What to consider when cherry-picking settlement terms

In light of a recent EAT ruling, Benedict Gorner examines the perils of negotiating the terms of a departing employee’s financial package 

Unfortunately, it sometimes happens that a business decides going forward there will no longer be a role for a senior manager. In those circumstances it is likely to be better for all concerned if the terms of the manager’s exit can be discussed and agreed. 

That will necessarily mean there will be a series of meetings and a process of negotiation to agree the financial package on which the manager will leave. As part of that negotiation process there will be offers and counter offers.

The case of Evergreen Timber Frames v Mr N K Harrington concerned a claim that an offer made during such a negotiation process was contractually binding as it had amounted to a promise of a gift regardless of whether the other terms of the settlement were accepted or not.

Harrington, a manager, had been told that his role was at risk of redundancy. As part of the process leading up to him leaving there were various meetings and discussions relating to the financial package with which he would leave. 

As the negotiations advanced and his leaving date grew near, a draft offer was put to him in which he was reassured that he would get to keep his company car as it would be a gift. Harrington said he would accept the offer but also wanted to be able to keep his company computer, and required an assurance he would still receive his bonus. The employer did not agree to his further requests and told him that he would not be allowed to keep the company car as no settlement had been reached. 

Harrington issued a claim for breach of contract on the grounds that he had been promised the car as a gift and had accepted the offer. He had believed that the offer should have also included the computer and the bonus, but that did not mean the offer of gifting the car could be withdrawn.

The Employment Appeal Tribunal held that Harrington had not been entitled to compensation for breach of contract, and a first instance decision of the employment tribunal awarding him £8,400 as the value of the car was overturned. It found that Harrington had not accepted the offer put to him and that as a result there had not been any binding agreement reached for the transfer of ownership of the company car. The offer of the car was not a freestanding gift, but a proposal made as part of the wider termination package. Harrington had not been entitled to accept part of the package offered while still disputing the exclusion of the computer and bonus from the settlement package. 

The decision shows that an employee will not be able to pick and choose which of the settlement terms they will accept. If it’s part of a package, the whole agreement has to be accepted or there will be no agreement reached.

In practice the ruling highlights for employers the importance of ensuring that correspondence is clearly marked as being ‘without prejudice and subject to contract’ and that negotiations are conducted on the same basis. If the draft settlement had been marked up in this way it would have been much more difficult for Harrington to argue that agreement had been reached.

It should always be made clear that only the contractual terms contained in the completed signed settlement agreement are binding. If these precautions are not taken, there is always the risk that, following a breakdown in negotiations, a party might allege that an earlier offer had contractual effect as it had been accepted independent of the wider negotiation process.

Benedict Gorner is an employment partner at Gateley Legal