Geys v Societe Generale, London Branch  EWHC 648 (Ch)
Judgment concerning sums due on termination of employment contract and whether the claimant should receive payments as the employer thought the claimant had breached the agreement. The employer was found liable to pay.
The claimant was an ex-banker whose employment was terminated with immediate effect in 2007. He claims he was entitled to 12.5m euros for termination. The bank first calculated that the liability was just under 8m euros as the date of the termination was disputed, since they submitted that the claimant had accepted the breach of contract on the date of termination and they had the right to terminate the contract by making a payment in lieu of notice. This was important as the outcome would effect whether the claimant was entitled to an additional bonus. Further they then changed tack and claimed that the Termination Payment should only be paid if all contractual and statutory claims against the company were waived.
On the issue of the termination date counsel for the claimant submitted that the contract had not been terminated in November 2007 as the claimant had affirmed it at a later date in January 2008. Alternatively the termination was ineffective. Mr Leggatt QC, sitting as a Deputy Judge, found that while the bank had the right, under the contract and staff handbook, to terminate the contract it had not done so until January 2008 as, broadly, they had not sent a letter confirming the details until then. He then went on to conclude the bank was right to contend that the payment of the termination payment and the claimant's obligation to enter into a termination agreement were concurrent. However he dismissed their interpretation of the contract because, among other things, given the draconian consequences, the wording was not sufficiently clear and also because it would be unreasonable for the bank to be able to prevent the claimant from bringing proceedings where the amount of the termination payment is in dispute. As the termination payment had not been agreed, the concurrent termination agreement was not in place.
Neutral Citation Number:  EWHC 648 (Ch)
Case No: HC08C02683
IN THE HIGH COURT OF JUSTICE
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 25 March 2010
MR. G. LEGGATT Q.C.
Sitting as a Deputy Judge of the Chancery Division
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**RAPHAEL GEYS (Claimant)
– and –
SOCIÉTÉ GÉNÉRALE, LONDON BRANCH (Defendant)
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David Cavender Q.C. (instructed by Fox Williams LLP) for the Claimant
Ian Gatt Q.C. and Rachel Bennett (of Herbert Smith LLP) for the Defendant
Hearing dates: 16 – 19 March 2010
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**Mr G. Leggatt Q.C.:
**1.The claimant, Mr Raphael Geys, was employed by the defendant, Société Générale, London Branch ("the Bank") as Managing Director, European Fixed Income Sales, Financial Institutions, from 9 February 2005. On 29 November 2007 the Bank told him that his employment was being terminated "with immediate effect". The dispute in this action is about when, as a matter of law, the claimant's contract came to an end and what amount of money he is owed under his contract with the Bank. Substantial sums are at stake. On the claimant's case he is entitled to be paid more than €12.5 million on the termination of his contract plus further sums not yet quantified for which the Bank is said to be liable because of its failure to make payments to him in a tax efficient manner. By contrast, the Bank originally calculated the amount of its liability as €7,989,619, but now claims that the claimant is not entitled to be paid anything at all because he has not complied with a condition precedent to his right to receive payments on termination.
2.The claimant's contract of employment is contained in the following documents:
(1) A letter dated 28 January 2005 containing the Bank's offer of employment to the claimant;
(2) A document entitled "Contract of Employment" (which I shall refer to as "the Contract");
(3) The Bank's UK Staff Handbook, which contains in Section I standard terms and conditions of employment ("the Handbook"); and
(4) The Bank's UK Compliance Manual.
3.Under the terms of the Contract the claimant was entitled to an annual salary of £150,000 (clause 4) and various further benefits. Three of these benefits were, potentially, of particular value to the claimant and are of particular relevance to the present dispute.
4.First, as well as being eligible to participate in the Bank's discretionary bonus scheme ("the Scheme"), the claimant was eligible to participate in the Bank's Fixed Income Sales Scheme ("FISS") in respect of the years 2005 to 2008. Under the FISS, the claimant was entitled to an award calculated according to a formula which was dependent on the "Gross Revenue" and "Net Revenue" achieved by the European Fixed Income Sales and Derivatives to Financial Institutions Division of the Bank ("the Division") for the relevant year (clauses 5.2 to 5.4). A proportion of any award (25% of any amount in excess of €250,000) was subject to deferral in that it was to be retained by the Bank and released in three subsequent yearly instalments (clause 5.7).
5.Second, the Bank agreed to use "all reasonable endeavours" to ensure that "any award made to [the claimant] under the FISS" was made in as tax-efficient a manner as possible to take advantage of the claimant's Non-UK domiciled status (clause 5.5). In his evidence the claimant described this benefit as making "a massive difference to the economics" of his contract with the Bank.
6.Third, if the Bank terminated the claimant's employment in certain circumstances the Bank undertook to make a "Termination Payment" with two components: (a) the value of the proportion of any award under the FISS which under the rules governing deferral had been retained by the Bank and not yet released; and (b) a "Compensation Payment" which varied in amount depending on the year in which the claimant's employment terminated (clauses 5.14 and 5.15). If the claimant's employment terminated after 31 December 2005 but before 1 January 2009, the Compensation Payment was to be calculated as a percentage of the average of the last two awards made to the claimant under the FISS (and the Scheme). The claimant was also entitled to a replacement bonus in relation to the FISS (and the Scheme), payable at the same time as the Termination Payment, for the year in which his employment terminated up to the date of termination (clauses 5.18 and 5.24).
7.Clause 13 of the Contract provided:
"Your employment can be terminated on the expiry of 3 months' written notice of termination given by you to the Company or by the Company to you."
8.I will refer to terms of the claimant's contract of employment in more detail where they are relevant below.
9.There are four main areas of dispute between the parties:
(1) When did the claimant's contract of employment terminate?
(2) In calculating amounts payable under the FISS, was the Bank entitled to deduct from "Gross Revenue" certain "negative sales credits"?
(3) What was the extent of the obligation undertaken by the Bank to use all reasonable endeavours to ensure that any award made to the claimant under the FISS was made in as tax efficient a manner as possible?
(4) Has the claimant forfeited his entitlement to payments on termination of the contract by pursuing some of the claims which he has made in these proceedings?
10.By an order made at a case management conference on 18 June 2009, certain issues relating to the tax efficiency obligation were excluded from the scope of this trial. These excluded issues are: (1) whether there has been a breach of the obligation; (2) if so, the consequences of any such breach; and (3) the quantification of any other sums payable as a consequence of that obligation. The parties have also agreed that three further issues should not be determined at this trial which have been set out in a document that can be incorporated in the order made following this Judgment. One of these issues relates to the dispute about negative sales credits and I will mention it in that context. The other two issues are relevant to questions of quantum and interest which, in any event, I consider should be left over for assessment.
11.At the trial I heard evidence from the claimant and from four witnesses called by the Bank: Mr Stephane Landon; Mr Rodolphe Sahel; Ms Patricia Froment; and Mr Graham Clark. The evidence of the first three of the Bank's witnesses was principally concerned with the system of sales credits operated by the Bank. The fourth witness, Mr Clark, gave evidence about the conclusion and termination of the claimant's contract of employment, although he was not personally involved with either.
**The Court's Task
12.Most of the issues contested at this trial are issues as to the proper interpretation of the claimant's contract of employment and the legal validity and effect of the parties' actions. The principles which the Court must apply in construing the contract are well established. Its meaning must be ascertained from the words used by the parties, interpreting those words as a reasonable person would understand them in the context of the contract as a whole, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties when the contract was concluded. It is fundamental to this exercise that the Court's approach is objective, in the sense that the Court is concerned only with the meaning which the contractual documents would convey to a reasonable person and not what either of the parties to the contract subjectively understood or intended them to mean. It is equally clearly established, and was recently confirmed by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38**  AC 1101, that evidence of what was said during the course of pre-contractual negotiations is inadmissible in construing the contract.
13.Some of the testimony given by the claimant and by the Bank's witnesses at the trial concerned their subjective understanding of the claimant's contractual rights and of what the contract meant. In addition, both parties sought to rely on evidence of communications which took place during the negotiation of the claimant's contract. In accordance with the principles that I have mentioned, I have paid no regard to that evidence in interpreting the contract.
(1) The Date of Termination
14.The first issue is the date when the claimant's contract of employment terminated. It makes a significant difference to the amount payable under the contract on termination whether this date falls in 2007 or in 2008. This is because, if the claimant was still employed by the Bank at the end of 2007, he was entitled to an award under the FISS for that year. This in turn also affects the amount of his Compensation Payment. On the Bank's calculations the difference in financial terms between a termination date of 29 November 2007 and 29 February 2008, for which the parties respectively contended, is approximately €2.5 million.
