Hopkin v Financial Security Assistance (UK) Ltd  EWCA Civ 243
Reasons for dismissing an appeal seeking a declaration that the claimant was entitled to performance shares under his contract of employment.
The claimant had joined the defendant in 2007 and, and during negotiations, had been shown pro-forma examples of agreements between the defendant and its employees in relation to the award of performance shares (the claimant had been in a similar scheme with his previous employers). The claimant was made redundant by the defendant in September 2008. He was paid a guaranteed bonus after termination but the defendant refused to acknowledge any entitlement to two tranches of shares: one awarded to him in February 2008 and another tranche said to be promised in his letter of engagement for January 2009. The claimant issued proceedings under Part 8 of the CPR but the claim was was dismissed in the High Court broadly because the scheme conditions envisaged a four-stage process: award, allocation, vesting and only then payment and it was not certain that would be such a distribution.
In this judgment, Aikens LJ reviews the contentions of the parties before construing the relevant contracts. He identifies that it is clear that the employee will not have any vested rights at the time of the award. He also notes that references to payment in relation to the shares should not be interpreted as the same in relation to cash bonuses as the shares will only be vested after specified performance cycles. Finally, the terms of the engagement letter did not affect the terms of the performance share plan. Accordingly, he refused the declaration sought.
Case No: A3/2010/1360
Neutral Citation Number:  EWCA Civ 243
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
MR JUSTICE SIMON
HC 09 C 03008
Royal Courts of Justice
Strand, London, WC2A 2LL
LORD JUSTICE THORPE
**LORD JUSTICE AIKENS
LADY JUSTICE BLACK
- - - - - - - - - - - - - - - - - - - - -
RICHARD HOWARD HOPKIN (Appellant)
- and -
FINANCIAL SECURITY ASSURANCE (UK) LIMITED (**Respondent)
**(Transcript of the Handed Down Judgment of WordWave International Limited
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Richard Leiper (instructed by Bates Wells & Braithwaite London LLP) for the Appellant/Claimant
Mr Adam Solomon (instructed by Speechly Bircham LLP) for the Respondent/Defendant
Hearing date : 2nd March 2011
- - - - - - - - - - - - - - - - - - - - -
As Approved by the Court
Lord Justice Aikens :
- On 2 March 2011 we heard an appeal from an order of Simon J dated 14 May 2010 whereby he dismissed the claim of Mr Richard Howard Hopkin against his former employer, Financial Security Assurance (UK) Limited ("FSA"). Mr Hopkin had brought proceedings under CPR Pt 8 and sought a declaration that he is entitled to the "unconditional vesting" of 3000 performance shares which, under the terms of his contract of employment with FSA, had been "awarded" to him in February 2008 and also of 2000 performance shares due to be "awarded" to him in January 2009. The judge held that, upon the correct construction of the terms of the contract of employment, Mr Hopkin was not entitled to the "unconditional vesting" of those performance shares. He held, therefore, that the claim failed. However, the judge gave Mr Hopkin permission to appeal to this court, commenting that although he had come to a clear view on the matter, the contrary was properly arguable.
- At the conclusion of the argument before us of Mr Leiper on behalf of the appellant, Mr Hopkin, we decided to dismiss the appeal and we said we would give our reasons in writing. These are my reasons for dismissing the appeal.
- The factual background is not in dispute and was not in dispute before the judge. Mr Hopkin had previously been employed by Société Générale ("Soc Gen"). As part of his remuneration package with Soc Gen he participated in a "share performance scheme" which gave employees the right to deferred additional remuneration based on their good performance and the increased worth of the company after a period of time. In the summer of 2007 Mr Hopkin began negotiations with Mr Philippe Tromp of FSA about being employed as a managing director in FSA's securitisation department. FSA was then a part of a group of companies ultimately owned by Dexia SA, a Belgian company. The negotiations carried on during August and September 2007 on the questions of Mr Hopkin's title in the proposed job, his base salary, his entitlement to a cash bonus and his entitlement to take part in a scheme run by FSA for employees which involved the award of "performance shares".
