Neutral Citation Number: [2007] EWCA Civ 664
Case No: A3/2006/1791
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
Mr Justice Peter Smith
HC05C01270
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 4 July 2007
Before :

THE CHANCELLOR OF THE HIGH COURT
LORD JUSTICE MAY 
and
LORD JUSTICE LLOYD 
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Between :

	JOHN McCARTHY	Appellant	
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	McCARTHY & STONE PLC	Respondent	

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 MR D SWEETING QC & MR J JUPP (instructed by Messrs. Clarke Wilmott, Southampton) for the Appellant
MR M GRIFFITHS QC (instructed by Messrs. Travers Smith, London) for the Respondent

Hearing dates : 14 June 2007
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 Judgment

The Chancellor:

Introduction

1.	McCarthy & Stone plc, a public company carrying on business as a developer of sheltered accommodation for the elderly, adopted a Company Share Option Plan on 10th November 2000 (“the 2000 Scheme”) to provide further incentive and remuneration for its full time directors or employees.  Rule 4.4 of that scheme provided that 
“4.4 Where an Option Holder ceases to hold any office or employment the Remuneration Committee shall in its absolute discretion determine whether the Option will be exercisable having considered the extent to which the Performance Condition has been achieved at the date of termination.   If the Remuneration Committee so decides the Option Holder may exercise all or a proportion of his Option(s) during the period which begins on the date of such cessation and ends twelve months later, such proportion being determined by the Remuneration Committee pro rata to the achievement of the Performance Condition.”
2.	On 21st November 2000 the Company granted to its Executive Chairman, the eponymous Mr McCarthy (“the Claimant”), an option over 138,786 shares in the Company to be exercised not earlier than three nor later than ten years after its grant at an exercise price of 267.5p.   The relevant performance condition was an increase in earnings per share in the period of three consecutive financial years commencing on 1st September 2000 equal to or greater than 10% per year above the level of the rate of inflation (as defined).   This condition had been satisfied when, on 31st December 2003, the employment of the Claimant by the Company and all offices of the Claimant with the Company ceased.
3.	On 22nd December 2004 the Claimant gave notice to exercise this option.   The matter was considered by the Remuneration Committee on 17th January 2005.  The minute of their meeting records: 
“After discussion of the conduct of [the Claimant] and the proper weight to be given to the achievement of the Performance Condition, IT WAS RESOLVED by the Committee in exercise of its absolute discretion under Rule 4.4 that the notice of exercise dated 22nd December 2004 served on behalf of [the Claimant] be accepted as a valid notice of exercise in respect of 75%.....that is to say...valid over 104,089 shares at an exercise price of 267.5 pence per share”.

At the same time the Executive Committee resolved that the Claimant might exercise three other options granted to him under other schemes to the extent of 100%.  The Claimant exercised all four options to the permitted extent thereby giving rise to liabilities to income tax and primary National Insurance contributions of £197,931.33 which was duly paid by the Company between 22nd April and 12th May 2005.
4.	The Claimant was dissatisfied with the decision of the Remuneration Committee not to accept his notice to exercise as valid with regard to the remaining 25% or 34,697 shares at 267.5p.   On 18th May 2005 he instituted these proceedings against the Company seeking declarations to the effect that the performance condition having been wholly satisfied and the Remuneration Committee having determined that the option would be exercisable he was entitled to do so in respect of all the shares, not just 75% of them.   On 1st June 2005 the Company demanded reimbursement by the Claimant of the sum of £197,931.33 and, in due course, counterclaimed in the same proceedings for payment of that sum as money paid to the use of the Claimant.  This was on the basis that the Company had been compelled by law to pay to the Revenue money due in respect of the Claimant’s remuneration for which the Claimant receives credit in his personal liability to taxation.
5.	On 15th February 2006 Master Bragge ordered the trial as a preliminary issue:
“Whether on its true construction Rule 4.4...has the meaning and effect set out in paragraph 12 of the Particulars of Claim and if so whether the claimant is entitled to the declarations sought.”
In paragraph 12 of the Particulars of Claim the Claimant contends that:
“On its true construction and meaning Rule 4.4 of the Share Option Plan:
(a) confers a discretion on the Remuneration Committee as to whether an option is exercisable, for which purpose the Remuneration Committee is required to consider the extent to which the Performance Condition has been achieved at the date of the termination;
(b) In the event that the Remuneration Committee does so exercise its discretion:
(i) permits the Claimant to exercise his Option in full when the Performance Condition has been met; or
(ii) where the Performance Condition has not been met requires the Remuneration Committee to determine the proportion of his Option that the Claimant may exercise pro rata to the achievement of the Performance Condition;
(iii) alternatively requires the Remuneration Committee to determine the proportion in which the Option is to be exercised, whether or not the Performance Condition has been met, pro rata to the achievement of the Performance Condition.
On the same day, that is 15th February 2006, the Company sought summary judgment on its counterclaim under CPR Part 24 on the basis that the Claimant had no real prospect of succeeding in his defence to the counterclaim.
6.	The trial of the preliminary issue and the application for summary judgment came before Peter Smith J on 11th July 2006.  By his order made on 21st July 2006 he declared the determination of the Remuneration Committee on 17th January 2005 to be invalid and directed such Committee to reconsider its decision in the light of his judgment handed down on 20th July 2005.  Further he gave summary judgment to the Company on its counterclaim in the sum of £197,931.33.   Permission to appeal was given to the Claimant by Waller LJ, the judge having refused it.  By a respondents’ notice filed on 19th December 2006 the Company also appealed against the judge’s conclusion as to the invalidity of the determination of the Remuneration Committee. 
7.	Thus these appeals raise two distinct points.  The first arises from the preliminary issue and relates to the determination of the Remuneration Committee on 17th January 2005, the effect of which was to deny to the Claimant an effective option over 34,697 shares in the Company at 267.5p.   In that connection the Company seeks to rely on the fact that after the order of Peter Smith J the Company was taken over and its shares delisted.   The second is whether the judge was right to give summary judgment on the counterclaim requiring the Claimant to reimburse the Company for the sum of £197,931.33 it had paid in respect of the Claimant’s liability for tax and National Insurance arising from the exercise, as permitted by the Remuneration Committee, of all four options.

