Case Update

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...