England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION, COMMERCIAL COURT
(MR JUSTICE CHRISTOPHER CLARKE)

		Royal Courts of Justice Strand, London, WC2A 2LL
		4th February 2008

Lord Justice Dyson:

1. Imagine Group Holdings Limited is a specialist insurance company. The Imagine Group comprises the holding company and its subsidiaries. Nothing in this appeal turns on the distinction between these companies. I shall refer to the group as "Imagine".
2. Mr Huntington became one of its two joint chief executive officers. At all material times Mr George Myhal has been a managing partner in Brascan Corporation (later renamed Brookfield Management) as well as a director of Imagine Group Holdings Limited. Mr Huntington's contract of employment is contained in a letter dated 1 September 2000, signed by Mr Myhal and himself. It is a term of the contract that he is entailed to participate in Imagine's long-term incentive plan, ("LTIP").
3. On 8 May 2003, what has been referred to as the "May LTIP" was agreed between Mr Huntington and Mr Myhal. I shall refer to it as "the LTIP". The important features of the LTIP were summarised by the judge at paragraph 66 of his judgment. For the purposes of this appeal, however, it is only necessary to set out one provision of the LTIP:

"The Board of Directors of Imagine will have the right to construe, interpret, administer, amend or cancel the LTIP, at any time, provided that any amendment or cancellation of the LTIP will not affect the right of any participants to any payments under the LTIP that have been allocated or accrued to that date…."

4. Disputes arose between the parties as to the meaning and effect of the LTIP. These culminated in Mr Huntington terminating his contract of employment by purporting to accept Imagine's repudiation of it. Mr Huntington issued proceedings claiming damages for breach of contract. On 30 June 2006 Coleman J ordered that there be a trial of preliminary issues as follows:

"Whether D1 and D2 were in repudiatory breach of contract by:

a. Failing to make any determination or allocation of Mr Huntingdon's LTIP entitlement for 2004. In that regard, was any such failure consequent upon a failure by Mr Huntington promptly to prepare board papers necessary for the finalisation of the LTIP allocation and/or

b) Maintaining its entitlement (and settled intention) to leave the Danish Re and LION transactions out of the accounting exercise to establish Mr Huntington's 2004 LTIP entitlement and/or

c) Maintaining its entitlement (and settled intention) unilaterally to remove Mr Huntington's contract of employment and LTIP rights."

5. In relation to the issue in (c), the judge held that Imagine had not repudiated the contract in relation to Mr Huntington's rights under the LTIP. It is against that decision that he appeals.

The facts

6. The idea of a share option scheme to replace the LTIP was first mooted by Imagine in late 2003 or early 2004. Such a scheme would enable the participant to share in the profits of Imagine, but not in the same manner as the LTIP. Throughout 2004 there were inconclusive discussions about a share option scheme. On 6 April 2005, Mr Myhal sent Mr Huntington a memorandum headed "2004 Variable Compensation" attached to an email which said, "We need to make the announcements on the LTIP soon". He said that the plan was to replace the existing LTIP with a more typical share option plan and to implement that change as soon as possible.
7. On 20 April, Mr Huntington wrote a memorandum stating that he expected existing contractual rights, specifically the right to LTIP 2004 and the so-called "stub period" in 2005, that is, the period from 1 January 2005 until the date of the change, to be respected. As for the future, he suggested that Imagine should set out for key employees the specifics of the 2005 package under the proposed share option plan.
8. On 3 May 2005, Mr Myhal sent an email in which he said, in relation to 2005:

"We are preparing a management compensation plan to be presented at our first full board meeting (probably in August/September). This plan will be consistent with what we have previously stated and will be specific an amount so that individuals can develop some expectation of what it means for them. Moreover, the plan will be prepared after we have had an opportunity to canvass the market to make certain that it is competitive.

Please note that this plan will cover the senior management team including yourself, Mike Daly, Bob Forness and others. We are quite open to considering an alternative plan for our underwriters (or revenue producers) if you believe that this is warranted. This may be a straight cash bonus plan or a plan that resembles our existing LTIP. This is something that you and the senior management team need to consider.

Finally, if there are some managers who feel that these determinations violate the terms of their employment contracts then we should sit with each of them to discuss our compensation approach and philosophy. If at the end of that meeting they remain uncomfortable then we should negotiate a fair and amicable basis for their departure."

9. This email gave rise to a telephone conversation between Mr Huntington and Mr Myhal on 5 May and an agreement between them, which Mr Huntington set out (with more detail) in a note which he attached to his email to Mr Myhal, dated 6 May. In this email Mr Huntington said:

"Equally, if you are in agreement I would ask that you e-mail me by return so that I can proceed to let the various interests know that a solution has been found and they should stop panicking."

