Supreme Court rules on termination of employment contracts

The Supreme Court has ruled that employment contracts are not terminated by wrongful repudiation until the repudiation is accepted by the innocent party.

Despite a dissenting judgment yesterday from Lord Sumption, Lord Wilson said afterwards that the court’s decision brought the law of England and Wales into line with other common law jurisdictions.

Lord Wilson said that the case of Raphael Geys, a Belgian working in a senior position at the London branch of Societe Generale, raised a “major issue of law which has been simmering for 60 years”. He said the judgment took the “simmering issue off the hob".

“And, to continue the metaphor, the issue will now be ‘set’ for England and Wales, in the way in which it already is for other common law jurisdictions.

“Notwithstanding a powerful dissent by Lord Sumption, the other members of the court unequivocally hold that the special features of a contract of employment do not remove it from the usual contractual principle that a wrongful repudiation terminates a contract only if and when it is accepted.”

The court heard in Societe Generale v Geys [2012] UKSC 63 that Raphael Geys was managing director of European fixed income sales at the bank’s London branch from February 2005.

He had a written contract and further terms were incorporated into it by the staff handbook, which included a payment in lieu of notice clause.

It reserved the bank’s right to terminate his employment at any time, subject to making a compensation payment in lieu of notice, calculated according to the termination date.

Geys argued that he was not dismissed until January 2008, entitling him to a termination payment of more than 12.5m euros plus damages for breach of contract.

The bank argued that the managing director was dismissed on 29 November 2007, or at the latest on 18 December 2007, entitling him to a payment of no more than 7m euros.

Giving the leading judgment in Societe Generale v Geys [2012] UKSC 63, Lord Hope (pictured) said the main question was whether repudiation of a contract of employment by the employer by an “express and immediate” dismissal automatically terminated the contract or whether the normal contractual rule that the repudiation must be accepted by the other party applied.

“The timing of the repudiation may be crucial, and if the automatic theory were to prevail an employer may well be tempted to play this to his advantage – by getting in first before a rise in pay or pension entitlement takes place or, as in this case, a rise in the entitlement to bonuses,” Lord Hope said.

“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.”

Lord Hope, Lord Wilson, Lord Carnwath and Lady Hale agreed that repudiation must be accepted by the innocent party and that the employment contract was not terminated until January 2008, entitling Geys to the additional 5.5m euros.

Lord Sumption dissented. Describing Geys as a “lucky man”, he said: “He had a responsible and highly paid job with an entitlement to participate in a profit-sharing bonus scheme dependent on the performance of his division, in addition to discretionary bonuses. The other side of the coin was that he had no contractual job security.”

Tom Custance, partner at Fox Williams, who acted for Geys, said: “This successful outcome for Mr Geys vindicates his decision to take his case to the UK’s highest court.”