UK: Case Update

Last Updated: 26 March 2013
Article by Bob Mecrate-Butcher and Nick Hurley

The duty of good faith and the penalty doctrine

In Imam-Sadeque v BlueBay Asset Management, the High Court considered two important issues: whether the duty of good faith is reduced during garden leave and whether the penalty doctrine applied to a clause in a compromise agreement.

When Mr Imam-Sadeque, an asset manager at BlueBay, resigned he was not entitled to unvested awards under the terms of the incentive plan because he was not a "good leaver". However, he negotiated a compromise agreement which included a provision that he would be considered a "good leaver" and therefore entitled to fund units for 2012 if he did not breach the terms of his contract during his notice period (which included non-competition, confidentiality and non-solicitation clauses). BlueBay subsequently discovered that, while still employed, Mr Imam-Sadeque agreed to join and helped a competitor start up, disclosed confidential business information and was heavily involved in the recruitment of a colleague. He argued that he was not in breach as an employee's duty of good faith lessened during garden leave and that the terms of the compromise agreement, forfeiting the 2012 awards, were unenforceable as a penalty.

The duty of good faith is not reduced during garden leave

The High Court held that the duty of good faith did not lessen during garden leave. The purpose of garden leave is to secure an employee's loyalty to his current employer (while still being paid but not required to work) and to delay the transfer of that loyalty to the new employer until the notice period expires.

Conditional benefits not subject to penalty doctrine

The Court also held that the clause in the compromise agreement did not forfeit a benefit. This happened because he was a "bad leaver" under the terms of the incentive plan. The compromise agreement had merely given a conditional benefit in relation to units that, in fact, never accrued because he failed to fulfil the condition. A contingent right which had not accrued could not come within the penalty doctrine.

The judge went on to give his view that a clause could not be a penalty if, as in this case, it was commercially justified. He considered that, even if the doctrine did apply, it was not a penalty as it was freely negotiated as part of a bundle of obligations and benefits and it would be contrary to the commercial objectives of the incentive plan if an employee could act in breach of contractual duties and still receive the 2012 fund units. In addition, he acknowledged that the provisions in the incentive plan providing variable remuneration on a deferred basis also complied with FSA Remuneration Code requirements.

Key Points to take away

  • This confirms the duty of good faith is not reduced during garden leave where it relates to competitive activity or non-poaching of employees. Employers should also consider making this duty express rather than seeking to rely on the implied duty.
  • Although the judgment confirms that the penalty doctrine does not apply to conditional benefits it does leave open the possibility of a challenge as to how this might apply to accrued benefits, although generally the courts are reluctant to expand this doctrine.

When does a contract of employment end?

The answer to this question is not straightforward and was considered by the Supreme Court in Geys v Societe Generale. It held that where an employer is in repudiatory breach the contract does not end automatically, it ends when the employee elects to accept the repudiation as having that effect. The rationale behind this is to protect the innocent party. This is in recognition that there are circumstances where it is in the employee's interests to affirm the contract e.g. to ensure entitlement to bonuses or share options. Equally, if the employee is in repudiatory breach, there may be times where an employer may wish to affirm the contract, e.g. in order to enforce restrictive covenants. The Court also confirmed that clear notification of termination is required.

Key Points to take away

  • In order to avoid being in a situation which will enable employees to claim their employment is continuing, employers should ensure their PILON clauses are worded so that termination of employment takes effect once the employee has been notified that their employment is being terminated and that the PILON will follow.

As a matter of good practice the employer should also ensure it notifies the employee in writing that it is exercising its right to make the PILON.

Disciplinary procedures and injunctions

In West London Mental Health NHS Trust v Chhabra the Court of Appeal confirmed that it will only intervene in disciplinary proceedings in the form of an injunction or declaration where the employer is in breach of contract. Although the availability of this remedy only applies to those with contractual disciplinary procedures, it is likely that employees who stand to gain from prolonging their employment (e.g. where a bonus entitlement is at stake) will be looking for ways to claim that an ostensibly non-contractual procedure is contractual, for example, by arguing a policy has been incorporated into the contract as a result of an implied term.

Key Points to take away

  • Ensure that any disciplinary procedure (whether contractual or not) is followed carefully to avoid arguments that the employer is in breach.
  • Ensure that the disciplinary procedure is clearly expressed to be non-contractual. Although there is the risk that this may not be sufficient to establish that this is the case, it will certainly make it more difficult for the employee to argue otherwise.

Cases on appeal

  • Mattu concerning disciplinary proceedings and legal representation has not been granted permission to appeal to the Supreme Court and neither has Ranson , which concerned the extent of fiduciary duties and the duty of fidelity. We have covered both of these decisions in our previous updates.
  • Permission to appeal to the Supreme Court has been granted in Clyde & Co LLP v Bates van Winkelhof which we covered in our last update. This case concerns whether former LLP member is a "worker" and can bring a whistleblowing claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Bob Mecrate-Butcher
Nick Hurley
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.