Nosworthy v Instinctif Partners Ltd

Bad-leaver provisions governing deferred consideration for the sale of shares do not constitute an unconscionable bargain unless serious disadvantage, morally culpable exploitation and an overreaching and oppressive transaction are all proved.

The penalty rule governs remedies for breach, not primary contractual obligations. It does not apply where forfeiture and compulsory transfer follow voluntary resignation under agreed bad-leaver provisions rather than breach of contract.

Deferred consideration for shares is received in the seller’s capacity as shareholder, not worker. It is therefore excluded from the statutory definition of wages. A new restraint-of-trade point will ordinarily be refused on appeal unless exceptional circumstances justify it, particularly where further factual findings would be required.

The Claimant held a 2% shareholding in her original employer. When that company was acquired by the Respondent, she sold the shares under a share purchase agreement and received deferred consideration comprising earn-out shares and loan notes.

Under the principal agreement and the Respondent’s articles, an employee who voluntarily resigned was a Bad Leaver. Following the Claimant’s resignation, her shares were compulsorily acquired at acquisition cost and her loan notes were forfeited.

The Employment Tribunal upheld a small contractual claim but awarded no remedy, and dismissed the unlawful-deduction claim. The Claimant appealed, alleging unconscionability, unfair exercise of discretion, a penalty, and, by amendment, unreasonable restraint of trade.

1. Appeal dismissed. The Employment Tribunal had not erred in rejecting each challenge to the Bad Leaver provisions.

2. The share purchase agreement, deed of adherence, principal agreement and articles formed the agreed contractual framework for the issue, holding and treatment of the earn-out shares and loan notes. The Claimant’s consideration for those instruments was the transfer of her pre-existing shareholding, not her employment services. The provisions in the share purchase and principal agreements were complementary, not separate or conflicting bargains.

3. The unconscionable-bargain challenge failed. Applying Alec Lobb and Brian Strydom, relief requires relevant disadvantage, morally culpable exploitation, and an overreaching and oppressive transaction. The Tribunal’s findings did not establish even the first element. There was no evidence that the Claimant lacked access to legal advice or was otherwise vulnerable in a legally relevant way.

4. The earn-out shares and loan notes were deferred consideration received as vendor of shares. They were not payments received in the Claimant’s capacity as worker and were excluded from wages by section 27(2)(e) of the Employment Rights Act 1996. The contractual claim was nevertheless connected with employment for Article 3 of the Employment Tribunals Extension of Jurisdiction (England and Wales) Order 1994.

5. The penalty argument failed. The Respondent did not rely on breach of clause 7.23. It applied the articles because the Claimant voluntarily resigned. Under Cavendish Square Holdings BV v Talal El Makdessi; ParkingEye Ltd v Beavis, the penalty rule concerns a secondary obligation imposed on breach, not the fairness of primary obligations.

6. The articles clearly classified voluntary resignation as Bad Leaver conduct. No exceptional circumstances required the remuneration committee to reclassify the Claimant as a Good Leaver.

7. The proposed restraint-of-trade ground was not permitted. It had not been raised below, required substantial additional factual findings on justification and reasonableness, and the circumstances were not exceptional. Article 5(e) of the 1994 Order would not itself have barred the point had it been raised in the Tribunal, because it was advanced to disapply a barrier to a monetary contractual claim rather than as a claim for breach of a restraint covenant.

• Employment Appeal Tribunal: dismissed the Claimant’s appeal from the Employment Tribunal.
• Employment Tribunal: upheld the contractual complaint but made no remedy award, and dismissed the unlawful-deduction-from-wages complaint.