*15.The relevant chronology of events is as follows:
(1) On 29 November 2007 the claimant was called to a meeting at which he was told, and handed a letter which stated, that the Bank "has decided to terminate your employment with immediate effect". He was then escorted from the building after being permitted to clear his desk. He did not subsequently attend the Bank's premises.
(2) On 7 December 2007 the claimant's solicitors wrote to the Bank's solicitors chasing "further information in connection with the sums [the Bank] is offering to pay Mr Geys following the summary termination of his employment" and "delivery of termination documentation pursuant to Mr Geys' contract of employment." The letter ended by stating that "[i]n the meantime, [the claimant] reserves all his rights".
(3) On 10 December 2007 the Bank sent to the claimant and copied to his solicitors a draft "Severance Agreement" in the form of the termination agreement at Schedule 1 to his Contract and a summary of the payments that were proposed to be made to the claimant in consideration for his entering into this agreement. The covering letter stated that "HR will contact you separately regarding your leaver details (notice pay, holiday pay etc)".
(4) On 18 December 2007 the Bank made a payment of £31,899.29 directly into the claimant's bank account. He was out of the country over Christmas and did not return until the New Year. The claimant said in evidence that he could not recall when he became aware of the payment; but he accepted – and I find – that it was probably before the end of December 2007. The claimant also accepted in cross-examination that, although he could not be sure what the payment related to, the "best guess I could have" was that it was intended to be a payment in lieu of notice.
(5) On 21 December 2007 the claimant's solicitors responded to the Bank's letter of 10 December 2007 and asked for further information, in particular as to how the proposed payments had been calculated, while continuing to reserve "all our client's rights in relation to his employment/contract of employment".
(6) On 2 January 2008 the claimant's solicitors wrote to the Bank's solicitors stating that the claimant "has decided to affirm his contract of employment". The letter also referred to the payment which had been made into the claimant's bank account and reserved the claimant's position "in relation to the acceptance of these monies once we understand what they constitute".
(7) On 4 January 2008 the Bank sent to the claimant what Mr Clark, Head of Compensation and Benefits, Human Resources for the Bank, described in evidence as "a standard Human Resources letter confirming the details of the termination of his employment". Under the heading "Notice Entitlement" the letter stated:
"Under your terms and conditions of employment, you are entitled to 3 months' notice of termination of your employment. Société Générale gave you notice to terminate your employment with immediate effect on 29 November 2007 (your Termination Date) and will pay you in lieu of your notice period. This payment will be calculated in accordance with Section 1/8.3 of the Société Générale CIB Staff Handbook".
The letter went on to say that the claimant's notice payment had been credited to his account on 18 December 2007.
The Parties' Contentions
16.The claimant's case is that the Bank's purported termination of his contract with immediate effect on 29 November 2007 was invalid and amounted to a repudiatory breach of the contract. The claimant did not elect to treat the contract as at an end but, after initially reserving his rights, affirmed the contract by a letter from his solicitors dated 2 January 2008. The Bank had no right to terminate the contract by making a payment in lieu of notice or, if it did, it failed to exercise that right effectively before the end of 2007. The claimant contends that the contract continued in force until 29 February 2008 (three months after the purported termination).
17.The Bank's case is that the contract terminated in 2007 – if not on 29 November when the claimant was told that the Bank was terminating his employment with immediate effect, then on or shortly after 18 December when the Bank made a payment to the claimant in lieu of notice. Alternatively, if the Bank is regarded as having repudiated the contract, the claimant elected to treat the contract as at an end shortly after 29 November and in any event before the end of 2007.
18.In determining the date on which the claimant's contract of employment terminated, the main issues therefore are:
(1) What was the legal effect of the Bank's purported termination on 29 November 2007 and of the claimant's response to it; and
2) Whether the Bank had a right to terminate the contract by making a payment in lieu of notice and, if so, when (if at all) the Bank exercised that right.
The Purported Termination on 29 November 2007
19.When the claimant was informed on 29 November 2007 that his employment was being terminated with immediate effect, no reference was made to any provision of the claimant's contract which entitled the Bank to do this. In this action the Bank has sought to rely on a right which it says it had to terminate the contract with immediate effect by making a payment to the claimant in lieu of notice. I will consider in due course whether the Bank had such a right. However, the letter handed to the claimant on 29 November makes no mention of a payment in lieu of notice, there is no evidence that anything was said to the claimant about such a payment on 29 November and no payment was in fact made to him at that time or until 18 December 2007. In these circumstances Mr Gatt Q.C. on behalf of the Bank was obliged to accept that the Bank could not claim to have terminated the contract by making a payment in lieu of notice before 18 December 2007.
20.No other justification was put forward for the Bank's refusal on 29 November 2007 to continue to employ the claimant. I accordingly find that the Bank's conduct and letter handed to the claimant on 29 November 2007 amounted to a repudiatory breach of the claimant's contract of employment. I do consider, however, that the letter had contractual effect to this extent: it gave the claimant notice by implication that his contract was to be terminated at the earliest possible date on which such notice would be effective – which under the terms of the contract was in three months time. It follows that, unless the effect of subsequent events was to terminate the contract sooner, the contract came to an end on 29 February 2008.
*No Automatic Termination
21.Under the general law of contract a repudiatory breach by one party does not automatically terminate the parties' primary rights and obligations under the contract. It gives the other party a choice whether to treat the contract as terminated or as still in force. The reason for the rule is that the party in breach should not be able to rely on his own wrong to deprive the other party of benefits under the contract. There is some support for the view that contracts of employment are a special case in that a repudiatory breach by one party automatically terminates the contract (at least where the employee does not thereafter continue to work for the employer). However, in Gunton v Richmond LBC  Ch 448 the Court of Appeal rejected this contention; and in Boyo v Lambeth LBC*  ICR 727 the Court of Appeal regarded itself as bound by its earlier decision. In the light of these authorities, Mr Gatt Q.C. accepted that he could not contend before me that the Bank's repudiatory breach on 29 November 2007 automatically terminated the claimant's contract of employment. I therefore proceed on the basis that the general rule applies and that the claimant had a choice whether to treat the contract as terminated or as still in force.
Did the Claimant treat the Contract as terminated?
22.It is established law that exercise of the option to treat the contract as terminated requires no particular form: what is necessary is a communication or conduct which clearly and unequivocally conveys to the repudiating party that the aggrieved party is treating the contract as at an end: Vitol S.A. v Norelf Ltd  AC 800, 810-811. Silence or inactivity, including the failure of the aggrieved party subsequently to perform the contract, will not normally satisfy this test, as it is generally equivocal. But in some circumstances it may do so. In the Vitol case, supra, at p.811, Lord Steyn said:
"It all depends on the particular contractual relationship and the particular circumstances of the case. But ... I am satisfied that a failure to perform may sometimes signify to a repudiating party an election by the aggrieved party to treat the contract as at an end. Postulate the case where an employer at the end of a day tells a contractor that he, the employer, is repudiating the contract and that the contractor need not return the next day. The contractor does not return the next day or at all. It seems to me that the contractor's failure to return may, in the absence of any other explanation, convey a decision to treat the contract as at an end."
23.On behalf of the Bank, Mr Gatt Q.C. submitted that Lord Steyn's example describes the present case. He relied on the fact that after the claimant left the Bank's premises on 29 November 2007 the claimant took no steps to perform his obligations under the contract or to affirm it until his solicitors' letter dated 2 January 2008. Mr Gatt submitted that, well before that letter was sent, the claimant had by his inaction, or by the letter from his solicitors dated 7 December 2007 which called for delivery of "termination documentation", unequivocally conveyed that he was treating the contract as at an end.
24.I do not accept these contentions. When the claimant was ejected from the Bank's premises on 29 November 2007, it was made abundantly clear that he was not going to be allowed to return to work the next day or at all. In these circumstances I do not think it could be inferred from the fact that the claimant did not subsequently try to attend the Bank's premises, and did not expressly affirm his continued willingness to perform the contract until 2 January 2008, that he was not ready and willing to continue to work if given the opportunity to do so. As for the letter of 7 December 2007, the "termination documentation" requested by the claimant's solicitors must refer to a proposed termination agreement such as was sent by the Bank on 10 December 2007. The request for delivery of this documentation indicated that the claimant was giving serious consideration to treating the contract as terminated but not that he had committed himself to doing so. In my view both the letter of 7 December 2007 and subsequent letter of 21 December 2007, on a fair reading and given the express reservations of rights which they contained, signified that the claimant was keeping all his options open pending the receipt of further information. He was entitled to a period of time in which to consider his position and make up his mind what to do, and I do not consider that in following that course he can be said to have conveyed an unequivocal election to treat the contract as at an end.
