LORD JUSTICE HUTCHISON: This is an appeal from a judgment of Sir Michael Davies, sitting as a Deputy High Court Judge, which he gave on 26 May 1994, whereby he decided an appeal from Master Tennant on an issue falling for determination under Order 14A. This issue was whether the Plaintiff, Mr. Abrahams, who had brought an action against his former employers, Performing Right Society Limited, was under a duty to mitigate. That issue arose by virtue of a plea in paragraph 8 of the Defence. Both the Master and the Judge held that there was no duty to mitigate and struck out so much of the Defence as asserted the contrary. The question on this appeal is whether they were right.
The facts were summarised with exemplary clarity by the Judge. He said, and the notice of appeal and written skeleton arguments before us assert, that the facts are not in dispute. Certainly both parties were and remain willing to proceed on that basis, and it is undoubtedly true that there are very many facts which are not in dispute. I mention them as briefly as I can.
1. On 1 April 1987 the Plaintiff, who had been employed by the Defendant since 1980, entered into a new five year contract. During the currency of that contract new terms were by agreement incorporated into it dealing with termination and notice. It is clear from contemporary documents that the stimulus for the new arrangements (which involved other executives as well) was the Defendant's realisation that the effect of provisions of the Employment Protection (Consolidation) Act 1978 was that on the expiry of a fixed term contract an employee whose contract was not renewed could advance a claim for unfair dismissal. The new provision in the Plaintiff's contract is, the parties agree, accurately embodied in the following documents, the material parts of which I cite. The first document is an extract from the Staff Committee Minutes of 11 January 1989.
"Mr. Freegard referred to the difficulties which had arisen in the negotiations with Mr. Billingham preceding his appointment as Director of Membership Services regarding the concept of the fixed-term contracts.......Mr. Freegard recalled that, following telephone consultations with those members of the Committee who had interviewed Mr. Billingham, his appointment had been made not on the basis of a fixed-term contract but on the footing that two years' notice of termination (or salary in lieu) would have to be given by the Society (except in the case of gross misconduct) and this formula had been applied, therefore, also to the appointment of Mr. Axon as Director of Administration. In the case of the other three top managers, there was no such provision in their contracts (which were for a fixed term), although in Mr. Freegard's case there was provision at the mid-term review (scheduled to take place two years before the end of the fixed term) for extension of that term to be considered.
In these circumstances the Committee decided that the two years' notice provisions in Mr. Axon's and Mr. Billingham's letters of appointment should, with immediate effect, apply also to the three other top management service agreements."
The second document is a letter from the Defendant's chief executive to the Plaintiff dated 28 March 1989 in which, after drawing attention to the minute just quoted, the writer continued:
"My understanding of the effect of the Committee's decision as regards your own position is that in the event of termination of your employment by the Society, either at the end of a fixed term contract period or at any time during the final two years of such period, you would be entitled, other than in the case of dismissal for gross misconduct, to a period of notice of two years or an equivalent payment in lieu; however, the period of notice that you would be required to give in the event of your terminating your employment either at the end of any fixed term contract or at any time within the previous twelve months, remains at one year."
The Plaintiff accepted the variation in his contract by signing a copy "agreed".
2. The 5 years under the agreement expired on 31 March 1992 and, early in that year, negotiations took place for a renewal. Terms for a new fixed term contract could not, however, be agreed and the parties reached a form of agreement the effect and interpretation of which has given rise to the controversy at the heart of this case. To explain what happened I begin by quoting a passage from the judgment of Sir Michael Davies:
"At a staff committee meeting held on 4 March 1992 the Plaintiff made a statement which he had put into writing.
It included the following:
'.....As you are all aware, the decision that has emerged is non-renewal of my contract but with an indication of my readiness to continue in post for 2 years from its expiry at the end of this month, i.e. the same period of notice as PRS has contracted to give me.....
