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Legal-ease: Contract law

Brown and Anor v Neon Management Services identifies areas where companies may need to re-examine their employment contracts to ensure the best protection for the business

The claimants alleged that Neon breached their contracts by failing to pay salary increases and discretionary bonuses that had been awarded to them and removing commission agreed at the time of recruitment. They alleged that these breaches amounted to repudiatory breaches of contract, entitling them to resign. They initially resigned on notice and two of the claimants subsequently resigned with immediate effect, citing further repudiatory breaches including Neon reporting them to the regulator for allegedly sending confidential information to their personal email addresses.

The High Court reached a series of conclusions that are important for HR:

1. An employee must not leave it too long before resigning in response to a repudiatory breach, otherwise the employee will be held to have affirmed the contract (meaning that both parties remain bound by it). Any employee with a long notice period wishing to accept a breach and no longer be bound by the contract should therefore resign summarily.

2. The accepted position is that once a repudiation has been accepted the contract falls away and neither party is bound by it. This has serious consequences for an employer seeking to rely on post-termination restrictions. Employers should consider wording contracts to the effect that such restrictions would remain enforceable notwithstanding an unlawful termination.

3. Reporting an employee to a regulator, where there could be serious ramifications for the future career of the employee(s), can be a repudiatory breach of contract if the employer has not carried out a reasonable investigation prior to making the report.

4. Wording is often used in contracts to withhold bonuses where the employee is under notice on the payment date. In this case, while the clause referred to the bonus no longer being payable if the employee was not employed on the payment date (for whatever reason and howsoever caused, and whether the termination was in breach of contract or otherwise), similar caveats did not apply to the situation where the employee was under notice on the payment date. As such, notice given in response to a repudiatory breach would not prevent the employee from being eligible for their bonus.

Lucy Gordon is a senior solicitor at ESP Law, provider of the HR Legal Service