Locke v Candy and Candy Ltd

This judgment is in five parts namely;.

This is a claim for payment of a bonus or equivalent damages made by an employee who was dismissed a few days before the bonus fell due. The employer in this case is Candy and Candy Limited, an interior design development management company. Mr Christian Candy is Chief Executive of that company. The claimant in this action is Mr Andrew Locke, a chartered surveyor with long experience of property development.

A contractual term which provides for payment in lieu of notice is often referred to as a ‘PILON’ clause. I shall use that abbreviation in this case.

After these brief introductory remarks I must now turn to the facts.

In 2007 the claimant was engaged by the defendant as development director for a project in Chelsea. This project was the development of Chelsea Barracks for the Qatari Government. The project was known within the defendant company as "Project Blue".

The claimant's employment commenced on 17^th September 2007. The claimant's contract of employment included the following terms:

“2.1

You shall be employed in the capacity of Development Director of Project Blue project at Candy & Candy Ltd, reporting to the Board of Candy & Candy Limited. In addition to the duties which this job normally entails you may from time to time be required to undertake additional other duties as are necessary to meet the needs of the Company’s business.

4.1

Your salary will be £200, 000 gross per annum paid monthly in arrears; you will be entitled to a work black berry to handle e-mails when you are out of the office: there are no other benefits. Your salary will be reviewed in accordance with Company policy as in force from time to time and in any event not less than once a year; C&C’s current policy is to review on or after the 1^st October each year with any amendment taking affect from the 31^st October of that year; however your first review will be 17^th September 2008 with your second review being 1^st October 2009.

4.2

You will be eligible for an annual bonus which will be awarded at the discretion of the Board. You should note that the bonus is discretionary and does not form part of your contractual remuneration. Any bonus awarded will be notified in your salary review meeting and paid in your October salary each year. In the first year you will receive a guaranteed bonus of £40,000 gross after six months employment and a further guaranteed bonus of £160,000 gross after 12 months employment. You must be employed by the company in order to receive the bonus;

7.1

The company may terminate your employment by giving to you not less than:

•

Three months notice if the notice is to be servied in the first six months of your employment;

•

Six months notice thereafter.

7.2

You may terminate your employment with the Company by giving not less than:

•

Three months notice if the notice is to be served in the first six months of your employment;

•

Six months notice thereafter.

7.3

Notice of termination of employment must be in writing.

7.4

The Company may terminate your employment without notice or payment in lie of notice in the event of serious or persistent misconduct by you.

7.5

The Company reserves the right to make a payment in lieu of notice.

7.6

During any period of notice, and provided that the Company continues to pay your salary and to provide all benefits to which you are contractually entitled (or to pay a sum in lieu of such benefits) until the termination of your employment (‘Garden Leave’), the Company shall be entitled at its absolute discretion:

•

To require you not to carry out your duties or to exercise your powers or responsibilities under this agreement during your notice period (or any part of such period);

•

To require you not to attend your place of work or any other premises of the Company or any Group Company during your notice period (or any part of such period);

•

To require you not to make contact with any employees, agents or customers or clients of the Company or any Group Company except as directed by the Company during your notice period (or any part of such period);

•

To require you to work from your home and/or to carry out exceptional duties or special projects outside the normal scope of your duties and responsibilities;

•

To announce to employees, clients, suppliers and customers of the Company or any Group Company that you have been given notice of termination or resigned (as the case may be).

Unless the Company agrees otherwise, you will not, during Garden Leave:

•

Do any work, whether paid or unpaid, for any third party;

•

Hold yourself out as a director or other officer of the Company or any Group Company;

•

Make any comment to any person about the change to your duties, except to confirm that you are on Garden leave.

You acknowledge that you remain employed by the Company and the terms of this agreement apply during any Garden Leave.

7.7

During Garden Leave you will be deemed to be using up any accrued but unused holiday entitlement.”

It will be noted that clause 7.5 is a PILON clause. Although laconically phrased, it is common ground that the clause means that the employer can summarily dismiss the employee by making a payment in lieu of notice. The only other contractual term to which I should refer is clause 11.5. This imposed restrictive covenants on the claimant for a period of six months after termination. During that six-month period the claimant was restrained from soliciting the defendant's customers or competing with the defendant.

