108 Medical Limited v Edward Hamish Millar

An employee who deliberately causes his employer to make unauthorised payments exceeding his contractual entitlement may be liable in conversion and for breach of the implied duty of fidelity. Conversion is a tort of strict liability where the conduct is deliberate and constitutes a sufficient interference with the claimant’s proprietary rights.

A settlement agreement warranty concerning circumstances amounting to a repudiatory breach may be a condition where payment is expressly conditional upon its truth and the warranty goes to the contract’s core. A knowingly false warranty may alternatively constitute misrepresentation, entitling the innocent party to recover the contractual payment, subject to any amount not disputed as lawfully due.

The claimant, a private medical services company, employed the defendant as Commercial and Finance Director and later Managing Director. It alleged that he caused unauthorised payments to be made to himself and others through the payroll, exceeding his contractual remuneration, and that he thereby breached his duties and committed conversion.

The claimant also sought repayment of sums paid under a settlement agreement terminating the defendant’s employment. Clause 9.1 contained warranties that there were no circumstances of which he was aware, or ought reasonably to have been aware, amounting to a repudiatory breach of his employment contract. The central issues were whether the payments were authorised, whether they constituted conversion or breach of fidelity, and whether the settlement warranties were breached.

1. Unauthorised payments. The defendant’s contractual remuneration comprised his agreed salary, a 5% pension contribution and specified travel expenses. The evidence did not establish any wider variation of that package. Salary sacrifice was permitted only for salary increases converted into additional pension contributions. It did not authorise general additional payments.

2. The defendant was not entitled to the disputed auto-enrolment pension payments, recurring bonuses other than the conceded £10,000 payment, payroll-based expense allowances, unexplained cost-of-net-payment adjustments, or payments to his wife and girlfriend. The accounting method was tax-inefficient, inconsistent and unsupported by reliable evidence of authorisation.

3. Conversion and fidelity. The excess payments were deliberate conduct inconsistent with the claimant’s rights, amounting to a complete encroachment on its possession and use of the money. Applying the principles in Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5) [2002] UKHL 19, the tort of conversion was established. The defendant also owed an implied duty of good faith and fidelity. His unauthorised payments breached that duty, although dishonesty or malevolence was not required for that conclusion.

4. Settlement agreement. Clause 9.1 was a condition because the agreement made payment conditional upon the truth of the warranties and the clause went to the core of the bargain. The defendant knew, or ought to have known, that he had made unauthorised payments amounting to a repudiatory breach. He was therefore liable to repay the settlement sums, excluding the statutory redundancy payment. Alternatively, the warranties were actionable misrepresentations.

5. Judgment was entered for the claimant for £127,370, subject to deduction of the contractual travel allowance and any necessary adjustment, together with £92,176 under the settlement agreement. Interest and consequential matters, including costs, were left for determination or agreement.