Repudiatory breach of contract

It is increasingly common for employees to have lengthy notice periods of 3 to 12 months within their employment contracts. Once a member of staff resigns with a long notice period, it is accepted that they will still uphold all elements of their employment contract, even when this is for up to a year.

What is a repudiatory breach of contract?

A repudiatory breach of contract is a breach which is so serious that it effectively renders the contract useless and therefore gives the innocent party the option to terminate. An obvious example of this would be an employer preventing a contractor from entering the site.

However, identifying a repudiatory breach of contract can often very difficult. For example, a generally poor standard of workmanship might have serious consequences, but it is unlikely to be classed as a repudiatory breach. Occasional late payments could cause major cash-flow problems for the payee, but they will probably not amount to repudiatory breaches, particularly if past experience shows that payment is always made eventually.

Is a breach serious enough to be repudiatory?

Contracting parties usually have an implied common law right to terminate the contract which exists alongside their express contractual termination rights. The common law right to terminate arises when a repudiatory breach of contract has been committed.

A repudiatory breach does not automatically have to result in termination. The innocent party may choose to accept the repudiation (thereby bringing the contract to an end) or affirm the contract (allowing it to continue). Whether the contract is terminated or affirmed, the innocent party will be entitled to claim damages for the breach.

Allegations against an employer

Can making unwarranted findings, alleging loss of trust and confidence and reporting an employee to a regulator constitute repudiation of an employment contract?

A recent High Court case, Brown & Anor v Neon Management Ltd & Anor, dealt with this issue. In this case, the Defendants (Neon Management) breached the Claimants’ contracts of employment. In response, the Claimants resigned on notice, alleging a repudiatory breach of contract.

Wrongful dismissal?

In this case, there are three Claimants - Mr Brown, Ms Bhoma are former employees of Neon Management and the third, Ms O'Reilly, is a current employee serving her notice (she had a 12 month notice period, and the other two employees had 6 month notice periods). They were seeking damages for wrongful dismissal and declarations that they were wrongfully dismissed, with the effect that contractual post-termination restrictions fell away.

Their complaint was that Neon Management breached their contracts of employment by, amongst other things, failing to pay salary increases and discretionary bonuses which had been awarded to them, making the salary increases and bonuses conditional upon acceptance of detrimental new contractual terms and the removal of profit commission agreed at the time of their recruitment.

The Claimants contend that those breaches individually and cumulatively amounted to a repudiatory breach of contract, entitling them to resign. They resigned in March 2018. Whilst working their notice, the Claimants contend that the Defendants committed further repudiatory breaches of contract including making unjustified findings of misconduct, alleging loss of trust and confidence and reporting the alleged misconduct to the first and second Claimants’ regulator.

The first and second Claimants accepted the repudiation by resigning with immediate effect and brought actions for wrongful dismissal and breach of contract. The third Claimant continued to serve out her notice period and brought an action for breach of contract.

The defence

Neon Management denied that there were any repudiatory breaches. They said that they were contractually entitled to make the salary increases and bonuses subject to the acceptance of more extensive post-termination restrictions. They also claimed that, even if there were breaches of contract, the modern legal position is that the post-termination restrictions do not automatically fall away and continue to be enforceable.

Misconduct

Neon Management alleged that the employees had committed an act of misconduct during their notice periods, by sending emails to their private email addresses. The question was, whether this could be considered as engaging in discreditable conduct or conduct that was detrimental to the interests of Neon. Not every breach of the strict terms of the IT policy, which is not contractual, would amount to conduct that was "discreditable" or detrimental. Mr Brown and Ms Bhoma stated that they had a legitimate business purpose for sending the documents in question, as they had to do so because of technical limitations.

The Judge's verdict

In determining these claims, the High Court Judge ruled that:

  1. Neon was in repudiatory breach of each of the Claimants' respective contracts of employment;
  2. The First and Second Claimants each accepted that repudiatory breach on 1 May 2018 and were thereby wrongfully dismissed;
  3. The First and Second Claimants accordingly no longer owe obligations under those contracts, including the post-termination restrictions, which fall away as a result of the Defendants' repudiation.

It therefore follows that the Claimants are entitled to recover damages for the backdated pay rises awarded, the discretionary bonuses declared for each of them and the appropriate share of correctly calculated PC that would have been payable. The Defendants' Counterclaim was dismissed in its entirety.

Affirmation of contract

Kate Fretten, a Partner in our Employment Team, points out the two important facts for an employer to be aware of from this case.

She explains "Resignation on notice, where the notice period amounts to six months or more, constitutes affirmation of the contract of employment, thus keeping it alive, in the absence of further breaches of contract. In addition, making unwarranted findings, reporting an employee to a regulator without proper foundation and alleging loss of trust and confidence all without giving an employee the opportunity to answer any allegations, could constitute repudiation of a contract of employment. Please do contact us at an early stage if you need advice on situations that arise like this."

 

At Frettens, all of our solicitors offer a free initial meeting or chat on the phone to answer your questions. If this article raises issues for you or your business, please call us on 01202 499255 and Kate or Paul will be happy to discuss it with you.