The claimant appears to have given satisfaction in his work on the Chelsea Barracks project. On 2^nd April 2008 the claimant and his team submitted a planning application for the proposed development. It appears from e-mail exchanges in early April that both Christian Candy of the defendant and representatives of the Qatari Government were well pleased with this work.

During the summer of 2008 the defendant sought to make changes to the claimant's contract of employment, which the claimant was not willing to accept. The details of the differences between the parties are not material. Suffice it to say that on 7^th September 2008 Mr Christian Candy orally terminated the claimant's contract of employment with immediate effect. By letter dated 8^th September 2008 the defendant gave written notice of termination with effect from 7^th September 2008. The defendant stated in that letter that it would pay six months salary in lieu of notice. In other words, the defendant was operating or purporting to operate the procedures set out in clause 7.5 of the contract of employment.

Following that termination the defendant paid six months salary to the claimant by monthly instalments. However, the defendant did not pay to the claimant the bonus payment of £160,000 referred to in clause 4.2 of the contract. Correspondence between solicitors followed. The defendant's solicitors asserted that this bonus payment was not due because the claimant had ceased to be employed before 17^th September 2008.

The claimant was aggrieved by the defendant's failure to make the bonus payment. Accordingly the claimant commenced the present proceedings.

By a claim form issued on 19^th October 2009, the claimant claimed payment of the unpaid bonus. The claim was framed as a claim for (a) payment of the bonus of £160,000, alternatively (b) damages of £160,000 for breach of contract by not paying the amount of the bonus. Other breaches of contract were also pleaded in the Particulars of Claim. However, it is common ground that even if those other breaches are established, they are not relevant to the issues in this appeal.

On 16^th November 2009 the defendant served a defence, denying liability. The essence of the defendant's defence is that the defendant lawfully terminated the claimant's employment pursuant to clause 7.5 of the contract of employment. The claimant’s claim for the bonus is precluded by the last sentence of clause 4.2 of the contract. This is because the claimant's employment came to an end just before the expiry of 12 months.

On 27^th January 2010 the claimant applied for summary judgment in respect of his claim on the basis that the defendant's defence had no real prospect of success.

The application for summary judgment came on for hearing before Master Eyre on 18^th March 2010. On that date the parties agreed that the hearing of the application under Part 24 should be treated as the trial of the action. This was because the case depended entirely on the correct interpretation of the claimant's contract of employment. There was no relevant dispute of fact between the parties which required determination at a full trial.

Master Eyre duly considered the parties’ submissions concerning the interpretation of the contact. He concluded that the claimant had no entitlement to a bonus under clause 4.2. Accordingly the Master entered judgment for the defendant. Master Eyre’s reasons for his decision were concise and they are set out in the order drawn up following the hearing. Those reasons read as follows :

“1.

The agreement contains a detailed provision for gardening-leave, whereby the Defendant might continue to employ the Claimant on a basis entitling the Defendant to impose the most far-ranging restrictions.

2.

The provision for a payment in lieu of notice envisages just that – no notice at all, but instead immediate termination.

3.

If the Claimant is right, and the Defendant was obliged forthwith to pay six months’ salary and the bonus that the Claimant would have received had there not been an immediate termination, then the Defendant was voluntarily accepting a most onerous obligation from which it derived no advantage.

4.

This interpretation is strained, unnecessary and inconsistent with the clauses 4.2 and 7 of the agreement.”

The claimant was aggrieved by the rejection of his claim. Accordingly he appealed to the Court of Appeal.

By a notice of appeal dated 6^th April 2010 the claimant appealed to the Court of Appeal against the decision of Master Eyre. The claimant's grounds of appeal, though set out at some length, may be summarised as follows. Clause 7.5 requires the defendant to make the same payment to the claimant as would have been due if the claimant had been given six months notice or six months garden leave. Therefore this payment ought to comprise both the salary and the bonus, which would have fallen due during the six-month period following 8^th September 2008.

Sir Richard Buxton gave permission to appeal in a written decision dated 3^rd June 2010. Sir Richard noted that the phrase in clause 7.5 "reserves the right to make a payment in lieu of notice" was lacking in precision. He considered it arguable that the claimant was entitled to recover the unpaid bonus as damages.