25.Accordingly, subject to the issue about a payment in lieu of notice, I conclude that the contract was still in force on 2 January 2008 when the claimant's solicitors wrote expressly affirming the contract.
Payment in Lieu of Notice
26.As mentioned earlier, the Bank's primary case is that it had the right to terminate the claimant's contract of employment with immediate effect by making a payment in lieu of notice, and that it exercised this right on 18 December 2007 when the sum of £31,899.29 was paid into the claimant's bank account. This contention is based on paragraph 8.3 of the Handbook, which states:
"[The Bank] reserves the right to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice (or, if notice has already been given, the balance of your notice period) based on the value of your:
Basic annual salary; and
Flexible benefits allowance
for your notice period (or, if notice has already been given, the balance of your notice period)."
27.On behalf of the claimant, Mr Cavender Q.C. submitted that the Bank cannot rely on this provision of the Handbook as it is inconsistent with clause 13 of the Contract which entitles the claimant to three months' notice, and the right given in the Contract takes priority. Alternatively, he argued that, if the Bank had a right to terminate the claimant's contract under paragraph 8.3 of the Handbook, that right was not effectively exercised during 2007.
Is there a conflict between the Contract and the Handbook?
28.In support of his first contention, Mr Cavender relied on clause 17 of the Contract, which provides:
"This contract is in conjunction with the offer letter, the Staff Handbook of the SGUK Group (as amended from time to time) and the SGUK Compliance Manual which, together with this letter, form the written particulars of employment as required by law. However, in the event of any conflict of any terms set out in this Contract and those contained in the Handbook the terms of this contract will prevail."
Mr Cavender submitted that the right reserved by the Bank in paragraph 8.3 of the Handbook is inconsistent with the right given to the claimant by clause 13 of the Contract to 3 months' notice of termination because the latter requires that the contract shall remain in existence for 3 months following notice of termination being given, whereas the former allows the contract to be brought to an end immediately. Furthermore, the claimant's contractual entitlements under paragraph 8.3 of the Handbook are considerably less valuable than under clause 13. Accordingly, there is a "conflict" between the terms of the Contract and the Handbook within the meaning of clause 17 of the Contract, with the result that the terms of the Contract prevail.
29.In considering the relationship between paragraph 8.3 of the Handbook and clause 13 of the Contract, the starting-point, as I see it, is that the provisions of the Contract and those contained in Part I of the Handbook are all terms of the claimant's contract of employment and need to be read in conjunction with each other. This is clear from the first part of clause 17 of the Contract (quoted above). I also note that the letter dated 28 January 2005 containing the Bank's offer of employment to the claimant stated:
"You are asked to read the Contract of Employment, Staff Handbook and Compliance Manual in conjunction with each other."
30.It is established law that a contract must be construed as a whole and so as to give effect, where possible, to all parts of it. One corollary of this principle is that "the Court's duty is to reconcile seemingly inconsistent provisions if that result can conscientiously and fairly be achieved": Pagnan SpA v Tradax Ocean Transportation SA  2 Lloyd's Rep 646 at 653, per Steyn J. In the same case, in the Court of Appeal, Bingham LJ stated at  2 Lloyd's Rep 342, 350:
"It is a commonplace of documentary construction that an apparently wide and absolute provision is subject to limitation, modification or qualification by other provisions. It does not make the later provisions inconsistent or repugnant.
… It is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses."
Pagnan further illustrates that this approach is applicable in a case where one provision was contained in the special conditions and the other in the printed clauses of the contract and the contract also included an "inconsistency clause" which provided that the special conditions "shall prevail in so far as they may be inconsistent with the printed clauses".
31.Applying this approach to the present case, I see no difficulty in reading the payment in lieu of notice clause in the Handbook as qualifying, and therefore not in conflict with, clause 13 of the Contract. On any view clause 13 cannot be read as giving the claimant an unqualified right to 3 months' written notice before his employment can be terminated, since it is clearly implicit that 3 months' notice need not be given if, for example, the Bank terminates the claimant's contract for cause as envisaged by clause 5.6(b) or exercises its right to terminate the contract with immediate effect under clause 5.8. Clause 5.8 provides:
"... If the Division does not achieve a Gross Revenue of at least Euros 330 million for the year ending 31 December 2006, the Company shall, during the period from 1 January 2007 to 16 February 2007, be entitled to terminate your employment with immediate effect by giving you written notice that it is exercising its entitlement to do so pursuant to this paragraph 5.8."
Given that – as in my view is clearly the case – clause 13 is impliedly subject to other contractual rights which expressly permit termination with immediate effect, there is no reason why those rights should not include the right expressly reserved by paragraph 8.3 of the Handbook. Furthermore, as Mr Gatt Q.C. submitted, the words "in lieu of notice" expressly indicate that the Handbook right is intended to provide an alternative option to continuing to employ the claimant for the notice period. There is therefore no conflict between the two provisions.
32.This conclusion is further reinforced by the fact that Schedule 1 to the Contract at paragraph 2(i) expressly contemplates that a payment in lieu of notice may be made. I do not consider that the absence of any reference to a payment in lieu of notice in Schedule 2 detracts from this, as where the claimant's employment has been terminated by making a payment in lieu of notice there is no further such payment to be made once termination has occurred.
33.I therefore conclude that the Bank had the right to terminate the claimant's contract with immediate effect under paragraph 8.3 of the Handbook by making a payment in lieu of notice.
*When was the right to terminate by making a payment in lieu of notice exercised?
34.In view of this conclusion, it is necessary to consider what the exercise of the right reserved in paragraph 8.3 of the Handbook required. The Bank's case is that all that it was necessary to do in order to exercise the right was to calculate the value of the claimant's basic salary and any flexible benefits for his notice period and to pay this sum of money to him. It seems to me that it would be a very surprising thing if a person's contract of employment could be terminated without his knowing it simply by making a transfer of funds to his bank account. I asked counsel whether they could find any authority on whether, in principle, a contract of employment can be terminated without the employee's knowledge or which provides an example of that. The only example put forward was the decision of the Court of Appeal in Kirklees Metropolitan Council v Radecki*  ICR 1258, which was cited by Mr Gatt. I do not consider that this authority assists the Bank's case, as it did not involve the exercise of a contractual right of termination but a repudiation by the employer of the contract of employment and the question of when the repudiation had occurred (which determined the "effective date of termination" for statutory purposes). The majority of the Court of Appeal considered that this was a question of fact on which no finding had been made, and the case was therefore remitted to the employment tribunal. However, all the members of the Court of Appeal, as I read the judgments, considered that the effective date of termination could not occur until the employee knew that the employer was treating his employment as terminated.
35.I would accept that in principle there is nothing to prevent the parties to a contract of employment from agreeing that the contract may be terminated simply by virtue of the employer transferring to the employee a sum of money which is subjectively intended by the employer to be in lieu of notice. But it would in my view require clear words before such an intention could reasonably be attributed to the parties. I do not consider that in the present case this is a reasonable interpretation of paragraph 8.3 of the Handbook in circumstances where the exercise of this right will have a very significant effect on the position of the employee by bringing his employment to an immediate end. In order for a payment to amount to a payment "in lieu of notice" within the meaning of the clause, I would hold that it is necessary for the Bank not only to make a payment to the claimant of a sum calculated in accordance with the clause, but also to give notice to the claimant that it is exercising its right to terminate the claimant's employment by making the payment. On general principle, such a notice must be sufficiently clear and unambiguous in order to be effective.
36.In the present case it was not until the Bank belatedly sent its "standard Human Resources letter" to the claimant on 4 January 2008 that it clearly conveyed that it had decided to exercise its right to terminate the claimant's employment by making a payment to him in lieu of notice and that the sum credited to his bank account on 18 December 2007 was intended to include such a payment. The fact that the claimant could have, and probably had, guessed that this was the most likely explanation for the credit was not in my view sufficient to alter his legal rights before the position was made clear.
