Richards & Anor v IP Solutions Group Ltd

A contractual power of summary termination for a material breach of a statutory duty does not impose strict liability. “Material” means significant and requires an objective assessment of the breach in its contractual and factual context.

Director duties incorporated into an employment agreement may be considered under a separate summary-termination provision, without prior notice or an opportunity to remedy. The court must assess the nature and degree of the breach, the surrounding circumstances, the employee’s position, intention, good faith and the consequences of the conduct. Technical breaches involving bonus payments or expenses will not necessarily justify summary dismissal.

Paul Richards and Keith Purves were founder directors, employees and substantial shareholders in IP Solutions Group Ltd. They were summarily dismissed after disputes concerning a quarterly bonus, the operation of a financial model, alleged threats to the company’s interests and personal expenses. The company subsequently sought to transfer their shares for £1 under the “Bad Leaver” provisions in its Articles of Association.

The claimants sought declarations and damages for wrongful dismissal and challenged the share-transfer consequences. The principal issues were whether the company was entitled to terminate their employment summarily and, if so, whether the Bad Leaver provisions were unenforceable penalties.

1. The claimants were wrongfully dismissed. The company had not established conduct justifying summary termination under clause 14 of the Service Agreements or at common law.

2. Clauses 14.2.1 and 14.2.2 were not mutually exclusive. Breaches of statutory directors’ duties could be considered under clause 14.2.2 without a prior warning or opportunity to remedy. That conclusion reflected the self-policing character of fiduciary responsibilities.

3. The word “material” in clause 14.2.2 qualified the breach and meant significant. It was not otiose and did not create strict liability. Whether a breach was significant required an objective assessment of all relevant circumstances, including the nature of the contract, the position held, the nature and degree of the breach, its consequences, and the presence or absence of bad faith or dishonesty.

4. The claimants’ receipt and retention of the Q1 bonus did not amount to a significant breach. The payment occurred against an apparently favourable forecast, the model was complex and produced changing results, the claimants did not intend to retain money belonging to the company, and an offset proposal had been made. Their conduct at the Remuneration Committee meeting did not constitute threats or breaches justifying dismissal. The proposal concerning auditors and the decision concerning sales consultants were ordinary management decisions and did not demonstrate pursuit of short-term personal gain.

5. The inadvertent over-claiming of expenses, absent bad faith or dishonesty, was not a material breach justifying summary dismissal. The matters taken cumulatively did not alter that conclusion.

6. The penalty issue was unnecessary to decide. Tentatively, the Bad Leaver transfer provisions were more akin to primary obligations agreed for distinct commercial reasons. Even if secondary obligations, they would have been enforceable on the approach in Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373.

7. The claimants were entitled to declarations that they had been wrongfully dismissed. Further relief and costs were left for later determination or agreement.