The determination of the Remuneration Committee

8.	As its formulation shows, the preliminary issue relates to the proper construction of Rule 4.4.  I have quoted the rule in paragraph 1 above but now need to put it in context.   The 2000 Scheme is as to Part A an approved scheme.  Part B, under which the Claimant was granted the relevant option, is not.  Common to both are certain definitions contained in General Rule 1.  They include a definition of “Performance Condition” as “the objective performance condition which must be met before Options may be exercised”.  General Rule 2 provides that the plan shall be operated at the discretion of the Directors who shall determine whether any option should be granted under Part A or Part B. 
9.	Part B rule 1 deals with the grant of options at the discretion of the directors.   It imposes an obligation on the Company to issue to the employee to whom it has granted an option a certificate under the seal of the Company.  The rule provides what information the certificate should contain.  Such information includes “the Performance Condition that must be satisfied before the exercise of an Option”.   Rule 2 contains the conditions relating to the grant of options.  They include:
“2.3 Options shall be granted subject to the condition that (save as provided in Rules 4.3 and 4.5 and 5) they shall only be exercisable (in whole or in part) following the attainment of the Performance Condition.
2.4 In the application of Rule 2.3, when events have happened which cause the Directors to consider that the Performance Condition has become unfair or impractical, they may, in their discretion (provided such discretion is exercised fairly and reasonably), amend, relax, waive or substitute such Performance Condition.  After any such amendment, relaxation or substitution the Directors shall issue to the Option Holder a replacement Option Certificate or other notice including the details specified in Rule 1.2.  Any such amendment, relaxation or substitution shall not result in the Option being subject to Performance Conditions which are more difficult to satisfy than those which applied immediately prior to such amendment, relaxation or substitution.”
Rule 3 deals with the number of shares in respect of which options may be granted.
10.	Rule 4 governs the right to exercise an option.  Rules 4.1 to Rule 4.4 are in the following terms:
“4.1 Save as provided in Rules 4.3 and 4.4 an Option may not be exercised before whichever is the later of:
4.1.1 the third anniversary of the Date of Grant, and
4.1.2 any date or dates which may have been specified in the relevant Option Certificate in accordance with Rule 4; and
4.1.3 the date it can be ascertained that the Performance Condition has been achieved;
and in any event may not be exercised later than the tenth anniversary of the Date of Grant.
4.2 Save as provided in Rules 4.3, 4.4 and Rule 5.6 an Option may only be exercised by an Option Holder while he is a director or employee of a Group Company.
4.3 An Option may be exercised by the personal representatives of a deceased Option Holder during the period of one year following the date of death.
4.4 Where an Option Holder ceases to hold any office or employment the Remuneration Committee shall in its absolute discretion determine whether the Option will be exercisable having considered the extent to which the Performance Condition has been achieved at the date of termination.   If the Remuneration Committee so decides the Option Holder may exercise all or a proportion of his Option(s) during the period which begins on the date of such cessation and ends twelve months later, such proportion being determined by the Remuneration Committee pro rata to the achievement of the Performance Condition.”
Rule 4.5 deals with cesser of employment, rule 4.6 with female Option Holders on maternity leave and Rule 4.7 with when an option lapses.
11.	Rule 5 deals with the consequences of a Takeover, Reconstruction and Amalgamation and Liquidation before an option has been exercised.  Neither party suggested that it applied in the circumstance of such an event after the option had been exercised.  Nevertheless I should refer to Rule 5.3 for such light as it may throw on the true construction of Rule 4.4.  It provides:
“On the occurrence of any of the events described in Rule 5.1, the Committee may at its discretion determine and recommend that all or a proportion of any Option should become exercisable.  In exercising such discretion, the Committee shall have regard to the extent to which the Performance Condition has been achieved and the amount of time which has elapsed since Options were granted taking into account the pro-rated earnings per share as reported in the last published annual report and accounts PROVIDED THAT no Options may be exercised in the first year following the Date of Grant.”
Rule 6 deals with the manner of exercise of an Option, Rule 7 with the consequential issue of shares, Rule 8 with payment for them, Rule 9 with adjustments, Rule 10 with administration, Rule 11 with alterations to the Rules and Rule 12 with certain general matters.
