the bank had decided to terminate his employment with immediate effect. He was given a letter confirming this, allowed to clear his desk and was then escorted from the building. Mr Geys’ solicitors then wrote to the bank to ask for further information about the purported termination, and reserving their client’s position. The bank then sent a draft termination agreement setting out the sums it believed Mr Geys was entitled to. Mr Geys did not agree with the figures and refused to sign the agreement. The bank then paid his notice pay into his bank account on 18 December 2007. Mr Geys’ solicitors then wrote to the bank saying that Mr Geys had decided to affirm the contract, i.e. he had opted not to accept what he considered to be a fundamental breach of contract by the bank.
The Supreme Court agreed with Mr Geys. They said that the bank had a right to terminate the contract with immediate effect, but that the contract had been drafted in such a way that the contract could only be terminated “at any time with immediate effect by making a payment to him in lieu of notice”. They had not done that when they had purported to dismiss on 29 November 2007, so their purported dismissal amounted to a fundamental breach of contract. The Supreme Court held that where a party has committed a fundamental breach of contract, it is for the innocent party to either accept the fundamental breach, and treat the contract as being at an end, or to affirm the contract and allow it to continue – which is what Mr Geys did. In this case, by allowing the employment to continue until 2008, Mr Geys’ entitlement to a termination payment increased from €8 million to €12.5 million because the later date of termination triggered an entitlement to a bonus.
The problem for the bank was the wording of the contract – and in particular the word “by” in the pay in lieu of notice clause. Had the clause been more carefully drafted, the bank could have dismissed Mr Geys with immediate effect, and Mr Geys would not have been able to affirm the contract. It must be rare that a two letter word costs a party €4.5 million!
The moral in the story is make sure your contracts are properly drafted and seek advice before dismissing someone and making a payment in lieu.
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Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.