The appeal duly came on for hearing yesterday. Mr Andrew Stafford QC represents the claimant. Mr James Laddie represents the defendant.

The single issue around which argument revolved during the hearing was whether the last sentence of clause 4.2 restricted the operation of the PILON clause.

Mr Laddie accepts that, in the absence of the last sentence of clause 4.2, the PILON clause would require the defendant to pay both salary and bonus in respect of the six-month period commencing on 8^th September 2008. But, he submits, the last sentence of clause 4.2 makes all the difference. The effect of that sentence is that payment under the PILON clause is restricted to salary alone. Mr Laddie submits that if clause 4.2 does not have that effect, then it serves no purpose beyond stating the obvious. The court should strive for a construction of this contract which does not treat the last sentence of clause 4.2 as mere surplusage.

Mr Stafford for the claimant submits that clause 7.5 is a forward looking clause. It requires the employer initially, and now the court, to identify what sums would have been paid if the claimant had remained in the defendant's employment for six months after 8^th September 2008. Mr Stafford submits that the last sentence of clause 4.2 does not constrain the operation of clause 7.5. Nor is that sentence mere surplusage. The effect of that sentence is to make clear that if the claimant's employment ends before a bonus date, there will be no payment of part of the prospective bonus on a pro rata basis. This applies both in the first year when the bonus is a fixed sum and in later years when the bonus is discretionary.

Both counsel have urged that their respective interpretations of the contract make more commercial sense. Mr Stafford points to the great injustice suffered by the claimant, who worked for almost a year and then was summarily dismissed. The defendant should not be able to take the benefit of the claimant's work and evade paying the bonus.

Mr Laddie points out that if events took a different course the employee could still get a bonus. For example, the employee could give notice under clause 7.2 after working for 26 weeks and one day. Mr Laddie also pointed out that if the claimant's interpretation were correct, clause 7.5 would be of no benefit to the employer. It would always be better for the employer to invoke clause 7.6 and gain the benefit of control over the employee for a six-month period. Furthermore, by using clause 7.6, the employer would extend the operation of the restrictive covenants contained in clause 11.5 by a period of six months.

Both counsel in the course of their submissions made reference to the speech of Lord Browne-Wilkinson in Delaney v Staples [1992] 1 AC 687. In that case an employee who was summarily dismissed brought proceedings in the industrial tribunal, claiming holiday pay, commission and payment in lieu of notice. The Court of Appeal held that the industrial tribunal had jurisdiction to award holiday pay and commission, but no jurisdiction to award payment in lieu of notice. The House of Lords dismissed the employee's appeal. Lord Browne-Wilkinson (with whom Lord Templeman, Lord Bridge, Lord Ackner and Lord Goff agreed) stated that payments in lieu of notice fell into four categories. At pages 692 to 693 he said :

“The phrase ‘payment in lieu of notice’ is not a term of art. It is commonly used to describe many types of payment the legal analysis of which differs. Without attempting to give an exhaustive list, the following are the principal categories.

(1)

An employer gives proper notice of termination to his employee, tells the employee that he need not work until the termination date and gives him the wages attributable to the notice period in a lump sum. In this case (commonly called ‘garden leave’) there is no breach of contract the employer. The employment continues until the expiry of the notice: the lump sum payment is simply advance payment of wages.

(2)

The contract of employment provides expressly that the employment may be terminated either by notice or, on payment of a sum in lieu of notice, summarily. In such a case if the employer summarily dismisses the employee he is not in breach of contract provided that he makes the payment in lieu. But the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work to be done under the contract of employment.

(3)

At the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on payment of a sum in lieu of notice. Again, the employer is not in breach of contract by dismissing summarily and the payment in lieu is not strictly wages since it is not remuneration for work done during the continuance of the employment.

(4)

Without the agreement of the employee, the employer summarily dismisses the employee and tenders a payment in lieu of proper notice. This is by far the most common type of payment in lieu and the present case falls into this category. The employer is in breach of contract by dismissing the employee without proper notice. However, the summary dismissal is effective to put an end to the employment relationship, whether or not it unilaterally discharges the contract of employment. Since the employment relationship has ended no further services are to be rendered by the employee under the contract. It follows that the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work done under the contract of employment.