12.	It is apparent from the dates I have set out in paragraphs 2 and 3 above that the Claimant might have exercised the relevant option in full and as of right under Rule 4.1 at any time between 22nd November and 31st December 2003.  He did not.  Consequently the notice he gave on 22nd December 2004 took effect to the extent for which Rule 4.4 made provision.   In the meantime there had been disputes between the Company and the Claimant.  They were considered by the Remuneration Committee at the meeting on 17th January 2005.   The minute records, immediately before the passage I have quoted in paragraph 3 above, that:
“The Committee discussed the circumstances surrounding the approach made on behalf of the McCarthy family interests in June 2003.  In making the approach [the Claimant] had allied himself with the interests of a competing business.  He had not been in a position to make any material contribution to the performance of the Company or the achievement of the Performance Condition from the date the approach was made.  The results of the approach had been very considerable disruption to the normal operations of the Board, a risk to the morale and retention of staff, and a cost to the Company in terms of legal and professional fees in the order of £300k.  At the time the approach was withdrawn [the Claimant], whilst still a Director of the Company, had been responsible for a press announcement suggesting that the shares in the Company were over-valued.  Further, prior to termination of his employment he had circulated an email message to staff in terms which implied that their interests would be better served by joining the competing business of which he indicated he had agreed to become a Director.”
This is the alleged conduct the Remuneration Committee evidently took into account in reaching the decision to which the minute, quoted in paragraph 3 above, refers.
13.	Peter Smith J set out all these relevant matters before recording the submissions made to him by counsel.  In paragraphs 17 and 19 he noted the submission of counsel for the Claimant that Rule 4.4 required the two stage exercise reflected in the two sentences of the rule.  In the first the Remuneration Committee has an absolute discretion to determine “whether the option will be exercisable having considered the extent to which the Performance Condition has been achieved at the date of termination” of the employment of the Option Holder.  In the second the Remuneration Committee then decides the proportion of the shares subject to the option in respect of which it may be exercised “such proportion being...pro rata to the achievement of the Performance Condition.”
14.	The judge then turned to the consequences of that submission being correct.  He noted that counsel for the Claimant considered that it would warrant a declaration to the effect that the Claimant is entitled to exercise the option in respect of all the shares to which it extends, not only 75% of them.   In paragraphs 24 to 26 Peter Smith J said:
“24. This has caused me considerable difficulty.  The Remuneration Committee exercised a discretion.  That discretion is absolute.  It is plain from their decision and the Defendant’s submissions that they believed that there was no 2 stage process.  It is their case that as part of one decision making process they have an absolute discretion as to whether or not to permit the exercise of the option in full or in part and that the decision cannot be challenged as long as they act bona fide.  Accordingly if they have a bona fide belief as set out in the minute they are entitled to decide that it is appropriate to allow only a conditional exercise.  As part of that discretion they are also allowed to determine the percentage upon which the shares are to be exercised.
25. If the Claimant’s contentions are correct the consequence is that the Remuneration Committee have come about their decision in a way which is wrong in law i.e. they have exercised their discretion under a mistaken belief that the law entitles them to act in the way they did.
26. It seems to me that the consequence of that contention if successful is that the decision is a nullity.  The normal train of events therefore would be a declaration that the decision of the Remuneration Committee was null and void and to seek an order remitting the matter back to the Remuneration Committee and to require it to exercise it correctly according to the manner in which the law determines it can be exercised.”
15.	The judge then considered and rejected various objections of counsel for the Claimant to the consequence suggested by him.  He continued in paragraphs 27 and 28:
“27....The relief sought by the Claimant on the other hand seeks to take the benefit of part of the (faulty) method of decision i.e. the decision to allow the Claimant to exercise but removes from that decision the (inconvenient) part which allows only 75% exercise.
28.  I do not see how that can be done.  This is not a claim for damages as such; it is a challenge to the exercise of a discretionary decision.  If that decision was done in a way which was not lawful according to clause 4.4 then the consequence is that it is a nullity.  It does not in my view enable the Claimant to cherry pick the parts of the decision which suit him and ignore the parts which do not suit him.”

