Locke v Candy and Candy Limited

This appeal concerned the construction of a payment in lieu of notice clause (PILON) in an employment contract and whether it required payment of a guaranteed bonus that would have fallen due within the notice period. The contract contained clause 7.5 providing for payment in lieu of notice and clause 4.2 providing for a guaranteed first-year bonus with the statement that the employee "must be employed by the company in order to receive the bonus". The court considered the fourfold categorisation of payment in lieu of notice in Delaney v Staples and applied ordinary principles of contractual construction to determine whether clause 4.2 curtailed the scope of the PILON.

The majority (Arden LJ and Pill LJ) read the contract holistically and concluded that the natural meaning of the last sentence of clause 4.2 excluded payment of the bonus where employment had ceased by the relevant date, and thus the PILON did not require payment of the bonus. Jackson LJ reached the opposite conclusion, treating the PILON as unqualified and as requiring the employer to pay sums that would have been paid during the notice period, including the bonus; he would have allowed the appeal and entered judgment for the claimant. The Court of Appeal dismissed the appeal by majority.

Background and parties:

• The claimant, a development director employed from 17 September 2007, had a contract providing salary and a guaranteed first-year bonus of £40,000 after six months and £160,000 after 12 months (clause 4.2). The contract also contained a PILON clause (clause 7.5) and a garden-leave provision (clause 7.6) and restrictive covenants (clause 11.5).
• The respondent employer purported to terminate the claimant's employment with immediate effect on 7 September 2008 and paid six months' salary in lieu of notice but did not pay the £160,000 bonus due on 17 September 2008.

Procedural posture and relief sought:

• The claimant issued proceedings claiming the unpaid bonus or, alternatively, damages for breach of contract. Master Eyre heard the case (the Part 24 hearing was treated as a trial) and entered judgment for the defendant, holding the claimant had no entitlement to the bonus. The claimant appealed to the Court of Appeal; permission to appeal was given by Sir Richard Buxton on 3 June 2010.

Issues framed by the court:

• Whether a payment in lieu of notice under clause 7.5 was to be measured by reference to the sums the employee would have received during the notice period (including the guaranteed bonus), or whether the final sentence of clause 4.2 ("You must be employed by the company in order to receive the bonus") prevented recovery of the bonus where employment had ceased prior to the bonus date.

Court’s reasoning and decision:

• All judges considered the categorisation of PILON payments in Delaney v Staples and agreed that the categories are a useful starting point. Jackson LJ concluded that clause 7.5 was unqualified as to measure and, in the absence of express language excluding bonus, the payment in lieu should be the sum that would have been paid had notice been given, including the bonus; he would have allowed the appeal and awarded £160,000 plus interest.
• Arden LJ and Pill LJ preferred a different construction. They read the contract holistically and gave natural meaning to the sentence in clause 4.2 that the employee must be employed at the time of receipt of the bonus. On that basis the last sentence of clause 4.2 prevented payment of the bonus once employment had ceased and therefore the PILON under clause 7.5 did not require payment of the £160,000. The majority dismissed the appeal.

Subsidiary and contextual findings:

• The court noted competing commercial arguments for each construction but treated ordinary contract interpretation principles as decisive.
• Jackson LJ observed that the employer paid the PILON by monthly instalments and remarked that the payment in lieu arguably accrued immediately and could have been paid as a lump sum, but that point did not affect the principal issue.

Appeal dismissed by majority. Arden LJ and Pill LJ held that the natural meaning of the final sentence of clause 4.2 (that the employee must be employed by the company to receive the bonus) meant the bonus was not payable where employment had ceased before the bonus date, and that this sentence therefore limited the scope of the unqualified PILON in clause 7.5. Jackson LJ dissented on the construction point, concluding that an unqualified PILON required payment of sums that would have been paid during the notice period, including the bonus; he would have allowed the appeal and entered judgment for the claimant for £160,000 plus interest.

Appeal from the High Court of Justice, Queen's Bench Division (Master Eyre). Master Eyre heard the Part 24 application treated as a trial on 18 March 2010 and entered judgment for the defendant. Permission to appeal was given by Sir Richard Buxton on 3 June 2010. The appeal was determined by the Court of Appeal on 29 October 2010, neutral citation [2010] EWCA Civ 1350.