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Breach of contract

Repudiatory – or very serious – breaches of contract entitle the other party to the contract to consider that the contractual terms have been metaphorically ripped up. What happens in a case where one party contemplates breaching a contract, but the other party beats them to it? In Palmeri v Charles Stanley, Mr Palmeri was a self-employed stockbroker who had worked for Charles Stanley for more than 20 years. He had a three-month notice period, but his contract did not contain a payment in lieu of notice (PILON) clause. The business decided to change its operating model to take a bigger chunk of Mr Palmeri’s earnings. He was not pleased. The company gave him an ultimatum – sign a new contract on the new terms or leave immediately with a PILON. Mr Palmeri reacted furiously and was verbally abusive to the managers present and the firm more generally. He then agreed to take the new terms under protest for the duration of his notice period. Unfortunately, the abusive behaviour continued and escalated so the company withdrew the offer of new terms and summarily (without notice) terminated his contract.

Mr Palmeri brought two claims in the High Court – one for breach of contract for the summary termination and a second claim for breach of the implied term of mutual trust and confidence for failing to allow him an orderly exit for his clients. The company said Mr Palmeri’s abusive behaviour was a repudiatory breach of contract which entitled them to ignore contractual terms and terminate without notice. They also relied on several serious regulatory breaches which they only discovered after his termination. They said he was already in repudiatory breach of contract due to those regulatory breaches.

The High Court agreed that the company had no contractual right to make the original offer to Mr Palmeri – accept the new terms or receive a PILON – because they had no contractual right to pay him in lieu of notice. However, they said Mr Palmeri’s behaviour, including the abuse and the regulatory breaches, amounted to serious misconduct and a breach of the implied duty of trust and confidence. That repudiatory breach by Mr Palmeri justified the employer’s summary termination. The fact that the firm was preparing to breach his contract in future (by paying him in lieu of notice) if he didn’t agree to new terms was irrelevant. They were still entitled to rely on the abuse and regulatory issues as serious breaches of contract enabling them to avoid its terms on notice.

This case shows that repudiatory conduct by one party releases the other from the terms of the contract. In this case, the company had been planning to pay in lieu when it hadn’t got the contractual right to do so. Fortunately, Mr Palmeri’s bad behaviour got there first and prevented the employer from effecting that proposed breach of contract. Always check contractual terms before paying in lieu of notice. These clauses should be standard in contracts to give businesses flexibility when it comes to termination.