10. The conversation and email dealt with both 2004 and 2005. It is only necessary to refer to that part of the note which dealt with 2005. It stated:

"We will make it clear to employees that you are eliminating the LTIP plan with effect as of January 1^st, 2005. However, you are not yet in a position to tell individuals the specifics of the replacement plan, or the specifics of individual allocations to them for 2005 and for future periods. You have stated that you hope to have such details for the meeting of the board of directors in London in August or September. It is not possible to ask employees to give up contractual rights in exchange for something that is not yet defined. Thus, I suggest that we inform them of the elimination of plan and ask them to withhold judgement/action regarding the new plan until such time as it is clearly defined to them. Brascan and Imagine would agree that such action by employees will not prejudice or constitute a waiver of the rights of the employees under their employment contracts."

On 9 May Mr Myhal replied, saying:

"In principle, I believe your memo reflects my understanding subject to my comments below."

11. The comments relate to a different issue and are not material for present purposes. That is how matters stood when, on 18 May, Mr Huntington purported to accept Imagine's conduct as a repudiation of the contract.

The judgment, insofar as it related to issue 4(c)

12. Having referred to the provision in the LTIP to which I have referred. The judge said at paragraph 309:

"The reference to payments 'accrued to that date', in addition to payments that have been allocated, indicates that, if the Board cancels the LTIP mid-year, the employees will have the right to participate in the LTIP in respect of their service up until the date of cancellation -- what had been called 'the stub period'. The contrary was not suggested. Were it otherwise the Board would have been at liberty to cancel the LTIP on December 30th and, by that means, to disentitle the employees to a major part of their remuneration in respect of the calendar year. This cannot have been what the parties intended."

13. At paragraph 319 the judge rejected Mr Huntington's case that the email of 3 May indicated that accrued rights would not be respected by Imagine. He said that the email did not indicate -- and certainly did not indicate with the necessary clarity -- that accrued rights would not be honoured. The plan for 2005 was not to be promulgated until August or September at the earliest. It could not be taken as read that, when that plan came forward, the employees would find that their accrued rights had been ignored. Further, although the last paragraph of the email of 3 May was an indication that the employees were going to be invited to accept the plan or leave it on a fair and amicable basis to be negotiated, even that lay open the possibility that that basis would include a recognition of their entitlement in relation to the stub period.
14. The judge then turned to the email of 6 May. He analysed it in the following way:

"321. That paragraph reflects an understanding that Imagine intends to eliminate the LTIP plan with effect from 1st January 2005 and will announce that intention. Imagine will indicate the specifics of a replacement plan and of individual allocations for 2005 at a later date; and meanwhile will be inviting the employees to suspend judgment on the footing that to do so would not waive their employment rights. Those rights would include the right to have their accrued rights under the May LTIP recognised. Until they knew what they were being asked to accept the employees' failure to do anything would not prejudice them.

322. The paragraph is not an indication that Imagine will renege on the employees accrued rights in respect of the period up to the date when the existing plan is cancelled and the new plan is clearly defined to them. Given that the new plan had not yet been crafted, it was too early to tell what its details will be (as Mr Huntington recognised) and that will be the allocation for 2005 -- hence the need to suspend judgment. It was perfectly possible that the employees would receive the same or more than there May LTIP entitlement in respect of the stub period, even if differently calculated; or that, if they declined to remain as an employee under a scheme that was not the same the May LTIP, that they would be allowed whatever their entitlement was for the stub period. Since under the May LTIP Imagine had a right of cancellation they would have no legitimate complaint that Imagine had exercised it.

323. It was Mr Huntington's case that the passage about the 2005 underwriting years set out in paragraph 172 above had not been discussed in a telephone conversation on 5th May but was something he put into the memorandum. If that is so (and Mr Myhal was not clear whether the subject had been discussed in that telephone conversation) it seems to me more difficult for Mr Huntington to claim that Imagine was repudiating its obligations in respect of the stub period. Mr Myhal's broad agreement with Mr Huntington formulation is not an unequivocal indication that Imagine would not honour its obligations in respect of the stub period.