.....As I have indicated, it is my intention to serve out the 2 years notice and I wish to do so with as much as possible of my previous commitment to the organisation. Hence the importance that I attach to clearing the air.....'
There followed a letter from Mr. Freegard to the Plaintiff of 9 March 1992 and a 'Staff Announcement' signed by Mr. Freegard and the Plaintiff 'issued on 12 March 1992.
The letter stated:
'Our meeting began by your confirming to me what you had already indicated to me in January, namely, that you did not wish to negotiate a new contract but wished to continue under the terms of your existing contract for a further two years.'
The Signed 'Staff Announcement' is the second crucial document and the relevant words are:
'We are sorry to announce that discussions between the Society and Robert Abrahams have not resulted in agreement on the terms of a fresh service agreement to replace the existing one, which expires on 31st March 1992.
It has, however, been mutually agreed that Mr. Abrahams will remain in post as Director of External Affairs/Deputy Chief Executive for a further two years until 31st March 1994 under the terms of his existing contract.'
It is agreed that this constituted a new agreement between the parties; what is in dispute is its construction and effect, particularly having regard to the last quoted words viz. 'under the terms of his existing contract'."
The last observation by the learned Judge is essentially correct - the parties did and do agree that the Staff Announcement evidenced the new agreement.
The next material occurrence was that on 14 October 1992, the Defendant company summarily terminated the Plaintiff's employment. It has at all times accepted - perhaps I should say asserted - that in doing so it was in breach of contract.
The interlocutory history, including the nature of the issues before the Master and the last-minute amendment of the Defence at the first, and by reason of that amendment abortive, hearing before the judge in chambers, is set out in the judgment of Sir Michael Davies. I do not propose, despite the importance which both parties in their skeleton arguments attached to the fact that the Statement of Claim and the Defence were amended, to rehearse that history because it seems to me that, on a matter of construction and/or of law, it is not helpful to make the point that what is finally alleged did not at first occur to the parties or their advisers. It is to the final version of the pleadings that I make reference, and I shall cite the material paragraphs.
The Amended Statement of Claim, having pleaded the March 1989 variation, goes on to assert:
"4. In about March 1992, as evidenced by a Staff Announcement issued by the Defendant on 12th March 1992, it was agreed that the Plaintiff would remain in the Defendant's employment for two years until 31st March 1994 under the terms of his existing Contract. Accordingly such employment was agreed to be subject to the terms of the Contract of Employment (as varied).
7. In the premises, on 14th October 1992, the Defendant terminated the Plaintiff's employment without notice and is liable to pay the Plaintiff in lieu of such notice as follows...."
There then follows a computation:
| "Basic Salary |
£96,005.00 pa |
| [Plus certain ancillary annual payments amounting in all to |
20,191.01 |
| |
116,196.00" |
There were then calculations, one on the basis of:
| "x 24 months (being two years to 14th October 1994) |
232,292,00 |
Alternatively
| x 17 months 17 days (being to 31st March 1994) |
172,208.43 |
.....
The Plaintiff will give credit for the sum of £54,061.24 paid by the Defendant to the Plaintiff after 14th October 1992."
The material part of the Amended Defence reads:
"5. Paragraph 4 is admitted save that the said agreement created a contract for a fixed term to expire by the effluxion of time on 31st march 1994 in substitution for the entitlement on the part of:
(a) the Defendant to terminate on notice;
(b) the Plaintiff to receive such notice.
8. It is further admitted that subject to:-
.....
(2) the Plaintiff's duty to mitigate his loss as to which he is put to strict proof of all his attempts to find alternative employment.
The Plaintiff is entitled to damages representing the unexpired balance of the said fixed term, alternatively if, which is denied, there is no fixed term, damages representing the failure on the part of the Defendant to give notice in accordance with the Contract of Employment."
