284: Can misconduct justify summary termination despite the employer also being in breach of contract?

In the recent case of Palmeri and others v Charles Stanley & Co Ltd, the High Court has held that a firm was entitled to rely on the misconduct of a self-employed stockbroker to terminate his contract without notice, even though the firm had fundamentally breached the contract itself.

Mr Palmeri was a self-employed investment manager for Charles Stanley & Co Ltd. His contract required three months’ notice of termination from the firm and did not include a right to make a payment in lieu of notice. The company decided to change its operating model to take a larger portion of revenues from Mr Palmeri and other self-employed investment managers. However, despite lengthy discussions over several years, Mr Palmeri did not agree to the new terms and conditions. Eventually, at an unscheduled meeting, he was presented with an ultimatum: sign up to the new terms or leave immediately with a payment in lieu of notice. Mr Palmeri reacted furiously and offensively, disparaging the competence and integrity of the managers present in the meeting as well as the company’s senior management. He then said he would sign the new terms, but the firm decided that his behaviour meant that his position was untenable and terminated his contract without notice.

After Mr Palmeri’s departure, the firm’s compliance department discovered that he had committed a number of serious regulatory breaches whilst at Charles Stanley, including failing to report conflicts of interest and unauthorised credit broking.

Mr Palmeri brought a claim for breach of contract in relation to the termination of his contract without notice. He also argued that his behaviour in the meeting was not serious enough to amount to a repudiatory breach of contract, particularly in the context of the financial world where robust exchanges are common. Charles Stanley defended the claim on the basis that it was entitled to terminate Mr Palmeri’s contract summarily because of his conduct in the meeting and the regulatory breaches it had discovered subsequently.

The High Court found that the firm was in breach of contract in giving Mr Palmeri an ultimatum that he would be paid in lieu of notice. However, it concluded that Mr Palmeri’s abusive behaviour at the meeting and the historic regulatory breaches amounted to gross misconduct and a breach of his implied duty of trust and confidence which justified terminating his contract without notice.

This case is a reminder that where there is no contractual right to make a payment in lieu of notice, it will be a breach of contract to offer one. It also highlights that self-employed contractors as well as employees are subject to an implied contractual duty of trust and confidence. In this case the claimant’s conduct was particularly serious and clearly amounted to a repudiatory breach of contract which allowed the firm to terminate his contract. However, this will often be much more difficult to assess, particularly where the employer may also have acted in breach of contract.