16.	Peter Smith J then considered the obverse submissions made by counsel for the Company, namely that Rule 4.4 provides for a single exercise by the Remuneration Committee to which the express absolute discretion extends.  The consequence, as he recognised, was that all relevant factors might be taken into account in determining both whether the option might be exercised and if so the extent of such exercise.  In paragraph 34 Peter Smith J noted that difference between the parties’ submissions lay in the consequence.  If the Claimant was right then, as submitted, he should be entitled to exercise his option to the extent of 100% of the shares to which it extended.  If the Company was right then the Claimant might exercise his option to the extent of 75% only.
17.	The judge expressed his conclusions in paragraphs 35 to 39 in the following terms:
“35. In my view the Claimant’s contention is correct.  I do not see that it is overly analytical to require the Remuneration Committee to go through a 2 stage process.  First they have to decide whether or not to exercise their absolute discretion.  The key word I accept is “absolute” which gives them an unfettered discretion provided they act bona fide.  There is no reason in that process why they cannot have regard to the stage 2 consequences in deciding whether to allow it to be exercised and take into account bona fide factors which they believe are relevant to the Claimant’s conduct.  In so far as it had an impact on the satisfaction of the Performance Condition.  I do not believe it would be bona fide to take into account factors such as those referred to in the minute of the Remuneration Committee because (1) they did not affect the satisfaction of the Performance Condition (2) the Company clearly had remedies for such conduct but had chosen not to institute any proceedings so far as I am aware.  
36. Once the discretion is exercised in favour of the Claimant it is plain in my view that stage 2 requires the Remuneration Committee to decide that the Option Holder may exercise all or a proportion of his options such proportion to be determined pro rata to the achievement of the Performance Condition.  It seems to me that part of the clause is mandatory and gives the Remuneration Committee no discretion as to the extent of the exercise.  It says “if” the Remuneration Committee so decides the Option Holder may exercise all or a proportion then such proportion has to be determined pro rata to the achievement of the Performance Condition.  
37. In this case exceptionally the achievement of the Performance Condition is 100%.  I accept [Counsel for the Claimant]’s submission that the clause is primarily intended to operate at a time when an Option Holder departed with the Performance Condition partially satisfied.  The discretion element in my view comes in at stage 1 only.  I have set out above what I believe are the factors that the Remuneration Committee can take into account at stage 1.
38. For those reasons I prefer the Claimant’s construction of rule 4.4.  However I do not accept that the Claimant is thus entitled to the relief sought by the declarations.  
39. In my view he is entitled to a declaration that the determination of the Remuneration Committee is invalid and an order directing the Remuneration Committee to reconsider its decision under rule 4.4 in the light of this judgment.  I will leave the parties to draw up a suitable minute of order in that regard.”
18.	Counsel for the Claimant accepts and supports the judge’s reasoning and conclusion in paragraphs 35 and 36 but disputes the consequence to which the judge referred in paragraph 39.  Counsel for the Company disputes the reasoning and conclusions in all those paragraphs.  He contends that the determination of the Remuneration Committee was valid in all respects and the judge should have so declared in response to the preliminary issue.  In addition he contends that even if he is wrong on construction the consequence is neither as found by the judge nor as submitted by Counsel for the Claimant.  In these circumstances there are three issues (1) the true construction of Rule 4.4, (2) the proper consequence of that construction and (3) the effect (if any) on that consequence of the takeover of the Company and delisting of its shares.  I will deal with them in that order.
19.	As I have indicated the Claimant supports the judge’s reasoning and conclusion on the question of construction.   Counsel for the Company submits that the judge was wrong.  He contends that the Rule should be construed as a whole.  He suggests that it would be odd if the ‘absolute discretion’ related to part only of the exercise and in particular that part which, according to counsel for the Claimant, admits of only two answers, ‘yes’ or ‘no’.  He submits that the construction accepted by the judge and adopted by the Claimant is unnatural and artificial.   In particular, if adopted, it produces an inflexibility inconsistent with an ‘absolute discretion’.
20.	The point is a short one.  I agree with the construction put on Rule 4.4 by the judge for largely the reasons he gave.  Of course, the rule must be construed as a whole in the context of the 2000 Scheme and having regard to the wider considerations to which Lord Hoffmann referred in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 913.   The nature of the scheme is such that it is understandable that there should be a different provision in relation to the exercise of an option granted to one who was, but has ceased to be, an employee.  The reasons why it might be inappropriate to permit the exercise of the option by such a person are infinitely various.   Thus the Remuneration Committee have an absolute discretion at least at that stage, albeit the achievement of the performance condition is given some pre-eminence.
21.	In my view the language of Rule 4.4 is too explicit to conclude that there is one undivided process so that the ‘absolute discretion’ applies to the whole of it.  The rule evidently requires the Remuneration Committee to do two things in sequence.   The pre-condition to the application of the first sentence is that the option holder is an ex-employee.   If that condition is satisfied then the Remuneration Committee has to determine “whether” the option will or should be exercisable.   This is a single question which admits of only two answers, ‘yes’ or ‘no’.    The pre-condition to the application of the second sentence is “if” the Remuneration Committee has decided that the option should be exercisable.   In that event the ex-employee may exercise his option in relation to all or a proportion of the shares subject to the option.   The proportion is to be determined by the Remuneration Committee “pro rata” to the achievement of the Performance Condition.    This provides a striking contrast to the first sentence in which the achievement of the Performance Condition is only one, albeit important, factor for consideration.  Given the range of permissible Performance Conditions it is readily understandable that the Remuneration Committee should be needed to exercise such a judgment even though the performance condition is by definition to be objectively ascertainable.  However I see no reason for implying that the absolute discretion overlaps into the second stage or that the determination of the proportion admits of any consideration other than achievement of the performance condition in whole or in part.