37.I therefore conclude that although it was open to the Bank to terminate the claimant's contract of employment with immediate effect at any time by making a payment to him in lieu of notice, it was not until it gave notice to the claimant by its letter dated 4 January 2008 that it had chosen to exercise this right that the claimant's contract was terminated. Had the Bank worded its letter of 29 November 2007 appropriately, or had it sent out its further letter "confirming the details" of the termination of the claimant's employment promptly and in any event before the end of 2007, it would have saved a significant amount of money.
38.As for when this notice took effect, I would apply by analogy the provision of paragraph 8.1 of the Handbook which states:
"Notice given by [the Bank] in writing shall be deemed to have been given by [the Bank] upon either being handed to you or sent to your home address (as last notified by you to HR). If such notice is sent by post, it shall be deemed to have been received by you on the second day after posting."
Treating it as most probable that the letter dated 4 January 2008 was posted to the claimant's address on the date it bears, I accordingly find that the claimant's contract of employment was terminated by the Bank on 6 January 2008.
(2) Negative Sales Credits
39.Under the FISS, the claimant was entitled to be paid a percentage of the "Net Revenue" of the Division which was dependent on the "Gross Revenue" achieved by the Division for the relevant year. The terms "Gross Revenue" and "Net Revenue" are defined in clause 5.30(e) and (g) of the Contract as follows:
"(e) Gross Revenue shall mean the sales credit as calculated by the Company's management accountants using calculation methods and assumptions equivalent to those used to calculate the sales credit of the Division in respect of the year ending 31 December 2004. …
(g) Net Revenue shall mean the Gross Revenue of the Division less the aggregate of (a) its Employment Costs; (b) its Bonus Pool Costs; and (c) operational losses attributable to a member of the Division provided that such operational losses have been notified to you in writing within 10 working days after the date on which the transaction to which the loss relates was completed."
40.There is a dispute as to whether, in calculating the Gross Revenue of the Division for the year ending 31 December 2007, the Bank was entitled to apply "negative sales credits" in relation to two transactions involving clients who have been referred to (in order to maintain confidentiality) as "Client A" and "Client B". The claimant also claims that the Gross Revenue as calculated by the Bank is understated because it omits deals concluded by the Transaction Debt Advisory ("TDA") team and includes certain negative sales credits in respect of TDA deals.
41.Sales credits are a form of internal accounting used across the banking industry to measure the revenue generated by sales of financial products. The system of sales credits has a number of functions. One is to quantify the "Net Banking Income" derived from sales activities or a sales division as a whole. Another is to measure the performance of individual sales people and teams. A third is to assess the profitability of particular clients. Bonuses or other rewards paid to employees may be linked to sales credits, as in the case of the FISS in which the claimant was entitled to participate. The evidence indicated that, while the use of sales credits is market-wide, particular details of the way in which they are calculated may vary from one bank to another.
42.The basic method used by the Bank to calculate the sales credit for a particular transaction is to add (i) the "technical margin" and (ii) the "mark-up". The "technical margin" is a fixed amount which is assigned to the product being sold. The amount applicable to each product is shown in a document referred to as a "pricing grid". The "mark-up" is the difference between the price which the Bank's trading desk quotes to the sales person for the transaction and the price at which the sales person manages to sell the product to the client. Sales credits are usually determined when a transaction is concluded. The practice is for the sales person and trader to calculate and agree the sales credit applicable to the transaction based on the pricing grid. The sales credit for the transaction is then recorded on the computer system used by the Bank, known as Odyssey.
43.It was common ground that sales credits, both in the Bank's practice and generally, aim to reflect the expected profitability of a transaction, assessed as at the time of closing of the deal. This will not necessarily correspond to the actual profit made or loss incurred by the Bank on the transaction, which depends on a multitude of factors including subsequent market movements, decisions taken by the Bank's traders, counterparty performance etc. which the sales credit pricing grid could not and does not attempt to capture.
Negative Sales Credits
44.The concept of sales credits as well as their name would tend to suggest that they will be positive numbers. However, the evidence showed, and I did not understand the claimant to dispute, there are some circumstances in which it is the Bank's practice to include negative numbers in its sales credit calculations.
45.The evidence showed that such "negative sales credits" are applied by the Bank in at least three situations. First, the Bank operates a system of "subsidies" whereby managers can give sales people an extra incentive to sell a particular product by granting them an additional sales credit if it is sold. When the product is sold, the additional sales credit is entered in the sales person's account and a corresponding negative sales credit is entered in the management account. The reason for debiting the management account in this way is to ensure that the overall sales credit figures for the division are not affected by the extra incentive given. Second, the sales person and the trader may, exceptionally, agree to win the business of a new client or a deal from an existing client at a price which the trader does not regard as profitable – essentially a form of "loss leader". In such circumstances the fact that the transaction involves an expected loss may result in a negative sales credit being recognised. A third situation in which there can be a negative sales credit is where a communication error occurs at the time of executing a transaction – for example, where a sales person misunderstands the client's order and relays the wrong order to the trader. It is normally to be expected that such errors will be picked up promptly by the Bank's back office and action taken to correct the error. When this happens and the Bank incurs a loss, if the sales person is considered to be to blame, a negative sales credit may be entered reflecting the loss.
*The Client A and B transactions
*46.As mentioned, the principal controversy concerns negative sales credits which the Bank has applied in its calculation of sales credits for the year ended 31 December 2007 in relation to transactions involving Clients A and B. The facts of these transactions are the subject of agreed summaries which for the purposes of this Judgment I can summarise further.
47.As regards Client A:
(1) In August 2006 a member of the Division sold four credit derivatives products to Client A.
(2) In about July 2007 Client A made allegations of "misselling (lack of advice) and misrepresentation" in relation to this sale.
(3) This led to a dispute and (in November 2007) a settlement whereby, without any admission of liability, the Bank agreed to unwind the transactions in return for €46m from Client A.
(4) The Bank's loss on the transaction when it was unwound (after taking account of the settlement with Client A) was €74.6m. However, a hedge had been put in place prior to the settlement in order to freeze the extent of the Bank's loss and this produced a gain of €21.3m.
(5) A negative adjustment of €74.6m was applied to the sales credits for the claimant's Division on 27 November 2007.
48.As regards Client B:
(1) In June 2007 the Bank purchased certain senior capital notes issued by a special investment vehicle set up by Client B (the "Notes") for their par value of c.€20m. At the same time the Bank entered into a "gentleman's agreement" with Client B under which, after six months, any Notes which the Bank had not been able to sell could be sold back to Client B at par.
(2) Client B subsequently suffered financial difficulties and refused to take the Notes back; their value was written down by the Bank to nil.
(3) On 17 October 2007 a negative sales credit of €21.42m was applied in relation to this transaction to the sales credits for the claimant's Division.
- At this trial the Court has been asked to determine in what general circumstances, if any, the Bank was entitled when calculating "Gross Revenue" for the purposes of the claimant's contract of employment to apply a negative sales credit in relation to a loss suffered by the Bank on a transaction. There is a further subsidiary issue as to whether, if the Bank was potentially entitled to apply a negative sales credit in relation to the transaction concerning Client A to reduce any sum payable to the claimant, the amount of the negative sales credit should take account of the gain provided by the separate hedge arrangement taken out by the Bank or whether that gain should be excluded from the computation.
50.The parties have agreed that the Court should not be asked to determine at this trial whether, if in principle the losses qualified as negative sales credits, the Bank was entitled, in fact, to apply the particular negative sales credits which it has applied in relation to the Client A and Client B transactions and the TDA deals.
*Approach to the Issues
*51.For the purposes of the claimant's contract, the definition of "Gross Revenue" (quoted above) requires sales credits to be calculated "using calculation methods and assumptions equivalent to those used to calculate the sales credit of the Division in respect of the year ending 31 December 2004". It seems to me that in order to determine whether, and if so in what circumstances, the Bank was entitled to apply a negative sales credit in its contractual calculation, it is necessary to consider two questions. The first is a question of construction: what is meant by the phrase "calculation methods and assumptions" in the definition? Having ascertained the meaning of this phrase, the second question is one of fact: what were the "calculation methods and assumptions" (in the relevant sense) used to calculate the sales credit of the Division in respect of the year ending 31 December 2004? The final stage is to consider whether those "calculation methods and assumptions" are capable of justifying the application of negative sales credits in circumstances which might, depending on further findings of fact, cover the transactions relating to Clients A and B and TDA deals.