The important thing to note about these passages in the pleadings is that the Defence contains an unequivocal admission that the critical agreement - that at the beginning of March 1992 - is evidenced by the Staff Announcement of 12 March. In paragraph 5 of the Amended Defence the only qualification to the admission of paragraph 4 of the amended Statement of Claim is as to interpretation, not content, of the March 1992 agreement. No reference is made in the pleadings to the Plaintiff's statement of 4 March 1992, nor is it asserted that the terms of the agreement include matters orally agreed which are not evidenced by the Staff Announcement of 12 March. In the course of the hearing of this appeal we invited counsel for the Defendant to consider whether they wished to apply to re-amend this paragraph but, having considered the matter, they indicated that they did not.
The learned Judge held that the effect of the 1992 agreement was that the Plaintiff, whose employment had been terminated without notice, was entitled to payment in lieu of notice as a contractual debt and was not obliged to give credit for any actual or imputed earnings - that is to say was not under a duty to mitigate.
The Defendant's notice of appeal, not unhelpfully, contains much background and argument. However, the grounds relied on can be gathered from the following extracts:
".....the grounds of appeal are:-
(1) The learned Judge erred in law in failing to hold that the Plaintiff was under a duty to mitigate his loss, following his (admitted) wrongful dismissal on 14th October 1992.
(2) On its proper construction the agreement between the parties reached in about March 1992 contained no provision for payment in lieu of notice."
There is then a lengthy recitation under the heading "Background" in the course of which the Defendant, having (consistently with the pleadings) accepted that there was in March 1992 "an agreement that the Plaintiff would remain in post for a further two years until the end of March 1994 under the terms of his existing agreement [see the Staff Announcement]", goes on to recite, with an emphasis indicating reliance upon them, portions of the Plaintiff's statement of 4 March.
On the last two pages of the notice of appeal the grounds are elaborated in a number of paragraphs, from which it is clear that the Defendant is advancing three main arguments, namely
1) The true effect of the 1992 agreement was that, it being recognised that agreement on a new fixed term contract was impossible, the Plaintiff would in effect work out his period of notice - i.e. the two years from 31 March 1992 to which he would have been entitled under the 1989 variation if by 31 March he had not already been given notice. During those two years neither he nor his employers were entitled to give contractual notice, nor was there any contractual entitlement to payment in lieu of notice. However, in other respects the terms which under the five year contract governed his employment continued to apply.
(2) If, contrary to the first argument, the 1992 agreement did contain terms as to notice and payment in lieu, the Defendant's liability is to be assessed on the basis (a) that they could have given two years' notice on 14 October 1992 - i.e. to expire on 13 October 1994, and (b) that the Plaintiff was under a duty to mitigate his loss.
(3) Finally, it is said that, even if the Plaintiff's entitlement to compensation falls to be assessed only on the basis of payment in lieu of notice, that is not in law a contractual debt and the duty to mitigate applies.
These contentions have been developed in counsel for the Appellant's helpful skeleton argument and orally before us. They have been reformulated in the form of two issues. Counsel describes the first as their primary issue. It is whether the contract contained any provision for termination before 31 March 1994 or was simply a fixed term contract expiring on that date. The secondary issue arises only if the Defendant's arguments on the primary issue are rejected. It is (a) whether the Plaintiff's entitlement is to payment in lieu of notice for the period from 14 October 1992 to 31 March 1994 or for a full two years from 14 October 1992: and (b) whether in either event he is under a duty to mitigate. (I have used the convenient shorthand phrase "duty to mitigate" though I recognise, as has often been pointed out, that there is no duty and that the true principle is that, in certain circumstances, the Plaintiff is obliged to give credit for actual or imputed earnings).
The Plaintiff's contentions are, in essence, very simple. On the first issue it is argued that the words "under the terms of your existing contract" must involve that the provisions introduced by the letter of 28 March 1989 which were part of the existing contract continued to govern the contract. Accordingly, the notice and payment in lieu provisions continued in full effect. The Defendant was entitled to terminate the Plaintiff's employment either on two years' notice or summarily on paying two years' salary in lieu of notice. Accordingly, having (without breach of contract) elected to terminate summarily, the Defendant's breach of contract lies in not paying the two years' salary in lieu.