324. This is particular so given that in such discussions as there had been prior to the 9th May e-mail, as Mr Myhal put it:

'….I do not think we ever took any issue that, you know, we would unilaterally extinguish an employee's contractual rights, and I think his expectation that employees need the specifics of the replacement plan, I think we always accepted, absolutely....whenever this transition occurred we would have had to make sure we had an appropriate transition plan. We were not at any time suggesting that someone should somehow be out of pocket as a result of this change of one plan to the other'"

The law

15. The judge summarised the relevant legal principles in the following terms:

"195. A party to a contract will be held to have repudiated it if 'the acts or conduct of the party evince an intention no longer to be bound by the contract': per Lord Coleridge CJ in Freeth v Burr (1874) LR 9 CP 208 at 213. For that purpose the court must examine the totality of the party's conduct prior to the acceptance of the alleged repudiation. It is no bar to the acceptance of a repudiatory breach that the breach is anticipatory in that it consists of a threat not to perform obligations that are due to be performed in the future. But a statement that a party will not honour his obligations in the future, which, unaltered, would have been repudiatory, may cease to be so in the light of any withdrawal of that threat before the alleged repudiation is accepted: Norwest Holst Group Administration Ltd v Harrison [1985] IRLR 240.

196. The obligation to pay the agreed remuneration is one of the terms of a contrast of employment. An attempt to alter that obligation in a substantial way is a breach that is necessarily repudiatory. As Judge, LJ, with whom the rest of the Court agreed, put it in Cantor Fitzgerald International v Callaghan [1999] IRLR 234, para 42:

'Where, however, an employee unilaterally reduces his employee's pay, or diminishes the value of the salary, the entire foundation of the contract of employment is undermined. Therefore an emphatic denial by the governor of his obligation to pay the agreed salary or wage, or a determined resolution not to comply with his contractual obligations in relation to pay and remuneration, will normally be regarded as repudiatory. To the extent that Gillies [1979] IRLR 457 suggest otherwise, it does not accurately reflect the relevant legal principles.'

197. The court cited with approval the position adopted as common ground by the parties in Rigby v Ferodo Ltd [1987] IRLR 516:

'The unilateral imposition by an employer of a reduction in the agreed remuneration of an employee constitutes a fundamental and repudiatory breach of the contract of employment which, if accepted by the employee, would terminate the contract of employment.'"

Submissions

16. Mr Andrew Clarke QC's submissions can be summarised very shortly. Imagine's position was clear and accorded with Mr Huntington's note of 6 May. It had decided to remove the LTIP with retrospective effect from 1 January 2005. It could lawfully cancel the LTIP prospectively but not retrospectively. To cancel the LTIP retrospectively amounted to a fundamental alteration of a term as to remuneration, and was therefore a repudiation of the contract of employment. It is immaterial that what replaced the LTIP might have left them him no worse off as regards to the stub period. The judge was right to hold, as he did at paragraph 321, that the note of 6 May reflected an understanding that Imagine intended to eliminate the LTIP with effect from 1 January 2005. That was determinative of the issue of repudiation. The first sentence of the note of 6 May was clear and unequivocal. Its effect was not modified by anything that came later in the note. In particular, Mr Clarke submits that the last sentence of the note did not preserve Mr Huntington's right under the LTIP plan with effect from 1 January 2005. Imagine repudiated the contract when Mr Myhal sent his email on 9 May, assenting to the terms of Mr Huntington's note of 6 May.
17. Mr Alan Boyle, QC submits that the email of 6 May must be considered in its contextual setting. This includes the email of 3 May, which the judge had correctly interpreted as not amounting to a repudiation. The premise underlying the note of 6 May is that employees had accrued contractual rights for 2005 which could not be taken away. Employees were to be asked, but not forced, to give up those rights in return for their rights under the yet-to-be defined management compensation plan. Once the plan was clearly defined to them, they would have to decide whether or not to accept it. It is not possible to construe the note as an indication that Imagine intended to impose the management compensation plan on employees, regardless of their wishes and in derogation of their existing contractual rights to LTIP, accrued since 1 January 2005. This follows in particular from 1) the express recognition of employees' accrued rights; 2) the fact that employees were to be "asked" and not compelled to give up those rights in exchange for participation in the replacement plan; 3) the fact that employees would withhold judgement/action on whether or not to give up existing accrued rights; and 4) the express agreement in the last sentence that Brascan and Imagine would agree that such action by employees would not prejudice or constitute a waiver of the rights of employees under their employment contracts.
18. Mr Boyle also relies on the evidence given by Mr Huntington. At paragraph 140 of his first witness statement, he said this:

"With regard to 2005, I propose that Brascan would announce to employees that the existing LTIP would cease with effect from 1 January 2005 and that employees should have an opportunity to consider the alternative proposal without prejudicing or waiving their rights under their contracts of employment."

