Societe Generale v Raphael Geys: PILON decision will affect employers

January 31, 2013

On 19 December 2012, the Supreme Court handed down its decision in the ongoing battle between Mr Geys and Societe Generale over the termination of Mr Geys’ employment contract. Fox Williams advised Mr Geys throughout his successful litigation. In this article we summarise the background, the decision, and the implications for employers.

Key facts

  • Mr Geys was employed by the Bank in 2005 as Managing Director of its European Fixed Income Sales, Financial Institutions division.  
  • Mr Geys’ contract contained a performance related bonus and a termination payment linked to previous years’ bonuses.  
  • On 29 November 2007, the Bank sought to terminate Mr Geys’ employment without cause and with immediate effect.  This action amounted to a repudiatory breach of contract as Mr Geys was entitled to three months notice.
  • On 18 December 2007, the Bank then sought to exercise a PILON (payment in lieu of notice) clause, which was provided for in the Bank’s Handbook and not in Mr Geys’ employment contract, by paying into Mr Geys’ bank account his three month notice pay. 
  • The Bank did not notify Mr Geys that they had exercised the PILON clause until they wrote to him on 4 January 2008.

HRLaw has previously reported on the Court of Appeal decision in 2011 and the High Court’s decision in 2010.

Significance of the termination date?

  • If Mr Geys’ contract terminated in 2008, rather than 2007, the termination payment under his contract would be almost 2 million Euros higher.  
  • The Bank therefore argued that his contract terminated either on 29 November or on 18 December 2007.  Mr Geys’ case was that his contract terminated on 6 January 2008 (the deemed date of receipt of the Bank’s letter of 4 January 2008).

Key issues for the Supreme Court

The Supreme Court was faced with the following two issues of “general public importance”:

  1. Does a repudiation of an employment contract by the employer, which takes the form of an express and immediate dismissal, automatically terminate the employment, or does the normal contractual rule that the repudiation must be accepted by the other party apply in an employment context?
  2. When was the contract terminated?

Repudiation

A repudiatory breach is a breach of contract which is sufficiently serious to entitle the innocent party to treat the contract as terminated with immediate effect and sue for damages.

The Bank had brought a cross-appeal on the grounds that Gunton v Richmond-upon-Thames London Borough Council [1981], should be overturned.  Gunton held that employment contracts should be treated like any other contract in circumstances where there has been a repudiatory breach, enabling the innocent party to either accept the breach and bring the contract to an end, or to affirm the contract so that it continues.  

The Bank argued this right should not apply in an employment context: not least because a repudiatory breach of an employment contract breaks the trust and confidence in the employer/employee relationship, so the contract cannot continue.

The Supreme Court decided that an employment contract should be treated like a normal contract, in the context of repudiatory breach. It held that removing the right to choose whether to accept the breach and treat the contract as at an end or to affirm the contract and treat it as continuing, risked disadvantaging the innocent party “in a way that enables the wrongdoer to benefit from his own wrong”.  

The Supreme Court considered this injustice to be the ‘crucial point’;  this is because the Court recognised that the timing of the repudiatory breach may be crucial – as it was for Mr Geys.  If the employment contract automatically terminated when the repudiation occurred, with no choice to the employee whether to accept the breach or affirm the contract, then the employer may be tempted to use this to its advantage. For example, by ending a contract in breach of the notice provisions so as to ensure it avoids any large contractual payments which are triggered by particular dates.  

Termination date

Before the Court of Appeal, the Bank succeeded on its argument that the mere action of paying the notice monies into Mr Geys’ bank account was sufficient to terminate his contract: there was no requirement to notify Mr Geys that the Bank was exercising the PILON provision.

The Supreme Court overturned this decision.  As the PILON clause in the handbook was silent on notification, the question was, is notification required or is the act of payment sufficient?  

The significant factor for the Supreme Court was that a party to an employment relationship should be “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”.  

Quite simply, both employer and employee need to know where they stand and the exact date upon which the employee’s employment ceases.  This is not least because various entitlements of the employee may be brought to an end when the contract terminates, and if the employee does not know he has been terminated, he does not know he has lost those entitlements.  Further, the time limit to bring a tribunal claim against the employer starts to run from the date of termination – therefore, there must be clarity as to when this date is.

The Court therefore held that it is necessary that an employee receives notification from the employer, in clear and unambiguous terms, that the PILON clause is being exercised to terminate the employment with immediate effect. It is not for the employee to establish whether he has received his notice monies in lieu.

Significance?

Employers who do not have PILON clauses in their employment contracts risk not being able to terminate the contract without notice (save in the case of gross misconduct). Unless the employee accepts the breach of contract, then employment will continue until notice is given in accordance with the contract.

Potentially, employment could continue until a Tribunal or Court hearing, resulting in significant cost to the employer.

If you want to rely on a PILON clause, the Geys decision tells us that employers must:

  • do so in accordance with the contract;
  • inform the employee in writing that the clause has been exercised;
  • explain the effect of exercising the clause (e.g. tell them when they will receive their notice monies, what those monies are, and the date on which employment terminates);
  • follow procedure in a timely and considered manner – seemingly small administrative omissions can result in a breach and the contract continuing past your intended date of termination with potentially costly consequences.  

Related pages:

Employment for Financial Services more

Employment Litigation more

Experts on the human side of enterprise more

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