22.	That this is so is confirmed by the provisions of Rule 5.3.  In the context of changes of control of the Company arising from takeovers etc then the Company itself is required to notify the Option Holders of that event so that they may decide whether to exercise their options or to take some other action.  Rule 5.3 then requires the Committee, defined as a committee of the board, at its discretion to determine whether all or a proportion of any option should be exercisable.  Thus the discretion is expressly imported into the equivalent of the second stage under Rule 4.4.  Even then the range of factors relevant to this determination is limited.
23.	Accordingly, I conclude that on its proper interpretation Rule 4.4 requires a two-stage process, that the absolute discretion referred to does not extend to the second stage but that at that second stage the only relevant consideration is the proportion in which the Performance Condition was satisfied at the appropriate time.   It is an unchallengeable fact that in the case of this option that proportion is 100% not 75% .  Then what is the consequence?  Before Peter Smith J the Company contended that if it was wrong on the two stage point, nevertheless the determination of the proportion under the second stage did admit of factors other than strict proportionality.  The Company did not submit to either the judge or this court that if its submissions on both the two stage point and the factors admissible at the second stage are rejected then the determination of the Remuneration Committee should be set aside as having been made under a mistake of law.
24.	The submission of the Company to both the judge and this court was that on the Claimant’s own case the Remuneration Committee might have determined the proportion at 0% or 100%.   The Company submits that the Claimant cannot take the decision of the Remuneration Committee in his favour at the first stage and assume a decision in its favour at the second.  Rather, it submits, the assumption should be that the determination should be taken to be 0% by analogy with the principle that the party in breach is entitled to have the remedy against him in damages assessed on the basis of the lawful contractual performance most favourable to him.  Accordingly, so the Company contends, the Claimant is not entitled to a declaration such as he seeks entitling him to exercise his option as to 100%.
25.	I do not accept these submissions either.  The judge concluded that the Remuneration Committee’s determination of 75% was wrong in law.  For the reasons already given I consider that he was right to do so.   He was also right to recognise that the decision as to the right proportion was, in principle, for the Remuneration Committee not the court, see Keen v Commerzbank AG [2007] ICR 623.  But he was not obliged to refer the matter back to the Remuneration Committee if there is only one permissible answer to the question.   In such a case to insist on a reference back with further proceedings to set aside any further determination if the second determination is not in the only permissible sense and so on until the right determination is reached would be to insist on unnecessary circuity of action, cf Re Collard’s WT [1961] Ch.293, 300.   I can see no reason why a declaration may not be made to accord with the only correct answer. 
26.	It is true that in paragraph 12 of its Particulars of Claim the Claimant suggested that the determination at the second stage might lead to a proportion of 0% or 100% but I did not understand that submission to be made in relation to the facts of this case.   In this case it is undeniable that the Performance Condition had been fully achieved by 1st September 2003.  Accordingly, on my construction of Rule 4.4 the only permissible proportion was 100%.
27.	Counsel for the Claimant also complained about the second part of the judge’s order.  He submitted that the Remuneration Committee’s conclusion at the first stage, assuming, as I would hold, that a two stage approach is required, was valid and that the judge’s conclusion as to the second stage should not have led to a remission to the Remuneration Committee merely to determine the inevitable.   In addition, as he observed, the judge’s order was to this extent outwith the preliminary issue he was trying.
28.	I do not accept the second submission because the preliminary issue was not confined to questions of construction but also embraced the question whether the Claimant was entitled to the declarations he seeks.  But, for the reasons I have already given I would uphold the first.  It remains to consider the consequence of the takeover of the Company and the delisting of its shares.
29.	In his Particulars of Claim the Claimant sought a declaration that he “is entitled to exercise his option in full”.   He proposes at the right moment to amend his Particulars of Claim to substitute the word ‘was’ for the word ‘is’ and to claim damages as the remedy for the breach of contract already alleged.   He now seeks a declaration in the amended form.   Counsel for the Company contends, for substantially the same reasons I have described in paragraph 24 above, that the court should refuse to make such a declaration because the damages truly due for the breach alleged are nominal and should not be increased by making a declaration in the form now sought.
30.	I do not agree with those submissions either.  If, as I would hold for the reasons already given, the only permissible determination is 100% then the damages claim will be substantial.  The price per share paid by the offeror in the takeover was £10.75 per share.  This may be compared with the option price of 267.5 p.per share.   There is no reason to withhold a declaration as to the true position even though the ultimate remedy will be damages.
31.	For all these reasons, in relation to the preliminary issue, I would set aside Paragraphs 1 and 2 of the judge’s order.  Instead I would make the declaration sought in paragraph 1 of the Particulars of Claim and a further declaration that the Claimant was, prior to the takeover, entitled to exercise his option in full.