On the second point the Plaintiff's case is that he, having a clear contractual right to payment of salary in lieu of notice, is not and cannot be obliged to give credit for actual or imputed earnings. His claim is not one for damages for wrongful dismissal but for a sum contractually due, so no question of mitigation arises. Even if, as counsel for the Defendant contends, the provision for payment in lieu is properly categorised as an agreement for liquidated damages, the duty to mitigate does not arise.
I now turn to consider the arguments that were addressed to us in a little more detail, beginning with the first issue, which is a matter of construction of the contract on which neither side really relied on any authority.
Mr. Ian Hunter QC for the Defendant submits, rightly, that the agreement of March 1992 evidenced by the document of 12 March must be construed in its context and having regard to the factual matrix. The following considerations are, he suggests, relevant:
(1) Whatever may be the true effect of the 28 March 1989 variation on the duration of the April 1987 five year agreement, it is clear that in the discussions in March 1992 the parties were treating that five year agreement as about to end and negotiating for a further such agreement. Those negotiations came to nothing.
(2) The Plaintiff's note of 4 March is an important document and shows that, once it had been recognised that renewal of contract negotiations were not going to bear fruit, what the parties discussed and reached agreement about was the way in which they should deal with the two year notice period. The inference is that their discussions proceeded on the basis that both sides were accepting that such notice could and, some fresh agreement apart, would be given at the end of the fixed term. The Plaintiff's note shows that his understanding of what had been agreed was that he would work out, not recover payment in lieu in respect of, that period. Particular emphasis is placed on
".....my readiness to continue in post for two years from.....the end of the month, i.e. the same period of notice as PRS has contracted to give me".
and on
".....it is my intention to serve out the two years' notice".
(3) In paragraph 9 of his affidavit in these proceedings the Plaintiff says:
"For reasons which I need not go into, no agreement could be reached on [renewal of my employment contract for a further five years].....but I was willing to continue in my post for two years from 1st April 1992 (i.e. after the expiry of the current fixed term contract)".
These statements show, Mr. Hunter argues, that the parties were agreeing a fixed period of employment for the two years of the notice period and they were plainly contemplating that there should be no right in the Defendants to terminate during that time. Alternatively, he suggests that the position could be put thus - that they were proceeding on the basis that the notice could be taken as having been given.
Accordingly, Mr. Hunter submits, when the words of the Staff Announcement of 12 March are construed in their proper context, it is clear that they bear the meaning he contends for. He points in particular to the words
".....will remain in post.....for a further two years until 31 March 1994."
These words, he suggests, are absolutely consistent with what has gone before, and indicate a contract which will come to an end at that date - a contract in effect spanning the notice period. As to
"under the terms of your existing contract"
Mr. Hunter submits that, read in context, they can only mean the terms other than the notice/payment in lieu provision, which the parties cannot have contemplated bringing into this short fixed term extension, the very basis of which was to deal with the notice period.
Mr. Hunter concluded by listing four reasons why he said the Plaintiff's construction was wrong:
(1) It was inconsistent with "until 31st March 1994".
(2) Given the assumption (whether right or wrong) that the existing contract was going to end on 31 March 1992, the language used in the 12 March document shows that the parties were treating the notice obligations as having been performed.
(3) It stands common sense on its head to think that in the circumstances the parties were subjecting the arrangements recorded in this document to an obligation on the Defendant's part to give two years' notice during that two year period. In particular it would be absurd if in February 1994 the Plaintiff was dismissed and was entitled to be paid two years in lieu.
(4) The other documents show that that is not how the situation was perceived by either party.