*Meaning of "Gross Revenue"
*52.In interpreting the definition of "Gross Revenue", Mr Cavender Q.C. on behalf of the claimant submitted that the Court should start by considering the definition of "Net Revenue" which allows the Bank to deduct from the Gross Revenue of the Division "operational losses attributable to a member of the Division provided that such operational losses have been notified to [the claimant] within 10 working days after the date on which the transaction to which the loss relates was completed." Mr Cavender argued that the losses incurred on the Client A and Client B transactions were manifestly "operational losses" within the ordinary meaning of that expression which were not notified to the claimant until many months after the transactions were completed. The clear intention in these circumstances, he submitted, is that the Bank should not be entitled to deduct such losses through the application of negative sales credits.
53.Mr Gatt Q.C. on behalf of the Bank responded that this argument involves the tail wagging the dog, since in order to calculate "Net Revenue" it is necessary first to have calculated "Gross Revenue", and if the use of calculation methods and assumptions equivalent to those used to calculate the sales credit of the Division for 2004 results in taking account of losses by applying negative sales credits at the level of "Gross Revenue", no question of whether or not these sums should be deducted under the contract as "operational losses" arises.
54.Although I doubt that the parties had in contemplation the possibility that losses actually incurred on transactions (as opposed to losses expected at the time of closing) might be deducted in calculating Gross Revenue – otherwise the contract is unlikely to have been drafted as it was, it seems to me that Mr Gatt's submission is logically correct. If it were shown that the Bank used relevant "calculation methods and assumptions" in calculating the sales credit of the Division for the 2004 year which involved the application of negative sales credits, then it seems to me that the claimant would be fixed with those methods and assumptions whether he knew of them at the time of contracting or not and that it would be necessary under the test which the parties have agreed to use equivalent methods and assumptions in the contractual calculation of "Gross Revenue" for 2007.
55.As for what is meant by "calculation methods and assumptions", I think it is inherent in the natural meaning of this phrase and the purpose for which such methods and assumptions are to be used that the phrase is intended to refer to criteria (to use a neutral word) which are capable of being applied in a systematic and reasonably certain and predictable way. Thus, to justify the Bank's calculation for 2007, it would need to be shown that there was a system or rule which (i) existed at the time when the sales credit of the Division in respect of the year ending 31 December 2004 was calculated, (ii) was used in making that calculation and (iii) would result in a negative sales credit being applied to the transactions involving Client A and Client B. I therefore turn to consider whether on the evidence there was any such calculation method or assumption.
*The Claimant's Evidence
*56.The claimant gave evidence and was cross-examined at some length about his understanding of the Bank's practices. I regard that evidence as of limited relevance given that the claimant was not employed by the Bank in 2004 and had no direct involvement in the calculation of sales credits after he joined. What his evidence did establish (and the contrary was not suggested by the Bank) was that there was no mention made of any use of negative sales credits in the discussions which the claimant had about the Bank's sales credit system before his contract was concluded: those discussions were limited to the Bank's sales credit pricing policy as reflected in its pricing grid and the claimant's desire that there should be a restriction on the Bank's ability to deduct operational losses attributable to a member of the Division when calculating Net Revenue for the purpose of his contract.
*The Bank's Evidence
*57.The Bank was not able to produce any document generated at or shortly after the 2004 year end showing the sales credits for the year as they were calculated at that time. However, Ms Froment for the purposes of giving evidence in this case sought to reconstruct what such a document would have shown by interrogating the Odyssey system and printing out a spreadsheet. Although criticisms were made of this exercise, I am satisfied that the spreadsheet provides the best available – and sufficiently reliable – evidence of the Bank's sales credit calculation for the year ended 31 December 2004 as it existed following the year end and when the claimant's contract was concluded.
58.The spreadsheet includes a number of negative sales credits. All but one of these fall into the category of "subsidies". The only exception is an entry of -€178,120.83 relating to a transaction on 30 April 2004. No further information about this transaction was available when Ms Froment gave evidence, but after the close of evidence the Bank disclosed additional documents comprising a more detailed print-out from the Odyssey system and an email which led to the entry. The further print-out recorded that the entry was made on 7 May 2004 and included the comment "loss sur deal origine" (i.e. loss on the original deal). The email, also dated 7 May 2004, contained a request to allocate a €120,000 negative sales credit to an individual sales person (Nicolas Kuch) on a particular deal "following Duncan's mistake on an amortised swap". There was no evidence as to what "Duncan's" role was, the nature of his mistake, the explanation for the apparent discrepancy between the figures of €120,000 mentioned in the email and €178,120.83 recorded in the spreadsheet, how either of these figures had been calculated, nor the rationale for the application of the negative sales credit to this transaction.
59.More general evidence about the Bank's use of negative sales credits was given by Mr Landon and Mr Sahel. In particular, Mr Landon testified that there was no written policy governing the attribution of negative sales credits which existed in 2004 or (so far as he could say with any confidence) now; that cases in which such negative sales credits have been applied in respect of losses sustained on a transaction are very unusual and there is no automatic way of dealing with them – "it is more by experience and practice"; that the decision to apply a negative sales credit in relation to a particular loss is made by senior management on a case by case basis. Mr Landon also said that "once a rule is set up in a new case it is applied on a regular basis", although he did not give an example of any such rule.
*60.I do not consider that the evidence established that any relevant calculation method or assumption existed or was used for 2004 which involved the application of negative sales credits, save in the three circumstances which I have described earlier. It seems likely that the negative sales credit applied on 7 May 2004 in respect of the transaction 30 April 2004 was an instance of the third of these categories and was a case of a communication error. Certainly there is no evidence to the contrary. To the extent that the Bank has applied negative sales credits in other situations – and in particular, in relation to the Client A and B transactions in 2007 – this appears to have been done on an ad hoc basis. I am unable to discern from the evidence any system or rule which was applied in these cases. But if there was such a system or rule, there is no evidence which indicates that it was used to calculate the sales credit for the Division for 2004. Thus, for example, there is no evidence that, before 2007, the Bank had ever applied a method or assumption which involved or would entail deducting from the sales credits for the year a loss which arose from a transaction concluded in a previous year (as in the case of Client A) or which arose from a client's default whether under a legally binding or non-binding agreement (as in the case of Client B).
61.The Bank's pleaded case (in paragraph 67A of its Re-Amended Defence) is that it was entitled to apply a negative sales credit in each of the following circumstances: (1) where the claimant was responsible for a loss suffered by the Bank in the sense of having caused that loss by his own acts or omissions; (2) where the loss suffered by the Bank was suffered as a direct result of the actions of one of the members of the claimant's sales team which he supervised, even where the claimant was not individually at fault; and (3) where, having regard to the circumstances of the transaction as a whole, in particular given the involvement of the sales team in the initiation, instigation, design and/or execution of the transaction, it is appropriate, where the benefit of the transaction would have enured to the sales team, that the burden of its failure is similarly reflected.
62.Assuming – which seems to me doubtful at least in the case of the third of these alleged criteria – that they are sufficiently systematic to be capable of constituting "calculation methods and assumptions", there is no evidence that any of these criteria was used to calculate the sales credit for the Division for 2004. They are in my view ex post facto attempts to rationalise the decisions made in 2007, in the unprecedented circumstances which then arose in relation to the Client A and B transactions, to deduct the losses suffered by the Bank on those transactions in its calculation of sales credit for 2007. The same applies to the alleged principle, suggested for the first time in the oral evidence of Mr Landon, that a negative sales credit was to be applied where a loss occurred which arose from a risk not factored into the pricing grid used to calculate the original sales credit for the transaction.
63.I accordingly find that there was no calculation method or assumption which existed or was used to calculate the sales credit of the Division in respect of the year ending 31 December 2004 which is capable of justifying the application of negative sales credits to the transactions involving Client A and Client B.
64.In the light of this finding, it is not necessary or indeed possible to determine whether the hedging transaction should be taken into account in calculating a negative sales credit for the transaction involving Client A. In my view that question is unanswerable because there was no precedent for what occurred and no applicable method or assumption which was available to determine whether the gain on the hedge should or should not be set off against the loss on the transaction itself in calculating any negative sales credit. This merely serves to reinforce the conclusion that there is no justification under the test in the claimant's contract for applying a negative sales credit in this case.
*65.The claimant gave evidence that it was his understanding that an agreement had been reached before he left the Bank under which his division would receive sales credits from TDA transactions. The emails on which he relied did not demonstrate that such an agreement had been reached but only that a scheme was under discussion, and I accept the evidence of Mr Sahel that no agreement was ever concluded to implement a sales credit scheme for TDA deals.
66.It appears that some sales credits in relation to particular TDA deals were attributed to the Division by agreement on an individual basis. In so far as any negative sales credits were applied to such TDA deals, the principles which govern their validity are those which I have identified. In particular, if these represented adjustments made in order to reflect "subsidies", they were justified.