The Counterclaim

32.	As I recorded in paragraph 3 above, in December 2004 the Claimant exercised four options to which he was then entitled to the extent permitted by the Remuneration Committee.  Such exercise generated a liability to income tax and primary National Insurance contributions of £197,931.33.  The liability was discharged by the Company between 22nd April and 12th May 2005.  Had the Claimant still been in receipt of employment income from the Company the latter might have reimbursed itself by deduction therefrom.  As it was his employment had ceased so that there was no employment income due to the Claimant from the Company from which any such deduction might have been made.   On 1st June 2005 the Company demanded reimbursement of the tax and National Insurance paid in respect of the exercise of the options by the Claimant after his employment with the Company had ceased.   On the refusal or failure of the Claimant to do so the counterclaim was made.
33.	By its counterclaim the Company seeks reimbursement pursuant to a contract express or implied and as money paid to the use of the Claimant.  Peter Smith J declined to grant summary judgment on the basis of a contract express or implied but granted the application on the third alleged basis.   On this appeal the Claimant contends that the judge was wrong.  The Company does not now seek to rely on the claims based on a contract express or implied.
34.	The principle on which the Company relies is not in dispute.  It is set out in Goff & Jones, “The Law of Restitution” (6th Ed.) paragraph 15-01 in the following terms:
“In general anybody who has under compulsion of law made a payment whereby he has discharged the primary liability of another is entitled to be reimbursed by that other....
The classic statement of the common law principle is to be found in a passage from the first edition of Leake on Contracts, which was quoted by Cockburn CJ in Moule v Garrett in 1872
“Where the plaintiff has been compelled by law to pay, or being compellable by law, has paid money which the defendant  was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability; under such circumstances the defendant is held indebted to the plaintiff in the amount.”

.....

“To succeed in his claim for recoupment the plaintiff must satisfy certain conditions.  He must show:
(1) that he was compelled, or was compellable, by law to make the payment;
(2) that he did not officiously expose himself to the liability to make the payment; and
(3) that his payment discharged a liability of the defendant.”
35.	The application of that principle is exemplified in Brooks Wharf and Bull Wharf Ltd v Goodman Bros [1937]  1 KB 534 where a bonded warehouseman paid the customs duty due by the importer of skins.  He successfully sued the importer for that amount by way of recoupment.  Lord Wright MR stated that (p.544):
“The essence of the rule is that there is a liability for the same debt resting on the plaintiff and the defendant and the plaintiff has been legally compelled to pay,  but the defendant gets the benefit of the payment, because his debt is discharged...”
36.	The Company also relies on a dictum of Lynskey J in Bernard & Shaw Ltd v Shaw [1951] 2 AER 267.   In that case the employer had failed to deduct tax from payment of remuneration to one of its directors.  The Revenue sought to recover the tax from the Company.  The Company in turn sought to recover from the director the amount of tax it should have deducted.  It failed on the grounds that the tax had not in fact been paid by the company to the Revenue.  At page 270 Lynskey J said:

“If the money had in fact been paid by the plaintiffs in discharge of the tax liability, it might well be that there would be a cause of action for money paid by the plaintiffs to the use of the defendant, on the basis that they were compelled by process of law to pay money which was due in respect of his remuneration as to which he would ultimately be liable for taxation.  In those circumstances, the money might be recovered ……”
37.	Peter Smith J concluded that the Claimant had no defence to the counterclaim on the grounds that:
“The [Company] has paid the tax on his behalf which [the Claimant] would otherwise be liable to pay.  He has received that benefit also because he has, when his assessment return is sent in and the tax calculated, been given the benefit of that deduction and payment made by the [Company].  It is only his liability in question.  Merely because the revenue law is designed to ensure that the Revenue obtain early monies from somebody other than the ultimate tax payer as a matter of operation of the recovery of its tax is neither here nor there....The Company is deducting monies which represent his Income Tax liability.”
38.	Counsel for the Claimant submits that the judge was wrong on two grounds.  The first is to the effect that the Company might have put some provision into the 2000 Scheme whereby an option holder is bound to reimburse the Company for any tax and National Insurance contributions it may be obliged to pay in respect of an exercise of an option but did not.   It is suggested that in the absence of an express contractual right to recoupment the law should not impose a parallel liability in restitution.  The second is that the payment of the tax and primary National Insurance Contributions by the Company to the Revenue did not discharge a liability for that amount due by the Claimant to the Revenue.  It is accepted that such payment was for the benefit of the Claimant, but, so it is submitted, that is not enough.
39.	I have no hesitation in rejecting the first objection.  No doubt if there is an express contractual right to recoupment it will be rare that a party will need to rely on a parallel liability imposed by law.  But there is no reason in logic or justice for withholding the restitutionary remedy, which would otherwise lie, merely because the express contractual right had not been imposed.  It is in just those circumstances that the restitutionary remedy is required.
40.	So the validity of the judge’s decision depends on the second point.  We have had the benefit of much fuller argument than he had.  Much of it involves penetrating the thicket of the PAYE system.  But, when one emerges, the overall wood is, in my view, clear and may be summarised in a few sentences.   Thus:
(1) If a share option granted to an employee is exercised, during or after that employment, so as to realise a gain that gain, subject to some permissible deductions, is classified as “employment income of the employee for the relevant tax year”, see s.476(1) and also ss. 471(1) and (2), 476 (2) and 478 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

