On appeal

Continuing our regular series on the implications of recent significant
cases. Gareth Brahams, senior solicitor at Lewis Silkin, looks at the issues

Cancellation of share options "irrational"
Mallone v BPB Industries – Court of Appeal, 19 February 2002, unreported

Mallone was dismissed from his position as managing director of BPB’s
Italian subsidiary in November 1995. At that time, he held a substantial number
of share options in BPB that had been awarded each year from 1990 to 1994 under
the terms of BPB’s senior execution share option scheme.

Under the rules of the scheme, options held by an executive who ceased to be
employed by BPB could be exercised during the six months after the third
anniversary of them being granted. This was subject to an ‘absolute discretion’
on the part of BPB directors to allow only a fraction of those options to be
exercised. The fraction consisted of a denominator of 36 and a numerator to be
chosen by the directors.

On the day of Mallone’s dismissal, the directors purported to cancel his
share options in full by determining the numerator of the fraction to be
applied to any exercise by him of the options, as zero. This decision was not
notified to Mallone. He only became aware of it when his request in September
1997 to exercise his options was refused.

The High Court upheld Mallone’s claim for breach of contract, ruling that
although the contract purported to give the directors an absolute discretion in
relation to the options, they still had to exercise that discretion rationally.
In cancelling the options, they had failed to do so.

Dismissing BPB’s appeal, the Court of Appeal upheld the High Court’s
conclusion that the directors’ exercise of discretion was irrational. In
considering the fraction to be applied to the options, the directors were
obliged to bear in mind that they were dealing with vested property rights that
had been awarded because of Mallone’s good service. The court said there was
nothing in the circumstances of his dismissal that warranted him being divested
of those accrued rights.

This ruling is significant for two reasons. First, it is the first time the
Court of Appeal has confirmed that there is no such thing as an ‘absolute’
discretion. An employer exercising a discretion will be in breach of contract
if no reasonable employer would have exercised the discretion in that way.
Second, this is the first case in which the principle of ‘irrationality’ has
been applied to share options as opposed to discretionary contractual bonuses
(for example, Clark v Nomura International [2000] IRLR 766).

Withdrawn complaint could be resurrected
Rothschild Asset Management v Ako – Court of Appeal, 1 March 2002,

Ako brought an employment tribunal claim for unfair dismissal and race
discrimination against Rothschild, which she subsequently withdrew. The
tribunal issued a standard order dismissing the claim on withdrawal by the

Ako withdrew the claim because she realised she should have claimed not only
against Rothschild but also against another company that was a possible
transferee of the relevant part of the business under Tupe. Within a week, she
had issued a fresh claim naming both companies as respondents.

The issue was whether the legal doctrine of res judicata prevented Ako from
pursuing the second claim. Res judicata prevents people from re-litigating
cases (or issues in cases) on which there has already been a decision by a
court or tribunal.

A previous case suggested that once a tribunal claim is dismissed on
withdrawal by the applicant, it cannot be raised again (Barber v Staffordshire
County Council [1996] ICR 379).

In Ako’s case, however, the Court of Appeal held that she should be
permitted to proceed with her second claim. The key point was that she had not
intended to abandon her claim altogether by withdrawing the first application.
Rather, she wanted to discontinue the proceedings so she could reframe her
application correctly.

The court said that the position was similar to that in another recent case,
Sajid v Sussex Muslim Society [2002] IRLR 113, in which res judicata was held
not to apply. In that case, the applicant had withdrawn an employment tribunal
complaint for breach of contract but expressly reserved the right to reissue
the claim in the High Court.

The main point to come from these cases is that the reason applicants
withdraw complaints is the critical factor in determining whether they are
blocked from issuing fresh proceedings.

Employer not liable for racist comment
Haringey Council (Haringey Design Partnership Directorate of Technical
& Environmental Services) v Al-Azzawi – EAT, IDS Brief 703, p7

Al-Azzawi was an architect of Iraqi Arabic origin employed by Haringey
Council. He complained that, at a discussion about an upcoming quiz evening, a
colleague had referred to ‘bloody Arabs’ whom he claimed had disrupted the
event the previous year. Having investigated the matter, the council gave the
colleague a written warning for misconduct that stood for two months, and made
him write an apology to Al-Azzawi.

Al-Azzawi subsequently brought a complaint of race discrimination alleging,
among other things, that the council was liable for the racist remark. The
tribunal upheld this part of the claim and awarded £8,000 compensation.

On the council’s appeal, the EAT said the issue was whether the council had
taken such steps as were reasonably practicable to prevent the discriminatory
comment. The tribunal had wrongly focused on events after the incident – that
is, the disciplinary process and what was thought to be a lenient penalty.
According to the EAT, these matters were irrelevant to the question of the
council’s liability.

The tribunal had in fact found that the council had a comprehensive equal
opportunities policy in place and had provided training courses on racial awareness
for its employees (including the wrongdoer in question).

Moreover, the tribunal had expressly stated that the council had done more
than pay lip service to the issue of racial equality. The EAT concluded that
the council had taken all reasonable steps to prevent the racist remark and so
could not be held liable for it.

This decision provides a useful reminder of the practical measures that
employers need to have in place to avoid ‘vicarious’ liability for
discriminatory acts by their employees under the Race Relations Act 1976.

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