The Court of Appeal has held in Collidge v Freeport Plc that an employer does not have to make a compensation payment under a compromise agreement if the employee is in breach of a warranty he has given in the agreement.

Background
Mr Collidge was a director and employee of Freeport. He agreed to enter into a compromise agreement with the company, following allegations of misconduct. Under the compromise agreement he was to be paid £445,680 in compensation. The agreement also included a warranty by Mr Collidge that he was not aware of any circumstances that would have entitled his employer to summarily dismiss him.

After signing the compromise agreement, but before paying the compensation, the company became aware of overwhelming evidence indicating that they would have had good grounds to summarily dismiss Mr Collidge. They refused to pay Mr Collidge the compensation payment and he sued for it.

The Court of Appeal upheld the High Court's ruling and confirmed that the obligation of the company to pay Mr Collidge was dependant on Mr Collidge's obligations in relation to the warranty. As there were grounds to justify his summary dismissal, Mr Collidge was in breach of warranty and the company was not obliged to make payment to him.

Impact on employers
Where suspected misconduct is involved but the company is nevertheless paying compensation under an agreement, the company should require the employee to warrant that there are no circumstances justifying summary dismissal. The compromise agreement must be drafted so that payment of the compensation is conditional upon any warranties given by the employee. That gives the company the right to withhold the payment if a breach is discovered but the waiver of claims given by the employee remains enforceable.

03 July 2008

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