(2) ITEPA imposes a charge to income tax on all such employment income, see ss. 1(1)(a), 3(1), 6(1), 7(2), (4) and (6)(b) ITEPA.

(3) The liability for that charge is imposed on the employee, see ss. 6(4) and 13(1) and (3) ITEPA.

(4) The tax paid by the employer to the Revenue for which it is liable to account under the relevant PAYE regulations whether it has deducted it from sums due to the employee or not is to be treated “as an amount of tax which....is deducted in respect of the employee’s liability to income tax”, see ss.710(4) and (6) ITEPA.
41.	PAYE in respect of gains arising from the exercise of share options granted to employees was introduced in November 1996 and is applicable to all the tax arising from the exercise of all options with which the counterclaim is concerned.   Counsel for the Claimant relied on various regulations contained in the Income Tax (Pay As You Earn) Regulations 2003/2682.  Thus Regulation 68 imposes the obligation on the employer to deduct and pay to the Revenue sums due in respect of relevant payments to an employee.  Regulation 72 is headed “Recovery from employee of tax not deducted by the employer”.  Its effect is to confer power on the Revenue, in the circumstances specified in the regulation, to exonerate the employer for liability in respect of tax not deducted.  The only effect on the employee is that by regulation 72(6) the amount of tax for which the employer was liable but from which he has been exonerated is not added to the income of the employee in computing his liability for tax on his employment income.   This is achieved through Regulation 185 and ss. 59A and 59B Taxes Management Act 1970.
42.	As is well known the PAYE system is designed to recover tax due on income of an employee from its source, that is the employer, and in anticipation of the liability which arises at the end of the year of assessment in which it is paid.  Accordingly it is hardly surprising that the PAYE regulations do not impose any liability on the employee.  That is done by the primary legislation, namely ITEPA, to which I have referred and the general machinery for collection contained in the Taxes Management Act 1970 (“TMA”), to which I now turn.
43.	Part VI of TMA deals with “Payment of Tax”.   S.59A deals with payments on account of tax.  It imposes the now familiar requirement to pay tax on 31st January and 31st July, the first of which is payable during the relevant year of assessment and the second only three months after its conclusion.  It applies if in the previous year of assessment the tax on the income of the taxpayer from all sources exceeded the amount of tax deducted at source by a fraction to be prescribed by regulations.  Thus a liability is imposed on a taxpayer in respect of his income in excess of that from which tax has been deducted at source.  This section was referred to by Peter Smith J in paragraph 72 of his judgment as reinforcing the position that the Claimant “is liable to pay tax on his own earnings if it is not deducted”.
44.	The matter is put beyond doubt by the provisions of s.59B.  That provides that the amount shown in a taxpayer’s self-assessment under s.9 TMA for any year of assessment less (1) the aggregate of payments on account made by him under s.59A or otherwise in respect of that year and (2) any income tax deducted at source “shall be payable by him as mentioned in subsections (3) or (4) below”.  Those subsections deal with the time of payment by reference to notices given under ss.7 or 8 TMA.  But all of them recognise that the sums “payable by” the taxpayer are recoverable by the normal assessment procedures.
45.	Counsel for the Claimant seeks to avoid what appear to me to be the obvious consequences of the legislative provisions to which I have referred on the grounds that s.59B is concerned with the mechanics of calculation of the liability, not its imposition.  In one sense, of course, it is.  It provides the mechanics for recovering the sums due in respect of the liabilities imposed by ITEPA in the provisions to which I have already referred.  What it does not show is that an employee is not liable for tax on his employment income, including gains arising from the exercise of share options.
46.	In my view the judge was right in the conclusion to which he came in relation to income tax.  It was common ground that the system of recovery of primary National Insurance contributions was to the like effect.  Accordingly I can deal with it more shortly.
47.	The relevant legislation concerning National Insurance is contained in Social Security Contributions and Benefits Act 1992.  By s.6 class 1 contributions are  divided into primary and secondary contributions.  This case concerns primary contributions.  S.6(4)(a) provides that payment of “the primary contribution shall be the liability of the earner”.  Sch.1 para 3(1) provides that an employer “is liable in the first instance” to pay the primary contribution “on behalf of and to the exclusion of the earner”.   Counsel for the Company contends that that provision is conclusive of this dispute.  He submits that by force of the regulation the payment made discharged the liability of the Claimant.
48.	This is disputed by Counsel for the Claimant.  He relies on Sch.1 para 3(3).  That provides that:
“A secondary contributor shall be entitled...to recover from an earner the amount of any primary Class 1 contributions attributable to s.8(1)(a) paid or to be paid by him on behalf of the earner; and, subject to sub-paragraphs (3A) to (5) below but notwithstanding any other provision in any enactment, regulations under this sub-paragraph shall provide for recovery to be made by deduction from the earner’s earnings, and for it not to be made in any other way.”