*(3) Tax Efficiency Issues
*67.The third area of dispute between the parties concerns the extent of the Bank's obligation under clause 5.5 of the Contract to use "all reasonable endeavours to ensure that any award made to you under the FISS is made in as tax efficient a manner as possible to take advantage of your Non-UK domiciled status". I will refer to this obligation as the "tax efficiency obligation".
68.It is agreed that the tax efficiency obligation applied to any payments which the claimant was entitled to receive under clauses 5.2 to 5.4 of the Contract. These clauses set out the claimant's entitlements to awards under the FISS in respect of each of the years ending 31 December 2005 to 31 December 2008 for which the claimant remained employed by the Bank. In particular, the Bank accepts that if (as I have found) the claimant's contract of employment was not terminated until 2008, the claimant became entitled to an award under the FISS in respect of the year ending 31 December 2007 and the tax efficiency obligation is applicable to that award.
69.There is a dispute, however, as to whether the tax efficiency obligation applies to any part of:
(1) any payment made under the replacement arrangement in relation to the FISS set out in clause 5.24(a); or
(2) the Termination Payment specified in clause 5.15 of the Contract.
70.The relevant background includes the fact that, before the contract was concluded, the Bank engaged KPMG to assist in devising a plan for rewarding the claimant in a tax efficient manner. In a report dated 8 December 2004, KPMG provided an overview of a proposed plan and summarised its key features and risks. As described in that report, the proposed plan involved issuing shares to the claimant in a specially incorporated investment company, which was likely to be registered in Jersey but resident for tax purposes in the UK. These shares would have relatively little value initially. However, their value would rise to reflect awards payable to the claimant under his contract. Income Tax and National Insurance Contributions would be payable on the initial value of the shares. However, the increase in value would be a capital gain which the claimant could ultimately realise by disposing of his shares and which should be free of UK capital gains tax provided that the gain was not remitted to the UK.
71.This plan was subsequently developed by KPMG into a full technical report dated 15 April 2005, after the claimant's employment had commenced. However, the Bank did not implement the plan or any other arrangement designed to avoid or reduce the claimant's liability to pay tax in the UK.
*Arrangements on Termination
*72.Both the payments which are the subject of dispute are payments which the Bank is liable to make on termination of the claimant's employment. The Contract provides that, if the claimant's employment terminates in certain circumstances specified in clause 5.14 (broadly speaking, if the Bank terminates his employment without fault on his part) which include those which have arisen, a number of consequences are to follow. Two of these are as follows.
73.First, clause 5.18 provides that in these circumstances:
"your eligibility to participate in the Scheme and/or the FISS and/or any scheme which replaces the FISS in respect of the year ended 31 December in which such termination of employment occurs will be replaced by the arrangements set out in paragraph 5.24 which will not be subject to the Deferral under paragraph 5.7"
Clause 5.24(a) then sets out this "replacement bonus arrangement ... in relation to the FISS". The essential purpose of the arrangement is to calculate an amount, payable at the same time as the Termination Payment, which represents an appropriate proportion of the FISS for the year in which termination of the Contract takes place up to the date of termination.
74.Second, clause 5.14 provides that in the specified circumstances:
"the Company will, within 28 days after such termination of your employment, make a payment to you (the "Termination Payment") as specified in clause 5.15."
Clause 5.15 states:
"The Termination Payment shall be equal to the aggregate of:
(a) the value (calculated at the date of termination of your employment in accordance with the rules of Deferral) of the proportion of any award or awards that has or have been made to you but retained by the Company under paragraph 5.7 and not yet released; and
(b) the Compensation Payment … which shall be calculated as follows:
(iv) if your employment terminates after 31 December 2007 but before 1 January 2009, the Compensation Payment shall be 0.65 x (T divided by 2) where T is the aggregate of any award or awards that has or have been made to you under the FISS and the Scheme (whether or not subject to the Deferral under paragraph 5.7) in respect of the calendar years ending 31 December 2006 [and] 31 December 2007;"
75.On behalf of the Claimant, Mr Cavender Q.C. argued that the words "any award made to you under the FISS" in clause 5.5 are capable of including a payment made under the "replacement bonus arrangement ... in relation to the FISS" set out in clause 5.24(a) and also the first element of the Termination Payment set out in clause 5.15(a) which consists of the value of any deferred proportion of any award under the FISS. He invited the Court to look at the substance and not the form of these payments.
76.On behalf of the Bank, Mr Gatt Q.C. submitted that the phrase "award ... under the FISS" is not apt to include a payment made under the arrangement set out in clause 5.24(a) which is not the FISS but is intended to replace the FISS in certain circumstances. With regard to clause 5.15(a), Mr Gatt Q.C. pointed out that, under the rules of the FISS, if the claimant's employment was terminated in circumstances including those which have happened, any proportion of any award that had been retained by the Bank and not yet released was to be forfeited at the date of termination. What the claimant was entitled to receive pursuant to clause 5.15(a) as part of his Termination Payment was therefore not an "award made to you under the FISS" but a payment equivalent in value to the unpaid part of any such award.
77.It seems to me that there are differences between the two kinds of payment in dispute such that they fall on opposite sides of the line. Taking first the payment provided for in clause 5.15(a) which is the first part of the Termination Payment, this relates to sums which already constitute awards that have been made to the claimant under the FISS, albeit that under the arrangements governing deferral the money has been retained by the Bank and not yet released. The effect of the provisions applicable on termination is to accelerate the release of the money. I can see no logical reason why the tax efficiency obligation should not apply to such an accelerated payment. It seems to me to be an unduly technical argument to say that because the payment specified in clause 5.15(a) is expressed to be not the retained proportion of any award but the value of that proportion calculated at the date of termination, it is not of an "award ... under the FISS". The purpose of the language used in clause 5.15(a), as it seems to me, is merely to provide for the sum payable to be reduced to reflect its early receipt. The purpose of the forfeiture provision in the FISS rules, and also of clause 5.17 of the Contract, is simply to ensure that the claimant will have no claim to receive any further payment following the termination of his employment. I do not consider that these provisions are intended to displace the fact that the payment specified in clause 5.15(a) is of an award that has been made to the claimant under the FISS.
78.On the other hand the amount payable under clause 5.24(a) is not in my view, either as a matter of language or in substance, an "award made to you under the FISS". Clause 5.18 makes it clear that the claimant is only entitled to an award under the FISS in respect of any year if he is employed by the Bank at the end of the year in question. The "replacement bonus arrangement" applies to the year (up to the date of termination) in which the claimant's employment is terminated and therefore to a period in respect of which there has not only been no award made to the claimant under the FISS but he is not entitled, and will never become entitled, to such an award. Moreover, the language of the Contract expressly distinguishes between the FISS and a replacement arrangement. For example, clause 5.26 states:
"The calculation of any bonus payments and/or awards (including, without limitation, under the Scheme, the FISS and any successor to the FISS and any replacement arrangements shall be subject to pro-rata deductions in accordance with the provisions of paragraph 5.27 and 14(b)." [emphasis added]
In these circumstances and where, in contrast, clause 5.5 refers only to awards under the FISS and not to payments under "any replacement arrangements", I do not think that clause 5.5 can properly be construed as covering such payments.
79.I conclude that the tax efficiency obligation in clause 5.5 applies to the sum specified in clause 5.15(a) but not to any payment made under the replacement arrangement in relation to the FISS set out in clause 5.24(a).
80.As regards the Compensation Payment specified in clause 5.15(b), I did not understand Mr Cavender Q.C. to argue that this can itself be described as an "award made to you under FISS", albeit that the payment is to be calculated by reference to the aggregate amount of such awards made for the two last years before the termination of the contract. Mr Cavender submitted, however, that if it is found that the Bank was in breach of the tax efficiency obligation and that performance of the obligation would have resulted in awards under the FISS for each relevant year being made in a tax efficient manner, then for the purpose of calculating the Compensation Payment the amounts of those awards should be grossed up to reflect the position which the claimant would have been in if the obligation had been performed.
81.In my view this argument is unsustainable for two reasons. In the first place, the tax efficiency obligation does not affect the amount of any award payable under the FISS. The amount payable to the claimant under the FISS is the same irrespective of whether that amount should be or is paid in a tax efficient manner. Clause 5.5 contains language which makes this absolutely clear:
"…any award made under the FISS will be subject to such Income Tax and National Insurance Contributions (or other similar deductions) as the Company may be required to deduct and the Company will not be required to gross-up any award to take account of any Income Tax and National Insurance Contributions (or other similar deductions) in any circumstances ..."