Mr. Nigel Davis QC began by emphasising the Plaintiff's reliance on the pleadings. In the circumstances he was entitled to do this, and was in my judgment right to point out that paragraph 5 of the Defence admits that the contract is as pleaded in paragraph 4 of the Statement of Claim. The statement of 4 March is not a contractual document; there is no suggestion of further oral terms having been agreed, and no implied term is alleged. He cautions us, properly, against departing from the pleaded case or importing into it as though they were evidence such submissions as that everyone was proceeding as though a two year notice had been given. He made it clear that in saying this he was not disputing the obviously correct contention that the contract fell to be interpreted in its factual matrix, so far as that appears from the material before the Judge.
Mr. Davis argues that the Judge was entirely correct when, at the end of his judgment, he said:
"The 1992 agreement did not dispose of the rights of the Plaintiff under the 1989 contract."
The Judge was right, he submits, for the very simple reason that that is what the contract says - "under the terms of his existing contract". There is nothing to indicate that the notice and payment in lieu provisions introduced in 1987 were superseded by the 1992 agreement. On the contrary, the letter from Mr. Freegard of 9 March indicates that the Plaintiff wished to continue "under the terms of your existing contract for a further two years". The Plaintiff was plainly intending to continue on the basis that he would be no worse off than under his existing contract, and the Appellant's argument gives no proper effect to the crucial words.
In this connection Mr. Davis points out that if the Defendant is right Mr. Abrahams would, for no countervailing advantage, have given up a most valuable right - namely the right to be paid in full for two years should the Defendant not give him notice. This is, he argues, a much stranger and less appealing consequence than that relied on by Mr. Hunter when making the point already noted - namely the oddity of the Plaintiff in February 1994 being entitled to notice of two years (or payment in lieu). Moreover, the latter is a right which the Defendant could have forestalled by serving notice at the beginning of the two year period.
I have already, by one or two observations in the course of this judgment, indicated the feeling of unease that I expressed during the hearing of this appeal as to the appropriateness of the Order 14A procedure for determining the question at issue - a question, it is fair to say, very different and much more complex than that arising on the pleadings at the time that procedure was embarked upon. However, the parties have chosen the procedure and reaffirmed their adherence to it during the hearing, and it falls to us to determine the matters in issue.
The conclusion I have reached is that Mr. Davis's arguments are correct, as was the learned Judge, and the first issue must be determined in favour of the Plaintiff. Construing the contract evidenced in the Staff Announcement of 12 March in its context as established by the documents in evidence before us, I can find no basis for saying that the notice and payment in lieu provisions are excluded. It is not permissible to approach this case otherwise than in accordance with the pleadings which, as I have already said, do not assert that there were other terms, express or implied, in the contract. The words used by the parties are clear, and their plain meaning accords with the Plaintiff's interpretation. The point that, on the Defendant's construction, the Plaintiff would have lost a valuable right, while not of course decisive, is certainly a further factor on which he can rely. The assertion that the continued availability of the notice requirement is in the circumstances absurd is not in my judgment valid. The Defendant could easily protect itself against unwanted liability by serving a notice, and the Plaintiff had good reason for wishing to retain the payment in lieu entitlement should the Defendant elect not to serve notice. In short, I can find no basis for accepting the Defendant's argument on this issue.
The second issue
This occupied most of the time taken by the argument, and a considerable number of authorities were cited. However,for reasons which I shall explain it is not necessary to review them all in detail.
The argument for the Defendant is that the termination of the Plaintiff's employment was wrongful, which entitles him not to payment in lieu of notice but to damages for wrongful dismissal - a claim which, in accordance with familiar principles, is subject to the duty to mitigate.
For the Plaintiff, however, Mr. Davis argues that the termination of the contract was lawful, and that by it the Defendant was electing, as it was entitled to do, between the options which the contract give it to serve notice or pay money in lieu. Accordingly, the Plaintiff became entitled to receive the stipulated payment in lieu of notice. That payment is a contractual right, not liquidated damages, and is not subject to the duty to mitigate. Furthermore, even if, as Mr. Hunter argues, the payment in lieu is liquidated damages, there is still no duty to mitigate.