Counsel for the Claimant relies on the words “not to be made in any other way”.  He suggests that that provision excludes the remedy on which the Company relies.  I do not agree.  Those words restrict and limit what the regulations may provide for, they do not exclude the primary liability declared by s.6(4)(a) or any restitutionary remedy outside the Act or the regulations.   In any event the restriction does not apply to contributions paid in respect of non-monetary earnings (which includes share option gains) received after the cessation of the employment, see Sch.1 para 3(3B) and (5). 
49.	Counsel for the Claimant also relies on the provisions of Sch.1 para 3(3B) and (5) as excluding any remedy of the Company against the Claimant other than as may be prescribed by regulations.  He took us through the Social Security (Contributions) Regulations 2001/1004, in particular regulations 67, 68, 69 and Sch 5 para 1 to demonstrate that the only provision there made for recovery of primary contributions paid by the employer from the employee requires the agreement of the employed earner, see Sch.5 para (1)(g).  But those provisions cannot avail him either.  Sch.5 relates to a transfer to the employee under Sch.1 para 3B of the liability of the employer for secondary contributions.
50.	As in the case of income tax, so, in my view, in the case of primary National Insurance contributions payable by the earner when one stands back from the detail of the legislative provisions the relevant outline is clear.  Thus the earner is liable for the primary contribution (s.6(4)(a)).  The primary method of recovery is through the employer (Sch.1 para 3(1)).  Payments made by the employer are made “on behalf of the earner”.  If, for any reason, the remedy of recoupment by deduction from earnings is unavailable to the employer there is nothing in the relevant primary or secondary legislation to exclude a restitutionary remedy.
51.	In my view it is clear that the payment by the Company of the sum of £197,931.33 claimed in the counterclaim was made by the Company to the Revenue under compulsion of law on behalf of and to that extent in discharge of the liability of the Claimant to the Revenue for the like amounts.  The fact that the primary means for enforcing the liability of the employee is not by action or assessment cannot avail the Claimant because, if all else fails, he can be made to pay.   I agree with Peter Smith J that the Claimant has no real prospect of success in defending the counterclaim.  I would dismiss the appeal against that part of his order.

Summary of Conclusions

52.	I summarise my conclusions as follows:
(1) for the reasons given in paragraphs 20 to 31 above I would set aside paragraphs 1 and 2 of his order and make the declarations indicated in paragraph 31 above;
(2) for the reasons given in paragraphs 39 to 51 above I would dismiss the appeal against paragraph 3 of his order.

Lord Justice May: 
53.	I agree that the appeal in relation to the preliminary issue should succeed to the extent indicated in paragraph 31 of the Chancellor’s judgment and for the reasons he gives; and that the appeal relating to the counterclaim (the income tax and National Insurance contributions issue) should be dismissed again for the reasons given by the Chancellor.  I gratefully adopt his account of the facts and circumstances of the appeal.
54.	As to the share option issue, I agree that Peter Smith J correctly construed paragraph 4.4 of the 2000 Scheme.  The second sentence of paragraph 4.4 is explicitly conditional on the first.  If the Remuneration Committee determine that the option will be exercisable, the second sentence provides for an objectively determinable proportion of the shares for which the option may be exercised depending on the extent to which the Performance Condition was achieved.  The Performance Condition was in fact achieved in full, and so, if the Remuneration Committee determined that the option was to be exercisable, the proportion in this case must be 100%.  The first sentence gave the Remuneration Committee an absolute discretion, they having considered in particular the extent to which the Performance Condition had been achieved.  They could, I suppose, have exercised the discretion as they saw fit, provided that they acted rationally.  They did in fact exercise the discretion to determine that the option would be exercisable, and in the present proceedings they adhere to the decision which they made.  In these circumstances, to contend even theoretically that they might have decided that the option should not be exercisable would not be to contend for a putatively rational determination on the facts as they are.  There is accordingly, on the proper construction of paragraph 4.4, only one correct answer, as the Chancellor has said.
55.	I do not wish to say anything further on the income tax and National Insurance contribution issue.
Lord Justice Lloyd:
56.	I agree that the judge's reading of clause 4.4 was correct, and that the only error in his judgment was that he should have made the declarations sought in the Particulars of Claim.  For the reasons given in the judgments of the Chancellor and May LJ, the appeal should be allowed with the result stated in paragraph 31.  I also agree, for the reasons given in the Chancellor's judgment, that the judge was right on the Counterclaim, and that the cross-appeal must be dismissed.