Accordingly, even if it were in principle correct that the Compensation Payment should be calculated by reference to the amounts which would have been paid under the FISS if the Bank had performed its tax efficiency obligation, this could make no difference to the amount of the Compensation Payment.
82.Secondly, such an approach to the calculation is in any case not in principle correct. Putting the claimant in the position that he would have been in if the obligation had been performed will be the object of an award of damages if a breach is established. But there is no warrant for calculating any sum specified in the contract on the basis of anything other than the actual facts. The sum required to be used in calculating the Compensation Payment in accordance with clause 5.15(b) is the aggregate of "any award or awards made to you under the FISS" (emphasis added), and not of "any award or awards which would have been made to you under the FISS" in hypothetical circumstances.
*Timing and Content of the Tax Efficiency Obligation
*83.As mentioned earlier, the questions whether the Bank was in breach of the tax efficiency obligation and, if so, whether the exercise of "all reasonable endeavours" by the Bank would have resulted in an effective scheme being put in place were excluded from this trial. However, two issues going to the scope of the obligation have been raised at this trial:
(1) when did the obligation arise; and
(2) what is the content of the Bank's obligation?
84.As a matter of principle it is clear that the obligation was a continuing one which commenced when the contract was entered into. As for the content of the obligation, the authorities cited by Mr Gatt Q.C. indicate that an obligation to use "all reasonable endeavours" can be equated with an obligation to use "best endeavours", that it requires the party undertaking it to use all reasonable endeavours and to go on using all reasonable endeavours until all reasonable endeavours had been exhausted and any further endeavour would merely be repetition of previous actions, but that it does not require the party to sacrifice its own commercial interests or undertake unreasonable courses of action in order to secure the desired outcome: see Rhodia International Holdings Ltd v Huntsman International LLC  2 Lloyd's Rep 325, 334-5 at paras 31-33; Yewbelle Ltd v London Green Developments Ltd  EWCA Civ 475 at para 29. However, I do not think it right to say anything further than this about the content of the obligation in this case before the relevant facts are found.
(4) The Condition Precedent Issue
85.The final issue for determination at this trial is whether, as the Bank contends, the claimant has lost the right to receive payments on termination of his contract as a result of having pursued some of the claims which he has made in this action – in particular claims for damages for breach of contract including alleged breaches of the 3 months' notice requirement and of the tax efficiency obligation.
*The Relevant Provisions
*86.The contractual provisions on which the Bank's contention is principally based are clause 5.16 and Schedule 1 of the Contract. Clause 5.16 provides (in relevant part) as follows:
"In consideration for the Company making the Termination Payment … you will enter into a termination agreement with the Company (in the form of the draft termination agreement in Schedule 1 of this letter but amended to take account of any payments due to you under this letter and to take account of relevant legislative developments) under which you will waive all contractual and statutory claims against the Company … arising out of your employment with the Company and its termination … If the Company and you wish to amend the form of the draft termination agreement further than as set out above, such amendments must be agreed within 28 days after the date on which your employment terminates (or such longer period as you and the Company agree), failing which you and the Company will enter into the termination agreement in the form of the draft termination agreement in Schedule 1 of this letter only amended to take account of any payments due to you under this agreement and to take account of relevant legislative developments."
It should be noted that references in this clause (as also in clauses 5.20 and 17) to "this letter" are clearly intended to mean "this Contract".
87.Schedule 1, which is referred to in clause 5.16, is in the form of a draft letter addressed to the claimant and intended to be signed by him and by a representative of the Bank upon termination of his employment. Paragraph 2 of Schedule 1 sets out the amounts, with blanks to be filled in as appropriate, which the Bank will pay to the claimant including "such of the payments referred to in Schedule 2 of the [Contract] to which you are entitled in accordance with the terms of your employment depending on the circumstances in which your employment terminates". Paragraph 7(e), which is the critical provision for the purposes of the Bank's argument, states as follows:
"It is a fundamental term of this letter that:
i) the payments to be given to you under paragraph 2 will at all times be conditional on you refraining from issuing or pursuing any type of employment related proceedings in respect of the Alleged Claims, any other Statutory Claim or any contractual or common law claim (howsoever arising), (with the exception of any claim for accrued pension rights, pension benefits or personal injury …) against the Company or any Group Company, (whether in an Employment Tribunal, the High Court, a County Court or otherwise); and
ii) if you subsequently issue or pursue such employment related proceedings in breach of this letter then the payments paid to you under this letter … will be repayable to the Company forthwith on demand; and
iii) the total sum will be recoverable as a debt, together with all costs (including legal costs) reasonably incurred by the Company in recovering the sum and/or in relation to any proceedings so brought by you.
The repayment provisions of this paragraph 7(e) will be without prejudice to [the Bank's] right to seek further damages from you in respect of the breach referred to in this paragraph and any other breach of this letter."
The Bank's Argument
88.The Bank's argument, as advanced on its behalf by Mr Gatt Q.C., proceeded in the following stages. First, Mr Gatt submitted that under clause 5.16 of the Contract the Bank's obligation to make the Termination Payment specified in clause 5.15 and the claimant's obligation to enter into a termination agreement in the form contained in Schedule 1 are concurrent conditions, in the sense that each party's obligation depends on the readiness and willingness of the other to perform. Therefore, in order to be entitled to receive the Termination Payment, the claimant must be ready and willing to enter into such a termination agreement. Second, Mr Gatt submitted that paragraph 7(e)(i) of Schedule 1, on its proper construction, makes it a condition precedent to the claimant's entitlement to receive the payments specified in the termination agreement that the claimant has refrained from issuing or pursuing proceedings against the Bank (other than proceedings confined to seeking to establish the correct amount of those payments) since the Termination Date. Third, Mr Gatt submitted that the claimant has failed to comply with this condition precedent because he has at one time or another in the present action pursued certain claims (referred to by Mr Gatt as "Non-Conforming Claims") which go beyond seeking to establish the amounts payable on termination. It follows, according to the Bank, that the claimant has lost the right to be paid the Termination Payment.
89.The first premise of the Bank's argument is in my view sound. I would agree that the correct analysis of clause 5.16 is that the Bank's obligation to make the Termination Payment and the claimant's obligation to enter into a termination agreement are concurrent conditions. The claimant's obligation is thus conditional upon the Bank making, or being ready and willing to make, the Termination Payment specified in clause 5.15 of the Contract. It follows from my conclusions on the issues concerning the date of termination and negative sales credits that the Bank has to date failed to comply with this condition because the amount which it has been ready and willing to pay to the claimant is less than the amount of the Termination Payment to which the claimant is entitled. Once, however, the correct amount of the Termination Payment has been established in these proceedings and the Bank pays or offers to pay this amount, the claimant will be obliged as a condition of receiving the payment to perform his concurrent obligation to enter into a termination agreement in the required form.
90.It is at the second stage that the Bank's argument in my view goes wrong. According to the Bank, the effect of paragraph 7(e)(i) of Schedule 1 is to make the claimant's entitlement to the payments to be given to him under the termination agreement conditional on his having refrained from issuing or pursuing proceedings against the Bank since the Termination Date (my emphasis). However, this is not what paragraph 7(e)(i) says. I am unable to construe that provision as looking backwards in this way and applying to proceedings which have already been issued or pursued before the termination agreement is executed and the condition in paragraph 7(e)(i) takes effect. In my view the wording of paragraph 7(e)(i) is plainly prospective and refers only to any proceedings which may be issued or pursued at any time in the future.
91.The fact that it is inconsistent in this way with the plain wording of the contract would be sufficient reason in itself to reject the Bank's argument, but there are a number of further objections which I also regard as fatal to it.
92.First, if the intention had been to make the claimant's right to receive payments on termination conditional on his having refrained after the Termination Date from making Non-Conforming Claims against the Bank, then one would expect the body of the contract to contain a clause which expressly states this and, given the draconian consequences of non-compliance with the condition, which states it clearly. It is an opaque and roundabout way of depriving the claimant of the right to receive termination payments where he has made Non-Conforming Claims to require him to enter into an agreement under which the Bank undertakes to make such payments (and which it must be ready and willing to make) but which the claimant is then disqualified from receiving as soon as he signs the agreement by reason of doing so. More than this, on the Bank's construction, the claimant is even required (as the final words of paragraph 7(e) indicate) by signing the agreement to assume a liability in damages for any loss caused to the Bank by his prior actions. I regard an interpretation which has this result as one which could not reasonably have been intended.