Mr. Hunter began his argument on this issue by submitting that the choice between the available options was the Defendant's. This is plainly right and, as I have said, is not disputed. He argued, however, that it by no means follows that, in terminating summarily, the Defendant was electing to pay money in lieu of notice. For that, he submitted, it would be necessary for there to have been tender of the money contemporaneously or at least an assurance of willingness to pay it. In the circumstances of this case, he contended, the only proper inference was that the Defendant was electing to break the contract - i.e. was not electing between two modes of performance but instead intimating that he would perform neither. It follows inevitably that the Plaintiff's claim is for damages and that the ordinary rules as to mitigation apply.
Mr. Davis's answer to this argument is that it is absurd to treat the Defendant's termination otherwise than as an election not to serve notice. Merely because it has not coupled it with a tender of payment or an affirmation of willingness to pay does not mean that it is repudiating all its contractual obligations. The only sensible inference is that it is doing no more than this action plainly involves - deciding not to serve notice. The Plaintiff, in reliance on that election, can claim the alternative contractual remedy available to him.
In my judgment Mr. Davis is plainly right about this and I conclude that the termination of the contract was lawful, and left the Plaintiff with a right to payment in lieu which, if the Defendant did not pay, he could enforce (as he seeks to do) by proceedings.
The next questions are - what is the nature of the claim for money in lieu in this case? Is it a claim for a sum due under the contract? Is it a claim for liquidated damages? Does it make any difference so far as mitigation is concerned?
It is conceded by Mr. Hunter that, if the claim is for a sum due under the contract, there is no duty to mitigate. However, he cites a number of cases which he suggests establish that the true analysis is that a sum agreed to be paid in lieu of notice amounts to liquidated damages. They are all of some antiquity and represent one side of what, in Freedland's "The Contract of Employment" (1976), is presented as a divergence of view. The cases are Goodman v Pocock, reported in the Queens Bench reports for 1850 and to be found at 117 ER 577, Fewings v Tisdal 154 ER 125 and French v Brooks 91 ER 1316.
These are all cases which, as I read them, turned largely on the form of action pleaded; but they certainly provide support for the proposition for which Mr. Hunter contends. They are to be contrasted with a case on which Mr. Davis relies, East Anglian Railways Co v Lythgoe (1851) 10 CB 726, where a Court of Appeal constituted under 13 and 14 Vict. C61 section 14, and consisting of two puisne judges sitting on County Court Appeals in the vacation, reached the opposite conclusion. Mr. Hunter cited another decision of that somewhat unusual court - Cowley v Furnell 138 er 915 - to reinforce his contention that the authority of Lythgoe's case was not very great. It is certainly not binding on us.
The reason I think it unnecessary to examine these cases or the conflict which they embody further, is that there are modern authorities relied on by Mr. Davis which in my view we should treat as determining the point.
In Rex Stewart Jeffries Parker Ginsberg Limited v Parker [1988] INLR 483, it was held by the Court of Appeal that where a contract of employment provided that the employee's contract could be determined by 6 months' notice or the payment of 6 months' salary in lieu, the Judge had been correct to hold that the contract offered alternative methods of lawful determination, and the Defendant's argument that the money in lieu was damages for breach of contract was erroneous.
In Delaney v Staples [1992] 1 AC 687, the issue was whether a payment in lieu was "wages" within section 7 of the Wages Act 1986. It was held that it was not. In the course of his speech, with which all their Lordships agreed, Lord Browne-Wilkinson at page 692 analysed the nature of wages and payments in lieu, and said this:
"The phrase 'payment in lieu of notice' is not a term of art. It is commonly used to describe many types of payment the legal analysis of which differs. Without attempting to give an exhaustive list, the following are the principal categories.