The nature of a payment in lieu falling within the fourth category has been analysed as a payment by the employer on account of the employee’s claim for damages for breach of contract.”

In relation to the fourth category Lord Browne-Wilkinson then referred to the judgment of Lord Donaldson MR in Gothard v Mirror Group NewspapersLimited [1988] ICR 729.

This four-fold categorisation of payments in lieu of notice is extremely helpful. I shall bear it in mind when reaching my decision in the present case.

After some hesitation I have come to the conclusion that the construction urged by Mr Stafford is correct.

Clause 7.5 of the contract gives the defendant the right to terminate the claimant's employment summarily by making a "payment in lieu of notice". The clause does not state the measure of that payment. In those circumstances the measure of such payment must be the sum which the defendant would have paid if it had terminated the claimant's contract by giving notice under clause 7.1 or clause 7.6. It is common ground that such a payment would have included both salary and bonus.

If the parties had intended some lesser amount to be paid under clause 7.5, they would and should have said so expressly, either in clause 7.5 or by means of a cross-reference in clause 7.5. They did not do so. The words "payment in lieu of notice” in clause 7.5 are unqualified.

Mr Laddie urges that the last sentence of clause 4.2 qualifies clause 7.5. Indeed, he says, that is the only function of that sentence. If the sentence does not qualify clause 7.5 it is mere surplusage.

If Mr Laddie is right, the parties have set about achieving their objective in a most unusual way. If the parties intended to say that "payment in lieu" excludes bonus, such a provision should feature in that section of the contract dealing with payment in lieu. Clause 4.2 is the wrong place for such a provision. The structure of this contract is clear. Clause 4.1 sets out the claimant's entitlement to salary while he is employed. It says nothing about his entitlement to payment in lieu of salary if he is not employed. Clause 4.2 sets out the claimant's entitlement to bonus, when (and only when) he is employed. It says nothing about his entitlement to payment in lieu of bonus if he is not employed.

A bonus payment is a form of remuneration. In some contracts of employment for senior professional staff (of which this case is an example) the bonus is an important element of the employee's reward for work done. Payment in lieu of notice is conceptually different from remuneration. It sub-divides into four categories, as explained by Lord Browne-Wilkinson in Delaney. In category 1 the payment in lieu of notice may be related to remuneration, because the employee is being paid in effect to do nothing. However, categories 2, 3 and 4 are not any form of remuneration. They are compensation because the employee has, with no advance warning, become unemployed.

Returning to the present case, the payment made to the claimant in lieu of notice falls within the bracket of categories 2, 3 and 4 in Delaney. It is compensation paid to the claimant because he suddenly finds himself unemployed.

Let me now revert to the structure of this contract. Clauses 4.1 and 4.2 deal with remuneration while the claimant is employed. Indeed that whole section of the contract is headed “remuneration”. Clause 7.5 of the contract deals with something conceptually different from remuneration, namely payment in lieu of notice. Clause 7.5 is part of a section of the contract headed "termination". I find it quite impossible to read clause 4.2 as somehow imposing a restriction or limitation upon clause 7.5.

I have considered Mr Laddie's argument about surplusage, but I am not persuaded by it. First it has often been noted that such an argument is a weak guide to interpretation. Those who draft contracts often put in provisions for the avoidance of doubt or just to be on the safe side. They should not thereby be taken to undermine or cut down the other provisions of the contract. Secondly, I do not accept that on the claimant's interpretation of this contract, the last sentence of clause 4.2 is redundant. It makes clear that no bonus can be awarded on a pro rata basis under clause 4.2, even if the employee has done work which might merit such a reward. That sentence applies to all bonuses during the claimant's period of employment, not just the fixed bonus in the first year.

I have carefully considered the arguments based on commerciality. The submissions of both counsel have some force. It may well be, as Mr Laddie says, that the employer would be better advised always to use the garden leave provision rather than the PILON clause, if the claimant's construction is correct. On the other hand, as Mr Laddie concedes, it is unattractive for the employer to take the benefit of eleven and a half months hard work and then evade paying the bonus by summary dismissal under clause 7.5. It may be thought that the court should lean against a construction which permits this unattractive conduct.

