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Keeping the contract alive: contractual notice and covenants

Michael Duggan QC

The High Court, Queen’s Bench Division had to consider “the interesting and difficult issue of whether,
when an employee leaves his employment without giving proper notice stating
that he will never return, the employer can keep the contract of employment
alive, so as to be able to enforce the employee’s obligation not to work for
anyone else, while simultaneously refusing to pay the employee any wages on the
basis that the employee is no longer ready and willing to work for the
employer” in Sunrise Brokers LLP v Rodgers [2014] EWHC 2633 (QB), a case in which Michael Duggan QC acted for
the successful Claimant, instructed by Twenty Twenty, Solicitors.

Mr Rodgers, a derivatives broker, walked out on his
employment on 27th March 2014 and gave written notice on 16thApril 2014. He was subject to a fixed term contract to 22ndSeptember 2014 then 12 months’ notice. Sunrise agreed to permit him 6 months’
notice to expire on 16th October, at which time it contended that Mr
Rodgers became subject to covenants of 6 months’ duration. Mr Rodgers had
already accepted employment on 5th March with a competitor, to commence at a later date.

The Claimant refused to accept Mr Rodgers repudiatory
breaches of contract in purporting to terminate the contract without notice and
elected to keep the contract alive. However, it contended that it did not have
to pay Mr Rodgers when he failed and/or refused to attend work. Mr Rodgers then
purported to accept this non-payment as a repudiatory breach with effect from
16th May.

Sunrise obtained an interim injunction on 23rd May
and the matter came on by way of a speedy trial between 24th to 29thJuly.

Richard Salter QC, sitting as a Deputy High Court Judge,
upheld Sunrise’s claims for a declaration and injunctive relief.

Sunrise were entitled to refuse to accept Mr Rodgers’
purported summary resignation, in breach of contract, and to keep the contract
alive, following Societe
Generale, London Branch v Geys
[2013] 1 AC 523.

The Judge rejected the argument by the Defendant that Sunrise
had to pay Mr Rodgers during the period of notice, even though it wanted him to
come to work and had not placed Mr Rodgers on garden leave. Provident Group v Hayward [1989] ICR 160, and Standard Life Health Care v Gorman [2010] IRLR 233 were relied on by the
Defendant for the proposition that the Claimant had to pay Mr Rodgers his
salary as the price of the restrictions
and other terms to which he was bound.The Court agreed that the cases cited by Michael Duggan QC that
supported the proposition ‘no work, no
pay’ were followed (Miles v Wakefield MDC[1987] 1 AC 539. Henthorn and Taylor v CEGB [1980] IRLR
361, CA; Cresswell v Board of Inland
Revenue
[1984] ICR 508 at 522; Wiluszynski
v Tower Hamlets
[1988]). Mr Rodgers’ entitlement to payment was therefore dependent
upon his readiness and willingness to work. The Claimant was prepared to have,
and indeed wanted, Mr Rodgers to work. He was not entitled to be paid whilst he
was refusing to work during the notice
period and had not been put on garden leave, which was at the employer’s option.
Accordingly, the Claimant did not breach the contract by not paying him so that
he was not entitled to resign.

The Defendant argued that the injunction offended the principle that the
Court would not indirectly make an order for specific performance, relying on
cases such as Evening Standard v
Henderson
[1987] ICR
588, Nichols Advance Vehicle Systems Inc v De Angelis (21 December 1979, unreported) and Warren
v Mendy
[1989] 3 All
ER 103 at 114.which hold that the Court ought not “ought not to enforce the
performance of the negative obligations if their enforcement will effectively
compel the servant to perform his positive obligations under the contract”. The
principle was recognised by the Court which, nevertheless, stated that “an injunction requiring Mr Rodgers to obey the
terms of the Contract until 16th October 2014 – at least to the
extent of not working for EOX or for any similar competitor firm to Sunrise,
and not contacting his former clients from Sunrise) – would be an appropriate
Order for me to make. Such an Order
would not mean that Mr Rodgers “would either have to go on working for his
former employers or starve or be idle”.Having regard to the particular facts of this case, and bearing in mind
the probable effect of such an injunction on the psychological and material
need of Mr Rodgers to maintain the skill or talent, it seems to me that such an
injunction would have no relevant compulsive effect, and so would not be likely
to offend the statutory prohibition.”

The Judge found that a handover, if Mr Rodgers had worked out his
notice, would have taken between 2-6 months, and adopted the middle ground of
four months, to which he added the six month period of the covenants. He
considered that Mr Rodgers should be restrained for a 10 month period. The
restraint during what would have been the notice period would be enforced to
the extent of Mr Rodgers not working for EOX or for any similar competitor firm
to Sunrise, and not contacting his former clients from Sunrise to 16thOctober and thereafter the covenants would be applied to 26thJanuary 2015. The Court thus, enforced restraints for a period of 10 months. It
held that the Claimant was the overall winner and ordered the Defendant to pay
the Claimant’s costs assessed at £168,000.

The case is of potentially far reaching importance as it brings together
and considers the dichotomy between the principles of ‘no work, no pay’ and the argument that a negative restraint should not
be ordered as it will result in the employee being ‘forced to work or starve’.
The Judge did not accept that Mr Rodgers would be in such dire straits but did
reduce the period down to what he thought was a fair period for a handover withthe covenants to follow. There are
important lessons to be learned:

1. Since Geysit has been clear that an employer does not have to accept a ‘walk out’ by an
employee as terminating the contractual relationship.

2. The employer may chose not to place an employee on
garden leave (where salary would have to be paid) during the notice period. The
employee cannot force the employer to put him on garden leave.

3. If the employee fails and/refuses to work he or she
may not entitled to be paid (it would be a good idea to have an express clause
to this effect) and the contract can be kept alive by the employer without
non-payment being a breach. ‘No work, no pay’.

4. The Court may enforce the notice period by way of
restriction which (i) it may reduce down as it considers appropriate and
(ii) it may, in the exercise of its
discretion order that any restraint will not apply to work that does not
compete with the employer.

5. Employees should not think that they will succeed
on the argument that injunctive relief should not be granted as such an order
will force them to work for the employer or remain idle. The Court will be
sceptical whether this is the true position and, in any event, the restraint
can be modified to permit the employee to work in a non-competitive area of
work.

Adopting the approach in Sunrise may deter
employees who think that they can get out of their contractual obligations
early by refusing to work whilst
insisting that they be paid for not working and that the covenants are
commensurately being reduced whilst they sit in the garden.; in effect, the
employee forcing the employer to put him on garden leave. Where the employee
refuses to work then he is not entitled to payment, the contract may be kept
alive and the notice period or some of it may be added to any restrictive
covenants. Subject to the Court’s discretion the period of restraint is likely
to be greater than any covenants with garden leave set off. The employer will
have to decide whether it wants the employee in its work place during any
notice period but, if it does, the approach taken by the Claimant in Sunrise,
on advice, has much to commend it.

Click here for the judgment.

 

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