(1) An employer gives proper notice of termination to his employee, tells the employee that he need not work until the termination date and gives him the wages attributable to the notice period in a lump sum. In this case commonly called 'garden leave') there is no breach of contract by the employer. The employment continues until the expiry of the notice: the lump sum payment is simply advance payment of wages.
(2) The contract of employment provides expressly that the employment may be terminated either by notice or, on payment of a sum in lieu of notice, summarily. In such a case if the employer summarily dismisses the employee he is not in breach of contract provided that he makes the payment in lieu. But the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work to be done under the contract of employment.
(3) At the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on payment of a sum in lieu of notice. Again, the employer is not in breach of contract by dismissing summarily and the payment in lieu is not strictly wages since it is not remuneration for work done during the continuance of the employment.
(4) Without the agreement of the employee, the employer summarily dismisses the employee and tenders a payment in lieu of proper notice. This is by far the most common type of payment in lieu and the present case falls into this category. The employer is in breach of contract by dismissing the employee without proper notice. However, the summary dismissal is effective to put an end to the employment relationship, whether or not it unilaterally discharges the contract of employment. Since the employment relationship has ended no further services are to be rendered by the employee under the contract. It follows that the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work done under the contract of employment.
The nature of a payment in lieu falling within the fourth category has been analysed as a payment by the employer on account of the employee's claim for damages for breach of contract. In Gothard v Mirror Group Newspapers Ltd. [1988] ICR 729, 733, Lord Donaldson of Lymington MR stated the position to be as follows:
'If a man is dismissed without notice, but with money in lieu, what he receives is, as a matter of law, payment which falls to be set against, and will usually be designated by the employer to extinguish, any claim for damages for breach of contract, i.e. wrongful dismissal. during the period to which the money in lieu relates he is not employed by his employer.'
In my view that statement is the only possible legal analysis of a payment in lieu of the fourth category. But it is not, and was not meant to be, an analysis of a payment in lieu of the first three categories, in none of which is the dismissal a breach of contract by the employer. In the first three categories, the employee is entitled to the payment in lieu not as damages for breach of contract but under a contractual obligation on the employer to make the payment."
Category 2 is this case, and, while the observations are, in the context of the present case, obiter, they carry great weight and I unhesitatingly follow them.
I therefore conclude that the provision in the contract for payment in lieu gave rise to a contractual entitlement.
As I have already said, Mr. Hunter accepts that, if this conclusion be correct, the argument on mitigation is not available to him. My view, however, is that while of course this concession is correct, Mr. Hunter has the further difficulty that, even were he right in his contention that the payment in lieu is to be regarded as liquidated damages, there would be no duty to the Plaintiff to mitigate. This was Mr. Davis's submission and I shall explain briefly why I regard it as correct. I should begin by saying that neither counsel cited any authority to us - they argued from principle. Mr. Hunter's contention was that all the cases we have examined had made a distinction between debt and damages and there was no warrant for saying that the duty to mitigate applied only to unliquidated claims. Perhaps impressed by the force of the arguments of Mr. Davis which I about to rehearse, Mr. Hunter was finally driven to assert that in any event the present was not a liquidated damages clause at all - it merely defined the outer measure of the damages recoverable. I cannot accept this analysis.
Mr. Davis submitted that to permit a party in breach who had agreed a pre-estimate of the damages that should be paid if he broke his contract to seek to diminish the agreed sum by argument as to mitigation, would be contrary to the whole principle underlying the concept of liquidated damages. He referred to the following passage in the 15th edition of McGregor on Damages. I quote from paragraphs 445 and 445A.
"Effect of holding a stipulated sum to be liquidated damages or a penalty
445 (a) Sum to be liquidated damages. The courts implement the intention of the parties in the case of liquidated damages by holding the plaintiff entitled to recover the stipulated sum on breach, without requiring proof of the actual damage and irrespective of the amount, if provable, of the actual damage.
