FACTS Mr Collidge was the chief executive and a director of Freeport. In early 2006, allegations of financial impropriety were made against him. In March 2006, the board proposed that Collidge be suspended while these allegations were investigated.
Collidge indicated that he would rather resign. The board agreed to this, but told him that their investigation would still proceed. Terms of a compromise agreement were then reached with Collidge. The agreement stated that “subject to and conditional upon the terms set out below [Freeport] will: (a) pay to you the sum of £445,680 gross as compensation in respect of the termination of your employment…” At clause 7, the agreement also stated that, “you warrant as a strict condition of this agreement that… there are no circumstances of which you are aware or of which you ought to be aware which would constitute a repudiatory breach on your part of your contract of employment which would entitle or have entitled the company to terminate your employment without notice”.
Before payment was made, Freeport’s investigation revealed that Collidge was in breach of clause 7 of the agreement. Therefore, the board would not authorise payment to him.
Collidge brought a claim in the High Court arguing that clause 7 was not a pre-condition to the enforceability of the agreement and therefore payment should be made.
DECISION The High Court held that clause 7 was a pre-condition to Freeport’s liability to perform its own obligations under the agreement. Therefore, Freeport was under no obligation to pay Collidge if the facts set out in the warranty provisions of clause 7 were untrue. This was a result of the introductory words to Freeport’s obligation to pay, (“Subject to and conditional upon the terms set out below…”), and the introductory words to clause 7, (“You warrant as a strict condition of this agreement…”).
Collidge went to the Court of Appeal, but his appeal was dismissed. The court said the agreement was structured in such a way as to make Freeport’s obligations conditional upon the action taken by Collidge.
The board had wanted to suspend Collidge while it carried out its investigation, but instead agreed termination arrangements with him that were conditional upon his warranty that he had done nothing wrong. In that way Freeport had expressly protected itself if it was subsequently shown that the promise Collidge had given was untrue.
IMPLICATIONS Compromise agreements often include warranties requiring the departing employee to confirm that they are not aware (or ought to be aware) of any circumstances that would entitle the employer to terminate their employment summarily. This case emphasizes the importance for employers of ensuring that the payment provisions contained in the compromise agreement are directly linked to the warranty. This will have the effect of making compliance with the warranty a pre-condition to payment under the agreement.
Although not practical in every situation, this case also highlights the benefits to an employer of concluding an investigation process before entering into a compromise agreement. This will avoid disputes arising over payment of the money and give the employer more leverage in the exit process.
Kate Hodgkiss, partner, DLA Piper