- In the course of these negotiations, Mr Tromp sent to Mr Hopkin two pro-forma examples of agreements between FSA and employees, evidencing awards of two types of performance shares to employees and also the historic payout values of FSA's performance shares plan. It is clear that Mr Hopkin studied those documents. Within them are references to FSA's 2004 Equity Participation Plan ("EPP") terms, although Mr Hopkin did not see or study those terms at the time.
- The pro-forma awards of FSA performance shares and Dexia SA "restricted stock" were stated to be issued under the terms of the EPP. The pro-forma awards therefore obviously reflected the terms of the EPP and its structure. The judge set out a summary of the effect of those two documents at paragraph 12 of his judgment and it is accepted that this summary is accurate.
- The judge said that these drafts demonstrated the following:
"(1) So far as the FSA performance share award was concerned the award was stated to be a grant of performance shares in the Equity Participation Plan ("EPP").
(2) The preamble referred to performance shares being paid out in two three-year performance cycles, with one third of the shares being allocated to the first circle and the balance of two thirds being allocated to the second circle.
(3) The preamble also referred to payments for the performance shares being made "in cash and/or shares or common stock".
(4) The stated purpose of the award, according to clause 1, was to enable the company to obtain and attract employees who would contribute to the long-term growth of the company.
(5) The scheme provided that on the date of the award the employee was [not]1 vested in any of the former performance shares which became vested on completion of the performance cycle.
Clause 5 continued:
"The Plan provides for vesting of all your Performance Shares upon termination of employment upon your death or Disability. The Plan provides a partial vesting of your Performance Shares upon termination of employment with the Company without Cause."
(6) Clause 6 provides that subject to a provision for an election to receive FSA stock, which is described in clause 7, payments would be made against the share allocations within 120 days of completion of the cycle provided the employee was employed at the conclusion of the cycle.
(7) Clause 7 provided that so far as the Performance Shares were concerned the payment would be in cash or shares, although at the time of this particular draft award, it would be likely to be cash.
There were similar conditions in the draft award relating to the Dexia restricted stock, although in the case of Dexia stock it was more likely that the employee would hold the stock, at least if he continued to be employed. In the case of each draft award it was stated to be the subject of the terms of the EPP."
- A draft engagement letter was sent by Mr Tromp to Mr Hopkin on 19 September 2007. Mr Hopkin amended it and added another paragraph, which became what I shall call paragraph  of the actual Engagement Letter of 26 September. It is clear that these amendments were made after a study of the two pro-forma awards. Mr Hopkin returned his amended draft to Mr Tromp on 24 September 2007.
- Terms of employment were then agreed and were set out in the Engagement Letter from Mr Tromp of FSA to Mr Hopkin dated 26 September 2007. I will return below to its terms. Mr Hopkin thereafter began employment with FSA. On 14 February 2008 Mr Hopkin signed an "Agreement Evidencing an Award" which "awarded" him 2700 Performance Shares in FSA, subject to the terms of the Award and those of the EPP. He signed a similar Award, also dated 14 February 2008 by which he was "awarded" 1995 shares of Dexia Restricted Stock, subject to the terms of that Award and the EPP. In each case the Award was counter-signed by Mr Sean W McCarthy, the President of Financial Security Assurance Holdings Limited.
- In August 2008, after the world banking crisis had begun, Mr Hopkin was told that his position had been "provisionally selected for redundancy". That was later confirmed and on 17 September 2008 Mr Hopkin was made redundant. He was paid his outstanding salary. He was also subsequently paid a bonus of £300,000 which had been guaranteed to him under the terms of the Engagement Letter. However, a dispute arose as to his entitlement to have "vested" in him the Performance Shares which had been awarded to him in February 2008 and further Performance Shares which the Engagement Letter said he would be "awarded" in January 2009.
- FSA refused to acknowledge Mr Hopkin's entitlement. Mr Hopkin therefore began proceedings in the Chancery Division under CPR Part 8. He claimed a declaration that he was entitled to :
"The unconditional vesting of 3,000 Performance Shares awarded to him in February 2008 and 2,000 Performance Shares due to him in January 2009."