93.Second, if the Bank were right that paragraph 7(e)(i) looks backwards to proceedings which have previously been issued or pursued, then there is nothing in the wording to prevent it from applying to any such proceedings which have been brought at any time in the past. No doubt recognising the unreasonableness of this consequence, Mr Gatt Q.C. submitted that the provision applies only to proceedings issued or pursued after the Termination Date. However, I can see nothing which justifies this limitation.
94.Third, the logical consequence of the Bank's interpretation of paragraph 7(e)(i) is also that, if there is a dispute about the amount owing to the claimant on termination of his employment, as has occurred in this case, the claimant cannot bring proceedings to resolve the dispute and recover the amount to which he claims to be entitled without forfeiting his entitlement to recover that amount (or any amount). This is because the scope of paragraph 7(e)(i) is as wide as could be and includes "any contractual or common law claim (howsoever arising), (with the exception of any claim for accrued pension rights, pension benefits or personal injury ...)" against the Bank. The fact that the Bank's interpretation leads to such a wholly unreasonable result where the claimant cannot enforce his contractual rights without losing them is a further compelling reason to reject it.
95.Mr Gatt Q.C. sought to avoid this reductio ad absurdum of the Bank's argument by saying that it was open to the parties to agree a carve-out from the proceedings referred to in paragraph 7(e)(i) to allow points of dispute between them to be litigated. That is plainly true, but the fact that it would be possible for the parties to vary an unreasonable agreement does not make the agreement any less unreasonable; nor does it address the fact that the Bank has no reason to waive such a favourable arrangement and that there is no recourse if it declines to do so. Mr Gatt's alternative suggestion was that there is an implied exception in paragraph 7(e)(i) for proceedings claiming a declaration of the claimant's contractual rights and payment of amounts due to him on termination. However, any such implication is inconsistent with the words "any contractual ... claim (howsoever arising)" and with the fact that the intended exceptions are expressly identified and do not include a claim of the kind suggested.
96.In support of the Bank's interpretation of paragraph 7(e)(i), Mr Gatt Q.C. also submitted that there is a contrast drawn in paragraph 7(e) between (e)(ii), which applies to proceedings subsequently issued or pursued, and (e)(i) which on the Bank's case applies to proceedings previously issued or pursued. He argued that (e)(ii) would be unnecessary if (e)(i) were also intended to be prospective in its effect. He also contrasted the words "payments to be given to you" in (e)(i) with the words "payments paid to you" in (e)(ii) (emphasis added) and submitted that the phrase "to be given" shows that the obligation not to issue or pursue proceedings applies to conduct which has occurred before the termination agreement is signed. None of these points in my view assists the Bank's case. The scheme of paragraph 7(e), as I interpret the provisions, is not to draw a contrast between two obligations – one applying to the past and the other to the future: it is, first, in (e)(i) to specify the obligation on which receipt of payments under the agreement is conditional, and then in (e)(ii) and (iii) to spell out the (draconian) consequences of any breach of the obligation. Further, I think it clear that the reason for referring to "the payments to be given to you under paragraph 2" (emphasis added) is that paragraph 2 provides for the payments to be made on the Bank's next payroll date after the employee has executed the agreement. These words in any event are relevant only to the time at which the claimant's obligation arises and not to the content of the obligation (and whether it is backward or forward looking) when it does arise.
97.Mr Gatt Q.C. further submitted that "as a matter of logic and common sense" it cannot have been intended that the claimant could exhaust all other claims he might consider himself to have (putting the Bank to the time and expense of having to defend any such claims) and then still be entitled to receive the Termination Payment. The Termination Payment consists of sums which the claimant would not otherwise have been entitled to receive on termination and the quid pro quo for that, Mr Gatt contended, was that, in return, the Bank would be protected from any other claims arising out of the claimant's employment or its termination.
98.I see nothing self-evidently logical about an arrangement of such a kind. Suppose, for example, that the Bank was in breach of the tax efficiency obligation during the period of the contract with the result that the claimant has suffered loss and has a good claim for damages. It is not obvious why the claimant should be required to abandon this claim in order to be entitled to a Termination Payment which he would equally have been entitled to receive if the Bank had performed its contractual obligation. On the contrary, to require the claimant to give up the claim seems to me to produce a windfall for the Bank. The implications of the Bank's argument are even more unmeritorious in relation to a claim for damages for wrongful dismissal. The consequence of the Bank's argument is that, if it wrongfully repudiates the contract and the claimant accepts the repudiation as bringing the contract to an end, the claimant cannot pursue a claim for damages for the losses which he has suffered without losing his right to the Termination Payment to which he would equally have been entitled if the contract had been terminated lawfully. This allows the Bank potentially to profit from its own wrong. Far from being a matter of "logic and common sense", the result seems to me wholly unreasonable.
99.The purpose of the provisions, as I interpret them, is to achieve finality once any dispute about the sums payable to the claimant under the contract has been resolved. The object is not to prevent the claimant from bringing proceedings to claim sums which he contends are due to him under the agreement (either as a debt or damages) or to penalise him if he does so. What the Bank is reasonably concerned to protect itself against is a situation in which, having agreed to make payments to the claimant which are intended to settle all his claims arising out of his employment, the claimant is later able to bring proceedings asserting further claims against the Bank which were not raised before the termination agreement was concluded.
100.In my view the contractual provision which determines what claims the claimant may pursue before a termination agreement has been entered into is not paragraph 7(e)(i) of Schedule 1, which applies only to claims pursued after a termination agreement has been concluded, but clause 5.16 of the Contract in so far as it obliges the claimant to enter into:
"a termination agreement with the Company in the form of the draft termination agreement in Schedule 1 of this letter but amended to take account of any payments due to you under this letter" [emphasis added]
Reading "this letter", as I have pointed out that it must be read, as meaning "this Contract", this expressly envisages that the claimant is entitled to claim and receive any payments due to him under his contract of employment. Such payments must in my view include not only any agreed sum which is outstanding but also any damages which are payable as a result of any breach of contract by the Bank. The expression "under" the contract is capable as a matter of language of including a liability to pay damages as well as a debt, and if a payment of damages were not included it would have the unreasonable consequences that I have referred to above.
Failure of Consideration
101.A further way in which the Bank's case was put was in terms of "failure of consideration". Mr Gatt Q.C. submitted that the consideration for the Bank's promise to pay sums under the termination agreement was the performance of the claimant's promise to refrain from issuing or pursuing proceedings of the kind referred to in paragraph 7(e)(i) of Schedule 1, and that there has been a total failure of consideration on the claimant's part by reason of the claims which he has made and pursued in this action with the result that he cannot recover any of the sums which the Bank promised to pay in exchange for the claimant's obligation.
102.Putting aside the fact that no termination agreement has yet been entered into so that no question of any total failure of consideration can yet have arisen, this argument is in my view misconceived for at least two reasons. First, like the condition precedent argument, the consideration argument depends upon construing paragraph 7(e)(i) of Schedule 1 as applying to steps which have already been taken to issue or pursue proceedings before the termination agreement is entered into. The argument therefore suffers from the same flaws. Second, even on the Bank's interpretation of Schedule 1, it cannot reasonably be suggested that the obligation in paragraph 7(e)(i) or its performance was the whole of the consideration to be given by the claimant for the sums paid to him. Other obligations which form part of the consideration include undertakings to refrain from making adverse or derogatory comments about the Bank (paragraph 3), to keep the terms of the agreement confidential (paragraph 5) and to deliver all property belonging to the Bank (paragraph 6). Even if the Bank's interpretation of paragraph 7(e)(i) were correct, therefore, non-performance of it would not amount to a total failure of consideration.
103.Accordingly, I reject the Bank's arguments that the claimant has lost any right to receive a Termination Payment, or any other payment, as a result of making or pursuing any of the claims which he has at any stage made in this action.
104.As the bases on which the parties have prepared their respective computations of the claimant's loss do not in either case coincide with the findings which I have made and in any event not all the figures are agreed, I have not attempted in this Judgment to address matters of quantum. If it cannot be agreed, the quantification of the claim including the question of interest will have to be determined at the further trial which is in any event contemplated to deal with the excluded issues.
105.I will hear submissions on the form of order which is appropriate to give effect to the conclusions reached in this Judgment and on the claimant's application for an interim payment which has been foreshadowed at the hearing.
Published: 18/04/2010 13:42