In the end I have come to the conclusion that arguments about commerciality point in both directions. I must concentrate on construing the contract as it is, rather than speculating about what it would have been sensible or just for the parties to agree. Having done this exercise, I conclude that the claimant's interpretation of the contract prevails. The last sentence of clause 4.2 does not cut down the effect of clause 7.5.

Let me now draw the threads together. The defendant chose to dismiss the claimant summarily by making payment in lieu of notice under clause 7.5. Unfortunately, in operating that clause, the defendant failed to make one element of the payment due, namely a sum equivalent to the bonus which would have fallen due on 17^th September 2008. Accordingly the defendant is liable to pay that outstanding sum of £160,000. This payment could be characterised (a) as a specific sum due under clause 7.5 of the contract or (b) as damages for the defendant's failure to pay the full sum due upon terminating the contract under clause 7.5.

In my view, therefore, this appeal should be allowed and judgment should be entered for the claimant in the sum of £160,000 plus interest. Whether, however, that will be the outcome of this case will depend upon the judgments of Lord Justice Pill and Lady Justice Arden.

This case amply justifies the advice often given to practitioners that care is needed in the drafting of clauses in service contracts for the payment of bonuses. This court has heard skilled and focussed argument in this case from two very experienced practitioners and I am indebted to them. Mr Andrew Stafford QC summarised his case this way. The employer did not comply with PILON, that is clause 7.5 because it failed to pay a guaranteed bonus of £160,000 after 12 months employment under clause 4.2.

Jackson LJ has set out the relevant clauses and I need not repeat them again. In my judgment the issue in legal terms is what is the meaning of the expression “a payment in lieu of notice” as that expression is used in PILON. The PILON itself could hardly be less helpful. It merely says that the employer must make a payment in lieu of notice. Clearly the employer cannot choose the amount. The amount must be found somewhere else in the contract. As I put it in argument we need to look at the rest of the contract to put flesh on the bones of the PILON. That means we need to interpret the contract holistically.

I accordingly do not accept Mr Stafford's submission that we should approach the PILON with the preconception that it necessarily seeks to give the employee what he would have earned as an employee had he remained an employee during the notice period. That submission assumes the answer to the question that interpretation of the contract must address. It is of course open to contracting parties to agree that a payment in lieu of notice shall be calculated in some different way from that in which the employee would have been remunerated had he continued to be an employee during the notice, and indeed that point is underscored by the fact that clause 7.5 uses the expression " a payment in lieu of notice " rather than telling us precisely what the amount of that payment was to be. Accordingly we have to approach the interpretation of the contract without any preconception and with an open mind. In my judgment, this approach is consistent with Delaney v Staples [1992] 1 AC 637, and that decision does not indicate that some other approach should be adopted.

When the contract is examined in its entirety, we find that clause 4.2, in the sentence immediately following that which provides for the bonus in issue, contains this sentence: "You must be employed by the company in order to receive the bonus".

Mr Stafford floated the possibility that this sentence merely applied to annual bonuses referred to earlier in clause 4.2, but that cannot be so because it comes immediately after the sentence dealing with the guaranteed bonus.

It is also in my judgment important to note that the sentence uses the words "receive the bonus" not "become entitled to the bonus" and thus it does not seem to me that the clause is dealing with apportionment. It is dealing with the status of the employee at the time when he actually received the bonus, not during the period of accrual and that is also in my judgment a significant pointer to its meaning.

In my judgment there is no issue in this case but that, provided the employer makes the right payment in lieu of notice, the employment of the employee with the employer comes to an end. The effect of the PILON is in this respect different from, for instance, the garden leave clause referred to by the Master. It follows that, if the last sentence of clause 4.2 applies, then the appellant does not have a claim in respect of the bonus and, accordingly, no claim under 7.5 in respect of it.

In my judgment the very words in which the last sentence of clause 4.2 is expressed, shows that it is directed to the situation where a person's employment has ceased by the time that the date for payment of the bonus arrives. It does not directly address apportionment for the reasons given though it might incidentally have that effect of expressly preventing an employee from claiming a proportion of the bonus.

To limit the effect of the last sentence of clause 4.2 to a prohibition on apportionment seems to me to deprive that sentence of its more obvious meaning and give it little or not content at all.