The terms of the Engagement Letter of 26 September 2007
- The judge very sensibly numbered the paragraphs of the letter dated 26 September 2007 from Mr Tromp to Mr Hopkin which set out the principal terms of the contract of employment. I will do the same. Paragraph 1 offered Mr Hopkin the position of Managing Director, responsible for FSA's Securitisation Business in Europe, Middle East, Africa and Australia/New Zealand, based in FSA's London office.
- Paragraphs 2 – 5 of the Engagement Letter are in the following terms:
" The terms of our offer are set out in this letter and the attached "Terms and Conditions of Employment", (the Terms and Conditions") which together will apply to your employment. Where the terms of this letter and the Terms and Conditions conflict, the terms of this letter will prevail.
 Your base salary will be at the rate of £150,000 per annum, payable monthly, in arrears. In January 2008, a guaranteed bonus of £300,000 will be payable. Your first salary review will be in January 2009 and at that time, a minimum guaranteed bonus of £300,000 will also be payable.
 You will also be eligible to participate in FSA's Equity Participation Plan, the performance share unit aware will be comprised of 90% FSA performance shares and 10% Dexia restricted shares. Performance Shares are awarded on a discretionary basis and are valued upon the increase in adjusted book value and the book value of the company over given periods and vest over two sequential three-year performance cycles. You will be awarded 3000 Performance Shares in January 2008 and a minimum of 2000 Performance Shares in January 2009.
 The cash bonuses and awards of Performance Shares referred to above will be paid to you subject only to the following conditions: firstly, that you have not been dismissed for gross misconduct; secondly, that you have not given notice voluntarily to terminate your employment with FSA in each case by the payment and award dates in question.
January 2009 Cash Bonus and Performance Share awards
It is acknowledged that these are indeed minimum amounts and may (in the discretion of FSA) be exceeded…"
- It will be noted that paragraph 4 of the letter refers specifically to FSA's EPP. As the judge remarked at paragraph 14 of his judgment, it would have been clear from the face of the Engagement Letter that the EPP would contain terms which might potentially be relevant to the parties' contractual relationship.
- The EPP is a long document. It states at its outset that the object of the EPP is to enable the company, Financial Security Assurance Holdings Limited, to retain and attract executives and employees who will contribute to FSA's success by their ability, ingenuity and industry and to enable such executives and employees to participate in the long-term growth of Financial Security Assurance Holdings Limited and Dexia by obtaining a "proprietary interest" in FSA or Dexia or the cash equivalent. It states that the EPP is to be unfunded and would be paid from the general assets of FSA.
- In paragraph 22 of his judgment, the judge summarised the effect of the terms of the EPP as "a carefully structured scheme which provided for a four-stage process: award, allocation of shares in the course of the performance cycles, vesting of those shares and , finally, distribution and payment. In the case of Dexia SA it is by no means certain that there would be a cash distribution".
The rival arguments on the construction of the contract terms
- For the appellant, Mr Leiper submitted that the terms of the contract, in particular, paragraph  are clear. He submitted that FSA agreed that it would not only "award" Mr Hopkin 3000 Performance Shares in January2008 and a minimum of 2000 Performance Shares in January 2009, but also that those "awards of Performance Shares" would be "paid to" Mr Hopkin provided that neither of the two circumstances set out at paragraph  of the letter were applicable at any time. It is agreed that Mr Hopkin was not dismissed for gross misconduct and that he did not give notice voluntarily to terminate his employment with FSA. Accordingly, he submitted, the two "awards of Performance Shares" must be "paid to" Mr Hopkin; in other words, he has an indefeasible right to those "Awards" vesting in him. Mr Leiper accepted that the Performance Shares would be valued and would vest in accordance with paragraph  of the terms of the Engagement Letter. However, he submitted it is clear that Mr Hopkin is entitled to the declaration that those Performance Shares would "vest" in Mr Hopkin over the relevant two sequential three-year performance cycles.