19. During the course of his cross-examination by Mr Boyle, Mr Huntingdon was asked about his note of 6 May in the light of his conversation with Mr Myhal on the previous day. The following exchange took place:

"Q: What you agreed with Mr Myhal in your telephone conversation on 5th May is recorded by you in your memorandum of 6th May and so far as 2005 is concerned, what you record as having been agreed in that conversation appears at 1783: 'You are not yet in a position to tell individuals the specifics of the replacement plan.' It is obviously a fair question for you to ask, what have you got in mind for me, and Mr Myhal is saying, surely, 'We are not in a position to tell individuals the specifics of the replacement plan', and you may not like that, Mr Huntington, but he is not saying 'You are not going to get it', he is saying he cannot give you the specifics, but the plan has not been designed, it is not yet ready. So in the meantime what you are recording here is that all the employees will get what they are already entitled to under the existing LTIP arrangements for 2005; is that not right?

A: If this is agreed to and I am stating that it is only acceptable that you cannot give someone detail if you give them a reservation of rights, and that is not done."

20. Then a further short exchange:

"Q: Do you agree that what Mr Myhal is saying here is that he accepts your memorandum as reflecting the understanding that you had reached, subject only to the two specific comments which he mentions?

A: No. And why I do not accept that is that there is a great number of points that he has not addressed. He has not --

Q: But he is accepting your memo --

A: No, he has not accepted the reservation of rights issues at all. It was never explicitly discussed and agreed in the first telephone conversation about that issue and he ignores it completely in this response."

21. Mr Boyle also relies on the evidence of Mr Myhal, which appears to have been accepted by the judge at paragraph 324 of his judgment and which I have already quoted. Mr Boyle submits, therefore, that Mr Huntington did not understand -- Mr Myhal did not intend for him to understand -- that Imagine were proposing, unilaterally, to deprive him of his accrued rights to LTIP as from 1 January 2005. In short, by accepting Mr Huntington's note of 6 May, Imagine did not evince an intention no longer to be bound by the contract.