In all the circumstances, although the point is undoubtedly a difficult one reading the contract as a whole and giving the words of clause 4.2 their natural meaning, I prefer the conclusion that the last sentence of clause 4.2 applies in this situation and that it must be read as applying to a situation where the company has exercised its rights under clause 7.5 to make a payment in lieu of notice.

I have proceeded on the basis that, as Jackson LJ has already observed, both sides could find reasons for saying that their interpretation is a commercial one. The deciding factor in my judgment is the natural reading of the contract as a whole.

I have come to the same conclusion as has Arden LJ. I agree with Jackson LJ and with Arden LJ that the appeal turns on a construction of the terms of the contract. I gratefully adopt the statement of facts and contractual terms by Jackson LJ. Mr Stafford QC for the appellant accepts and asserts that the employment was terminated on 8 September 2008, that is within one year of its commencement. He also accepts that under the terms of the contract the respondents were entitled to bring the contract to an end summarily. It is not suggested on the appellant's behalf that this bonus could be earned on a pro rata basis.

Mr Stafford submits that the appellant should nevertheless be put in the same position with respect to bonus as if he had been dismissed unlawfully. The period of notice to which he would have been entitled under clause 7.1 embraces the date on which the right to the bonus of £160,000 would have crystallised. Notwithstanding termination on 8 September 2008, the appellant was entitled to a forward looking calculation of the notice period and was entitled to the bonus which would have fallen due during that period. The last sentence of clause 4.2, which provides that the appellant "must be employed by the company in order to receive the bonus" cannot be applied, it is submitted, to the calculation of the "payment in lieu of notice" due under clause 7.5.

Mr Stafford accepts that the facts come within the second category of Lord Browne-Wilkinson's categorisation in Delaney [1992] ICR 483 at 488H. The contract of employment provides expressly that the employment may be terminated either by notice or, on payment of a sum in lieu of notice, summarily. If the employer summarily dismisses the employee he is not in breach of contract provided he makes the payment in lieu. Payment in lieu is not a payment of wages in the ordinary sense, since it is not a payment for work to be done under the contract of employment.

The issue, submits Mr Stafford, is what constitutes the "payment in lieu" within the meaning of that statement under clause 7.5. This was a contract of employment between experienced parties and involved substantial sums of money. The relevant terms dealing with remuneration and with termination are clear and succinct. It is right that clause 7.5, which deals with the position upon summary determination, does not specify in terms how the contemplated payment to the appellant is to be calculated so that other terms need to be considered. The respondents concede that payment of six months' salary was required if clause 7.5 is read with clause 7.1. As to bonus, however, the issue is in my view decided by the last sentence of clause 4.2 which I have already cited. The appellant was entitled to a 12 months bonus only if at the expiry of 12 months he was "employed by the company". It is common ground that he was not so employed on 17 September 2008.

Clauses 4.1 and 4.2 deal with remuneration and entitlement to bonuses. I have no difficulty in reading the last sentence in clause 4.2 with the provisions of clause 7.5, a clause dealing with termination of employment. In considering what "payment" is due in the situation which had arisen, clause 4.2, dealing with entitlement to bonus, cannot be ignored and must be applied when the calculation is made. The provisions of clause 4.2 are integral to the contract including the terms on which the payment in lieu of notice is to be made. There was no breach of contract.

On that result the appellant was deprived of a bonus to which he would have been entitled had he completed one year's service, which he almost had, but that in my view was the consequence of what the parties had agreed.

I mention one aspect of the evidence mentioned at the hearing in this court though not fully argued. Payment in lieu of notice was made by six monthly payments corresponding to the monthly salary payments if the contract had persisted. It appears to me that the payments should have been made as a lump sum upon termination, subject possibly to discount for accelerated payment, rather than by way of monthly payments. The right to the payment in lieu of notice appears to me to have accrued immediately. However, I mention the point only to make clear that it is not suggested that the monthly payments kept the employment in existence. This aspect of the evidence does not in my judgment bear upon the issue in the appeal. No separate claim has been made under this head. That is not surprising: any loss arising from the lapse of time in payment being in the circumstances very small.

The question of the possible relevance of section 86 of the Employment Rights Act 1996, which confers on employees a right to notice, was also raised at the hearing. Mr Stafford stated that it is not relied on and on the present facts that also is not surprising.

For the reasons I have given I would dismiss this appeal.