Garden Leave and Alleged Breach of Contract

The High Court considered whether an employer had breached an employee’s contract of employment by putting him on garden leave for 15 months before wrongly dismissing him. Following Braganza, an employer had to reasonably exercise its discretion to put an employee on garden leave, but on the facts had not acted irrationally.

Garden leave, which emerged as a concept in the 1980s, is normally considered in the context of an employer seeking to prevent an employee going to work for a competitor. By placing an employee on garden leave, and generally continuing to pay remuneration, an employer seeks to keep the employee out of the market for the relevant period. However, the doctrine of restraint of trade requires that an employer demonstrate that garden leave be reasonably necessary to protect a legitimate business interest before a court will grant an injunction.

An interesting aspect of this case is that the primary context was not restraint of trade, since the employer (“Icap”) was perfectly content for the employee (“F”) to leave: indeed, it wanted him to do so. Rather, Icap was seeking to save money by removing F’s minimum bonus. The relevant matters were (i) whether there was an implied term that Icap would not exercise its contractual discretion to place F on garden leave irrationally or perversely and (ii) if there was such an implied term, whether Icap was in breach.

The facts

F was employed by Icap from 1 February 1999 on the European Government Bonds (“Bonds”) desk. His service agreement was amended in October 2012 to put him on a five-year fixed term contract until 30 September 2017 with a discretionary bonus entitlement subject to a minimum of £200,000 a year. On 30 July 2014 F was placed on garden leave. On 7 November 2015, just over 15 months later, he was dismissed. The dismissal was admitted to be wrongful. The key issue was whether F should be awarded damages for the loss of his minimum bonus for the period of garden leave.

A clause in F’s contract said he would benefit from his bonus arrangements “except in respect of any period of Garden Leave”. In relation to such leave the contract stated that:

“During his notice period or any part or parts thereof, or at any other time, [Icap] may in its absolute discretion require [F] to perform any such duties or other such duties…as it may allocate to him or not to perform any such duties…provided always that throughout the period of any such action referred to in this clause (“Garden Leave”) [F’s] Salary and contractual benefits shall continue to accrue or be paid…”

On 10 July 2014, at a meeting between F and a manager, F was told that Icap proposed removing his minimum bonus from his contract of employment because of a sharp deterioration in performance of the Bonds desk. F refused to accept the variation and was placed on garden leave 20 days later. Icap accordingly paid F salary and benefits for the 15 month period of his garden leave, but refused to pay him his minimum bonus (that not being a contractual benefit).

F alleged that placing him on garden leave, effectively to avoid paying his minimum bonus, was a breach of an implied term of rationality and/or the implied term of trust and confidence. He focused, at trial, on the fact that the decision to “place” him on garden leave was a breach of contract. The court did not therefore have to deal with whether any decision to “keep” an employee on garden leave might also potentially be a breach (paragraphs 21 and 22 of the decision).

The law

On behalf of F it was argued that the discretion conferred on Icap to place him on garden leave was “not untrammelled”. Reliance was placed on Braganza v BP Shipping Ltd [2015] ICR 449, in the Supreme Court, in which Baroness Hale had said (at 18):

“Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually-agreed decision maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened where there is a significant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.”

Further F’s Counsel relied on both limbs of the Braganza test, i.e. whether the right matters had been taken into account and whether the result was so outrageous that no reasonable decision-maker could have reached it (at 30).

Icap denied it owed any implied duty not to exercise its discretion to place R on garden leave irrationally or perversely. Further, even if it did, its exercise of discretion was not irrational.

Decision

The court determined that the Braganza implied term did apply, and that both limbs of the test needed to be satisfied. However, Icap had been entitled to give F the binary choice of giving up his entitlement to minimum bonus or being placed on garden leave while Icap attempted to agree a settlement with him, bearing in mind the declining revenues of the desk. Further it could not be said that Icap had taken irrelevant matters into account or failed to consider relevant matters.

Hence Icap was not in breach of contract and F was not entitled to damages for the loss of his bonus during the period of garden leave. 

The full judgment can be read here.