445A In most cases where the plaintiff has recovered his liquidated damages the stipulated sum has been greater than the actual, or at least the provable, damage. However, just as this cannot diminish his damages, so he cannot increase them by ignoring the liquidated damages clause in the rare case where the actual damages is demonstrably greater than the stipulated sum, a situation most likely to arise where one sum is stipulated to be paid on a number of varying, yet uncertain, breaches and the most serious breach is the one which occurs....."
Mr. Davis submits, and I accept, that this formulation shows that the concept of a duty to mitigate is entirely foreign to a liquidated damage claim, the whole object of which I take to be to fix a certain sum to be paid irrespective of the actual damage suffered by reason of the breach. How could it be right to hold a plaintiff, who can show that his actual damage is greater, to the stipulated sum, but permit an employer who can show that it is less to take advantage of that fact? Why should such an obviously unfair and inconsistent approach be approved when it is open to the additional criticism that to allow it exposes the parties to the risk, expense and uncertainty of litigation the avoidance of which is to be presumed to be one of the principal reasons for their stipulating for liquidated damages?
Further support for Mr. Davis's argument is to be found in a passage, which he relied on in a slightly different context, from the 27th edition of Chitty on Contracts, Vol 1 paragraph 26-061:
"Penalty or liquidated damages
Damages fixed by the parties. Where the parties to a contract agree that, in the event of a breach the contract breaker shall pay to the other a specified sum of money, the sum fixed may be classified by the courts either as a penalty (which is irrecoverable) or as liquidated damages (which are recoverable). The clause is enforceable if it does not exceed a genuine attempt to estimate in advance the loss which the plaintiff would be likely to suffer from a breach of the obligation in question: it is enforceable irrespective of the loss actually suffered. The purpose of the parties in fixing a sum is to facilitate recovery of damages without the difficulty and expense of proving actual damage; or to avoid the risk of under-compensation, where the rules on remoteness of damage might not cover consequential, indirect or idiosyncratic loss; or to give the promisee an assurance that he may safely rely on the fulfilment of the promise."
It seems to me that, as a matter of principle, where there is a liquidated damage clause which is valid - i.e. cannot impugned as a penalty - there is no room for arguments on mitigation of damages - a concept relevant only in cases where damages are at large. I am conscious of the fact that this point, which had not emerged before the judge, has not been fully researched or argued by counsel and there may be authorities of which we are unaware. However, given that I am expressing a view on a point which only arises if I am wrong in my conclusion that the sum in lieu was due as a debt under the contract (and which therefore is strictly unnecessary for our decision) I am content to decide it as a matter of principle on the basis of the arguments we have heard.
I should in conclusion mention that we were, on the second issue, referred by Mr. Hunter to a number of well-known authorities and to passages in Halsbury's Laws and Chitty on Contracts which I have not in this judgment felt it necessary to cite, because it was clear that they dealt with principles as to which there was no disagreement between the parties - for example, that an employee who is wrongfully dismissed must in practice (whatever may be the theoretical analysis of his rights as an innocent party) accept that the relationship is over and sue for damages; that the claim sounds in damages and not for wages due; and that ordinarily the employee is under a duty to mitigate and cannot recover lost wages which he has or could reasonably have made good by obtaining other employment. There are also authorities cited by Mr. Davis to which I have not felt it necessary to refer.
I can summarise my conclusions on the second issue by saying that here too the learned Judge in my judgment reached the right conclusion. I consider that the Plaintiff's claim is for a contractual sum due and that therefore no question of mitigation arises, and that if, as the Defendant contends, it is for liquidated damages, the same conclusion follows. I would dismiss the appeal
LORD JUSTICE ALDOUS: I also would dismiss the appeal.
Appeal dismissed with costs. Leave to appeal to the House of Lords refused.
