In this article...

• The background
• The facts
• The decision
• What does it mean for me?

If an employee breaches a warranty given as part of a compromise agreement, can the employer withhold a termination payment due under that agreement? Tim Woodward considers the High Court’s decision in Collidge v Freeport plc.

The background

An agreement to settle statutory employment claims will be void unless it has been reached with the help of Acas or is set out in a compromise agreement. Compromise agreements often contain a warranty that the employee is not aware of any circumstances that would entitle the employer to dismiss him or her without notice. If evidence subsequently comes to light suggesting that the employee has committed gross misconduct, can the employer withhold payment of the sums due under the agreement?

The facts

Mr Collidge was the founder and chief executive of Freeport plc (“Freeport”) and was an employee of the company. On 31 March 2006 he entered into a compromise agreement providing for the termination of his employment. The agreement stated, amongst other things, that Mr Collidge would resign and that Freeport would pay him £445,680 following termination in full and final settlement of any claim.

Mr Collidge warranted as part of the agreement that he was not aware of any circumstances which would amount to a repudiatory breach of contract on his part entitling the company to dismiss him summarily. All payments under the agreement were expressed to be “subject to and conditional upon” the warranty.

After the parties had signed the compromise agreement but before any payment had been made, Freeport uncovered evidence that would have entitled it to dismiss Mr Collidge for gross misconduct. In particular, the company alleged that he had used a company driver on private business; misused his company credit card; submitted fraudulent expenses claims; wrongfully claimed both mileage allowance and petrol costs for the same journeys; and misappropriated company property.

Mr Collidge brought High Court proceedings for payment of the sums specified in the compromise agreement. Freeport contended that no payment was due because at the time when the parties signed the agreement, Mr Collidge was aware that he had breached his employment contract, entitling the company to dismiss him summarily, and was therefore in breach of the warranty he had given.

The decision

Before the High Court, Mr Collidge argued that the warranty was not a pre-condition of the enforceability of the compromise agreement. Alternatively he argued that, if he had breached the warranty, it was open to Freeport to accept the breach and bring the compromise agreement to an end in its entirety, but that if Freeport did not do so the agreement remained in force and the company’s only remedy was a claim for damages in respect of his breach.

The High Court disagreed. On the proper construction of the compromise agreement, it was a condition of payment that the facts stated in the warranty were true. The Court also rejected Mr Collidge’s argument that a breach of warranty amounted to a repudiatory breach of the whole agreement which, if accepted by Freeport, would discharge both parties from their obligations.

The Court went on to examine the evidence relating to Mr Collidge’s alleged misconduct. It concluded that there were numerous circumstances of which Mr Collidge was aware that would have entitled Freeport to dismiss him without notice. It followed that he was in breach of warranty and was not entitled to the payments provided for in the compromise agreement.

What does it mean for me?

		In view of the High Court’s decision, an employer entering into a compromise agreement should make it clear that payment of the sums specified in the agreement is conditional on the truth of any warranty given by the employee.
		If an employee is in breach of such a warranty, the decision suggests that this will not amount to a repudiation of the entire agreement. It follows that the employer may be able to withhold the termination payment while retaining the benefit of other provisions in the agreement, such as restrictive covenants.
		A similar analysis may apply where an employee breaches other elements of a compromise agreement, such as confidentiality clauses, that are expressed to be a pre-condition of the termination payment.
		Although it is common practice to include a warranty in a compromise agreement to the effect that the employee has not committed any act of gross misconduct, employers should still investigate any outstanding allegations of misconduct before signing the agreement.