- Mr Leiper emphasised a number of matters that he submitted the court must have in the forefront of its mind when construing the Engagement Letter of 26 September 2007 and in particular its fifth paragraph. First, the fact that Mr Hopkin had left his employment with Soc Gen where he was part of a share performance scheme similar to that of FSA, in which employees only had "vested" rights after 4 years. But, as a result of his resignation from that post, he had lost the benefit of those rights. Therefore Mr Hopkin was anxious to make sure he could recoup his position with his new employment with FSA. Secondly, Mr Leiper submitted that the purpose of the terms of paragraphs - of the Engagement Letter, at least so far as Mr Hopkin was concerned, was to ensure that he not only had a "guaranteed" award of Performance Shares for 2008 and 2009, but also a guarantee that the "awards" of those Performance Shares would actually be "paid" to him in due course, provided that neither of the events mentioned in the two conditions in  occurred. Thirdly, Mr Leiper relied on the use of the word "payment" in the pro-forma award documents that had been sent to Mr Hopkin by Mr Troop to demonstrate that ultimately, at the end of the performance cycle, the "award" of Performance Shares led to the benefits being "paid" to the employee. He submitted that the structure of the pro-forma Awards was reflected in the wording of paragraph  of the Engagement Letter. Lastly, he submitted that if the judge's construction was taken, it meant that paragraph  of the Engagement Letter added little or nothing to the terms of paragraphs  and . He said that such a result was improbable in the case of a concise commercial agreement such as this.
- Mr Leiper said that the result of all these considerations was that the word "paid" in paragraph was, in reality, a shorthand. If its import was set out in full then paragraph  meant, in relation to Performance Shares, that Mr Hopkin had, on the facts, an indefeasible right that the awards of Performance Shares would vest in his favour at the end of the appropriate performance cycle and that he would be entitled to a distribution of shares in FSA/Dexia SA and/or a payment of cash. That is how the word "paid" should be construed.
- Mr Solomon for FSA submitted in his written argument that the construction for which Mr Hopkin argues did not take proper account of the terms of the two draft awards of Performance Shares and Dexia Restricted Stock or the EPP to which paragraph  of the Engagement Letter refers. He submitted that they all made it very clear that there was no "vesting" in the Performance Shares at the time of the award of those shares. He submitted that the wording of the engagement letter, particularly , must be construed in the light of those background facts. Mr Solomon submitted that the word "paid" in  of the engagement letter, which refers back to both the cash bonuses and the Performance Shares, must mean in relation to the "award" of Performance Shares, "made" to Mr Hopkin. He submitted that the judge therefore correctly construed  of the engagement letter terms.
Principles of Construction
- As Mr Leiper acknowledged, Mr Hopkin's rights in relation to the Performance Shares depends entirely on the construction of the Engagement Letter. The judge summarised the principles of construction of commercial documents at  to  of his judgment, basing himself on the well-known speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896 at pages 912-3. Mr Leiper accepted that the judge's summary of the principles is accurate for the purposes of this case. The judge said:
8. First the court's task is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of entering into the contract.
9. Second, this is not simply a matter of determining the dictionary meaning of specific words, not least because the words chosen by the parties may not be appropriate.
10. Third, in interpreting the document the court may take account of the factual background, that is to say anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
11. Fourth, however, the court may not take into account the previous negotiations of the parties or evidence of subjective intent.."
Construction of the Engagement Letter, particularly para 5.
- I accept that the letter must be construed against the background that Mr Hopkin had left a position at Soc Gen where he would have benefited from terms which rewarded performance over the long-term. I would accept that he was anxious to protect his position. However, the letter must also be interpreted against the background of the terms of the two pro-forma Awards, which Mr Hopkin had plainly studied and which were known to FSA and also the terms of the EPP which are referred to in general terms in paragraph  of the letter.
- The two Awards and the terms of the EPP state in clear terms that a participant in the Performance Share scheme will not have any vested rights in the Performance Shares at the time that they are "awarded" to an employee. The employee will only obtain full vested rights at the end of the Performance Cycles and provided certain circumstances have not occurred. Therefore, if the intention of the Engagement Letter was to confer immediately on Mr Hopkin full "vested rights" in the Performance Shares which the letter stipulated would be awarded to Mr Hopkin at the beginning of 2008 and 2009, (subject only to the two conditions set out in paragraph ), then I would have expected the letter to say so expressly in clear terms. But it does not do so, as Mr Leiper is forced to accept.
