Geys v Société Générale: The expensive consequences of getting a termination wrong

January 10, 2013

This article was originally written for and published in Compliance HR.

The recent Supreme Court decision in Raphael Geys against Société Générale (London Branch) has raised important issues about the termination of employment contracts.

The facts
Geys was employed by Société Générale in 2005 as managing director of its European Fixed Income Sales, Financial Institutions division. His contract contained performance-related bonus provisions and also provided for a termination payment linked to previous years' bonuses. On November 29, 2007, Société Générale purported to terminate Geys' employment without cause but with immediate effect. They were not entitled to do this as his contract contained a three-month notice provision.

On December 18, 2007, Société Générale sought to exercise a PILON (payment in lieu of notice) clause by paying Geys' three months' notice pay into his bank account. They did not, however, notify Geys that they had done this until they wrote to him on January 4, 2008. This was significant because if Geys' contract terminated in 2008, rather than 2007, the termination payment under his contract would be almost 2 million euros higher. Société Générale therefore argued that his contract had terminated either on December 18, 2007, or on November 29, 2007. Geys' case was that his contract terminated on January 6, 2008 (the deemed date of receipt of Société Générale's letter of January 4, 2008).

The arguments
Société Générale's argument for the termination date to be December 18, 2007 was that the payment into Geys' bank account of his notice pay on that date was sufficient to exercise the PILON clause: there was no need also to notify him that the clause had been exercised. Their alternative argument for November 29, 2007, was that where an employee's contract is terminated wrongfully, it is not open to the employee to elect whether to accept the employer's repudiatory breach (and thereby bring the contract to an end) or to affirm the contract and keep it in existence: the contract comes to an end on the date of the wrongful termination.

The court's decision
The Supreme Court rejected both of Société Générale's arguments. It held that if a PILON clause is to be exercised, the employee has to be given express and unambiguous notice that the clause has been exercised and must be informed when it takes effect. Otherwise, employees would be left having to check their bank accounts on a regular basis to see if they had been dismissed or, if they became aware of an unusual payment into their account, would have to guess to what it related.

In the absence of notice, an employee might also be unaware that his health and life insurance had been terminated (together with his employment) as a result of a PILON payment, with potentially serious consequences.

The court's decision means that termination under a PILON clause will only be effective if the employee is explicitly notified that the clause has been exercised and informed when the payment has been or is to be made. If the notice is given before the payment is made, then the contract terminates on the date of the payment. If (as in Geys' case) the notice is given after the payment, then the contract terminates when the notice is received (or deemed to be received). The notice does not have to be in writing (in the absence of any contrary provision in the contract) but in practice it clearly should be to avoid scope for subsequent argument.

Société Générale's alternative argument that the contract terminated on November 29, 2007 resurrected a longstanding debate about whether employment contracts are in a different category from other contracts in the case of repudiatory breaches. The Supreme Court laid this debate to rest once and for all, holding that the standard contractual principle that the innocent party can elect whether to accept the breach or affirm the contract applies in the employment context as with other contracts.

Accordingly, in the event of a wrongful summary termination of an employee's employment, the contract continues in existence unless and until the employee accepts the employer's breach (or is deemed to have accepted the breach) or the employer subsequently terminates the contract lawfully. In the Société Générale case, Geys did not accept the breach (and, indeed, expressly affirmed the contract) and his employment therefore continued until it was properly terminated when he received notice of the exercise of the PILON clause on January 6, 2008.

In support of its conclusions on this issue, the court highlighted the unfair advantage to the employer if it were able to terminate a contract wrongfully on a date which suited it, for example, shortly before the employee was due to receive a bonus or salary rise or was about to complete another year's service which increased his pension entitlement. In Geys' case, had Société Générale's repudiatory breach on November 29, 2007 terminated his employment, Geys would have been deprived of a significantly enhanced termination payment.

The implications
As the court pointed out, Société Générale could readily have avoided the procedural problems they got themselves into, with two unsuccessful attempts to terminate Geys' employment before the end of 2007, and saved themselves a lot of money.

The main lesson for employers is to ensure that contractual termination provisions are followed to the letter, and that the employee is expressly and unambiguously informed of why, how and when his/her contract is being terminated. Contracts and staff handbooks may also need to be reviewed to identify and correct any inconsistencies or ambiguities.

Further, if employers do seek to terminate with immediate effect for cause (which was not the case with Société Générale and Geys), they need to be confident that they have the right to do so. Otherwise, if the termination is successfully disputed by the employee, the contract will continue unless the employee elects or is deemed to accept the employer's repudiatory breach. If the employer is in any doubt about its grounds for termination, therefore, it may be better advised to play safe and terminate on notice or exercise a PILON clause.

To the extent that there is not always proper coordination between line managers and their HR departments and/or external lawyers when decisions to terminate employment are made, the Geys/Société Générale case is a salutary reminder of the potentially expensive consequences of getting that process wrong.

Related pages:

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Employment Litigation more

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Financial Services more

Insurance Litigation more

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Litigation, Arbitration and Alternative Dispute Resolution more

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Tom Custance
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