Discussion

22. If this case turned exclusively on the true interpretation of the note of 6 May, looked at in isolation, I consider that it would be necessary to allow this appeal. The note comprises six sentences. The first sentence is a clear indication of an intention no longer to be bound by the contract. Imagine were not entitled to eliminate the LTIP with effect from 1 January 2005. They could only eliminate the LTIP prospectively. It was an important part of Mr Huntington's remuneration package. The first sentence is expressed in the language of unilateral action; it is not an invitation to the employee to agree a variation of his contract of employment. To accompany such a breach with an offer of an alternative package does not detract from the fact that it is a repudiatory breach. The offer merely gives the employee the opportunity to waive the breach or to affirm the contract by accepting the offer. Mr Boyle came close to conceding this, but, as he points out, the note must be read as a whole.
23. In my judgment, the second and third sentences do not affect the position. They merely confirm that the employer is not yet in a position to make an offer of a replacement plan. The fourth sentence says that it is not possible to ask employees to give up their contractual rights until the replacement plan is defined. The contractual rights are clearly the rights to the LTIP from 1 January 2005. I do not read the word "possible" as meaning "contractually possible". It seems to me that, in its context, it means that it is not practicable, because it is not reasonable, to expect employees to decide whether to agree to accept a replacement plan until it has been defined. But there is nothing in the fourth sentence which suggests that the elimination of the LTIP with effect from 1 January 2005 will only be effected by consent or that the elimination from that date will not go ahead, come what may.
24. The fifth sentence repeats that the LTIP will be eliminated. The phrase "the elimination of the plan" is a reference back to the first sentence. That is to say, elimination with effect from 1 January 2005. The fifth sentence asks employees not to decide whether to accept the new plan until it has been defined. This is consistent with the fourth sentence. It is not possible or reasonable to ask employees to accept the new plan until its details are known.
25. In my judgment there is nothing in the note so far to suggest that the proposed elimination is anything other than what it appears to be, that is, a repudiatory breach of contract. I turn to the last sentence which, Mr Boyle submits, shows that the note of 6 May included a reservation of Mr Huntington's accrued rights under the LTIP. By the sixth sentence, Brascan and Imagine agreed that "such action" by the employees -- that is, withholding judgment/action -- would not prejudice or be a waiver of their contractual rights under their employment contract. This is not an easy sentence to construe, but in my view the most natural interpretation of this sentence, looked at simply within the four corners of the note itself, is that it is agreed that the fact that the employees do not exercise their right to treat the contracts as repudiated, while they await the details of the replacement plan will not have prejudiced or constitute a waiver of their right to do so, if they decide ultimately they do not wish to accept the new plan and want instead to rely on their contractual rights. The reference to a waiver is significant. If Mr Huntington had agreed to the course suggested in the fifth sentence and suspended judgment pending the definition of a replacement plan, he might well be said to have affirmed the contract and thereby lost or waived his right to terminate it on the grounds of repudiation. On the other hand, it is difficult to see how inaction, pending the definition of the plan, could prejudice or amount to a waiver of his accrued right to receive LTIP from 1 January 2005. Once that right had accrued it had accrued, and could not be lost by such inaction.
26. It is important to observe that the sixth sentence is not saying that action by the employer will not prejudice employees' rights under the contract. There is nothing to suggest that, once the replacement plan is defined, the LTIP will not be eliminated for all purposes as from 1 January 2005. The sixth sentence does not say, "If you do not accept the replacement plan, you will be entitled to be paid under the LTIP from 1 January 2005". The only qualification to the absolute terms of the first sentence is that introduced by the fifth sentence, namely, that the elimination will not take effect until the replacement plan is clearly defined. The reservation of rights in the sixth sentence covers the situation where the employee does something, that is, takes time to decide whether to accept the offer. It is saying that the employee will not lose any contractual rights as a result of taking time to consider whether to accept the new plan until it is defined.
27. For these reasons, if the note of 6 May is looked at in isolation, I would hold that, by Mr Myhal's assent to its terms on 9 May, Imagine were in repudiatory breach of contract. But Mr Boyle is right to say that the effect of the note of 6 May must be determined in its contextual setting and with the assistance of such evidence as to the parties' intentions as may properly be considered. What is unusual about this case is that the act, which is alleged to have been repudiation, is the alleged contract breaker's assent to a proposal which, in part at least, emanated from the alleged victim.
28. I am in no doubt that Imagine was responsible for the proposal to replace the LTIP with effect from 1 January 2005. They hoped that their employees would agree to the replacement plan when it was defined, but they intended to press ahead even if there was no agreement. The critical issue for present purposes, however, is whether, in the absence of agreement, Imagine would insist on depriving employees of their accrued rights to LTIP as from 1 January 2005.
29. There was a difference between Mr Huntington and Mr Myhal which the judge did not find necessary to resolve, as to whether this issue had been discussed on 5 May. It is Mr Huntington's case that it was discussed and that he made it clear to Mr Myhal that the proposals to replace LTIP should not prejudice accrued rights. It would have been surprising if Mr Huntington had not wished to insist that accrued rights should not be prejudiced. Since Mr Huntington was responsible for the drafting of 6 May note and the introduction of provisions dealing with the effect of the proposal on contractual rights, it is reasonable to suppose that, in drafting the note, he intended, as he said, not to prejudice his rights under the contract. The judge accepted Mr Myhal's evidence that Imagine "never took any issue" that it would unilaterally extinguish an employee's contractual rights.
30. It is something of an understatement to say that the note of 6 May is not well drafted. In particular, the sixth sentence is difficult. I have given my reasons for construing it as preserving the right to treat the contract as repudiated. But I accept that this construction does not sit happily with the reference at the end of the sentence to "the rights of the employees under their employment contracts". The right to receive LTIP is undoubtedly a right under the employment contract. As I say, it is difficult to see how that right could be prejudiced or waived by Mr Huntington waiting for the details of the replacement plan before deciding what to do. Equally, it can with some force be said that it is difficult to see how the right to treat the contract as repudiated can be said to be a right under the employment contract.
31. I have described the sixth sentence as difficult to construe. It can, with some force, be said that, for the reasons I have given, it is ambiguous. In these circumstances it seems to me that one is entitled to have regard to what the parties to the negotiations said about what they intended, in order to resolve the ambiguity of the sixth sentence. Once regard is had to that material, it becomes clear that it was not the intention of Mr Huntington or Mr Myhal that the accrued rights to LTIP should be taken away. That conclusion is reinforced by the fact that the author of the provision dealing with the accrued rights was Mr Huntington himself. It is inherently improbable that he would have intended to lose those accrued rights. For these reasons, which differ somewhat from those of the judge, I would dismiss this appeal.

Lord Justice Thomas:

32. I agree, for the reasons given by my Lord. The claimant has failed to establish on the facts of this case that Imagine's conduct amounted to and evinced an intention to repudiate the contract.

Lord Justice Hooper:

33. I also agree.

Order: Appeal dismissed