- The question is, therefore, whether the meaning of the Engagement Letter, in particular paragraph , has the same effect when interpreted by a reasonable person having all the background knowledge which was reasonably available to the parties. I have reached the very clear conclusion that it does not do so. First of all, the distinction between the "award" of Performance Shares and the "vesting" of them is clearly drawn in paragraph  of the letter. That distinction reflects the terms of the pro-forma Awards and the EPP. Having the background knowledge that they did, the parties must have used the words "award", "vest", "paid" and "payment" in paragraphs  and  of the letter intentionally and in accordance with the meanings attributed to them in those other documents unless some contrary meaning is clear from the Engagement Letter.
- Secondly, the first part of the sentence which makes up paragraph  of the letter refers to "the cash bonuses and awards referred to above", which must be a reference back to paragraphs  and  of the letter which deal respectively with cash bonuses and the performance shares. The sentence in  goes on to say that those cash bonuses and awards of Performance Shares "will be paid to you". Therefore the word "paid" refers both to what is to happen in relation to both the "cash bonuses" and the "awards of Performance Shares".
- As Lord Mustill pointed out in Charter Reinsurance Co Ltd v Fagan  AC 313 at 384, *the word "paid" can be slippery. In the same case Lord Hoffmann demonstrated graphically the different uses to which the words "pay" or "paid" can be put: see page 391. Lord Hoffmann also emphasised that the meaning of a word will often depend on its context and, in some cases, the notion of a word having a "natural" meaning is not very helpful. In paragraph  "will be paid to you" can and probably does mean, in relation to the cash bonuses, that the relevant sum is to be credited to Mr Hopkin's bank account when it becomes "payable" in accordance with paragraph . But "will be paid to you" cannot mean the same in relation to the Performance Shares, because there could be no payment of shares or cash until the end of the performance cycles. So Mr Leiper has to say that "will be paid to you*" in paragraph  means, in relation to the Performance Shares "will be vested in you there and then", subject only to the conditions that follow. But there can be no warrant for that meaning, given the terms of paragraph , which specifically stipulates that the Performance Shares will vest over two sequential three-year performance cycles, in conformity with the pro-forma Awards and the terms of the EPP.
- Thirdly, if, as I think must be the case, paragraph  is to be construed consistently with the pro-forma Award documents and the EPP unless the contrary intention is clear, then Mr Leiper's construction cannot be correct, because it flies in the face of the terms of those documents. He responded by saying that this would mean that no proper effect can be given to the two qualifying conditions in paragraph , at least in relation to the Performance Shares. I disagree. In my view it is clear from the last phrase of paragraph  that those two conditions refer to the dates when the cash bonus becomes "payable" and the date when the Performance Shares are to be the subject of an "award". If, by any one of those times, Mr Hopkin had been dismissed for gross misconduct or he had given notice voluntarily to terminate his employment with FSA, then the cash bonus would not become "payable", so no "payment" of it would be made; similarly no Performance Shares would be the subject of an "award".
- The consequence is that paragraph  of the Engagement Letter does not affect the terms of the EPP, which remain applicable as to when and how Performance Shares which have been awarded to an employee of FSA will thereafter "vest" in the employee. Mr Leiper accepts that under the EPP terms Mr Hopkin was only entitled to a partial vesting of the Performance Shares that had been awarded to him under the Awards of 14 February 2008. That is what has happened. Although FSA now accepts that it was contractually bound to "award" Mr Hopkin at least 2000 Performance Shares in January 2009, Mr Leiper accepts that if his construction of paragraph  of the Engagement Letter is rejected, then none of those Performance Shares could vest in Mr Hopkin pursuant to the terms of the EPP. Therefore there is no point in a declaration that Mr Hopkin was entitled to have those Performance Shares "awarded" to him.
- It is unnecessary to say anything on Mr Solomon's argument that paragraph  is ambiguous and, since Mr Hopkin drafted it, the contra proferentem rule should be applied and it should be construed against him.
- For these reasons, Mr Hopkin is not entitled to the declaration he sought.
Lady Justice Black:
- I agree.
Lord Justice Thorpe:
- I also agree.
1 The word "not" is omitted from the judgment, but it is clear from the terms of the draft awards and the EPP that, at the date of the award, the employee is "vested in none of the Performance Shares subject to this award".
Published: 25/03/2011 16:52