Unravelling exit deals
Date: 12 June 2009
Authors: Charles Pigott
Issue: Vol 159, Issue 7373
Categories: Features, Employment
As the cause célèbre of Sir Fred (“the Shred”) Goodwin illustrates in a slightly different context, it is normally too late to renege on a promise once a formal commitment has been made. But two recent cases involving compromise agreements show that, as with most rules, there can be exceptions.
Outraged of Tunbridge Wells
Nearly two years ago a severe outbreak of the “superbug” c difficile at hospitals managed by the Maidstone and Tunbridge Wells NHS Trust led to the departure of its chief executive Rose Gibb. She agreed to accept the immediate ending of her employment in return for a termination payment totalling around £250,000. She entered into a compromise agreement to that effect, but before the money was paid over, the Department of Health intervened to stop the payment. A payment of £75,000 in respect of her contractual notice entitlement was subsequently authorised, but the rest of the money was not paid. Ms Gibb brought proceedings against the trust to recover the balance.
A few weeks ago the High Court’s ruling was published (see Gibb v Maidstone and Tunbridge Wells NHS Trust [2009] EWHC 862). It upheld the trust’s argument that because the termination payment was “irrationally generous” it simply did not have power to enter into the compromise agreement: it was ultra vires the trust.
The most telling point was that the total package was some £100,000 in excess of Ms Gibb’s combined contractual and statutory entitlement, ie the sum of her pay in lieu of notice and the maximum compensatory award for unfair dismissal. For good measure that judge added that the reasons that had been put forward by the trust’s remuneration committee for making the full payment—her long service to the NHS and the difficulties she would face in finding new employment—were irrelevant.
The ultra vires finding was not the end of the story, because Ms Gibb deployed two additional arguments to recover the money.
l The first was that as a result of the agreement not being binding on it, the trust had been “unjustly enriched”. Ms Gibb did not bring an unfair dismissal claim as a result of her belief that the agreement was binding, a claim that she would almost certainly have won. The judge dismissed this argument, pointing out that she had been aware that the payment was being blocked before the time limit expired, and so could have issued protective proceedings.
Ms Gibb’s second point was that the trust had assured her that the agreement was binding when she entered into it, only to change its tune later. That argument failed too: although the trust had been in fundamental breach of contract in making that assurance, that breach was so closely tied up with her dismissal that no separate claim for damages could be brought.
Warranties to the rescue
It is not always necessary to attack the validity of the entire comprise agreement to relieve an employer of the obligation to make a termination payment. Stanley v Capital Law LLP EAT/0417/08 shows that the wording of the compromise agreement itself may come into play.
This case involved a law firm in Cardiff which had entered into a comprise agreement with one of its salaried partners. It contained a warranty to the effect that he had not been guilty of a repudiatory breach of his contract of employment at the time the compromise agreement took effect. If that turned out to be false, another clause in the agreement entitled the employers to repayment of the termination payment and release from any continuing obligations.
After the agreement had been signed, but before the payment had been made, the employers discovered that Mr Stanley had seriously mismanaged one of his files, resulting in a potential negligence claim. That, they said, fell within the ambit of the warranty, and they refused to make the payment. The Employment Appeal Tribunal upheld the employment tribunal’s decision that Mr Stanley had indeed been guilty of a fundamental breach of contract, and his employers were entitled to withhold the termination payment.
No more rewards for failure?
The facts of both these cases go back to 2007, well before the worst effects of the credit crunch took effect and rewards for failure (or preferably the lack of them) became the most popular oxymoron in the English language. So their appearance now is coincidental. These decisions will make both sides more circumspect when agreeing termination packages. Until things settle down this is likely to make the negotiation process more protracted, and compromise agreements longer. Perhaps in the wider public interest that will be no bad thing. Ms Gibb is seeking leave to appeal, and whether the Court of Appeal gives her permission or not, further cases in this area are bound to emerge.
Charles Pigott is a professional support lawyer at Mills & Reeve
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