Settling down

Collidge v Freeport (IDS 832)

Settlement, or compromise, agreements are often used by employers and employees to resolve an outstanding dispute between them on termination of a contract. In those circumstances, it is not uncommon for employers to require the employee to provide a “warranty” (a strict contractual promise). But what happens when the warranty turns out to be false?

In Collidge v Freeport (IDS 832), the High Court said that the employer was released from the obligation to pay compensation money when the employee’s warranty turned out to be meaningless.

Basic facts

Mr Collidge, the chief executive of Freeport, decided to resign after the board voted to suspend him for alleged misconduct. As part of a written settlement, he agreed to accept almost half a million pounds in full and final settlement of his claims.

The agreement also contained a warranty clause, however. This stated that the company would only pay up if Mr Collidge gave a warranty that he was not aware of anything at the date of signing that might constitute a breach of his contract of employment. Otherwise the company would have the right to dismiss him summarily.

Both sides signed the agreement but the day before the company was due to pay out, it announced an investigation into a number of matters which, it said, could amount to gross misconduct entitling Freeport to dismiss Collidge immediately. This would represent a breach of the warranty.

As a result, Freeport refused to pay the compensation payment while the investigations continued. Mr Collidge brought proceedings in the High Court saying that the company was in breach of the agreement.

Arguments of the parties

Freeport claimed that it did not have to pay Mr Collidge if there were circumstances that he knew about (or should have known about) that would have amounted to a repudiatory breach of contract entitling the company to sack him on the spot.

For his part, Mr Collidge argued that clause 7(b) was not a “pre-condition” in terms of whether the agreement was enforceable or not. If the court found that it was, however, then he said that if the company accepted the breach, it could only bring the agreement to an end. If it did not accept the breach (as here) then it could only sue for damages, but not withhold the payment.

High Court decision

The High Court held that as the warranty in general was preceded by the words: "subject to and conditional upon the terms set out below" and clause 7 in particular by the words that “you warrant as a strict condition of this agreement …", it was clear that the warranty was a pre-condition of the agreement.

It followed therefore that if the warranty was untrue, the company did not have to pay out, but this did not mean it was repudiating the entire agreement.

The court then went on to look in detail at the allegations made against Mr Collidge to ascertain if there were circumstances at the date the agreement was signed that would have entitled the company to dismiss him summarily.

The judge found that, among other things, Collidge had wrongfully removed equipment from company premises, that he had misused a company credit card, used a company driver for private work and charged the company for materials which he bought for renovation work on his French home.

The court concluded that these facts would have justified summary dismissal, and that at the time Mr Collidge had given the warranty in clause 7(b), he was aware of that. As the court had already decided that payment of the settlement money was conditional on the validity of the warranty, it followed that the company was not obliged to pay up.