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IN THE SUPREME COURT OF JUDICATURE EATRI 97/0283/B

Royal Courts of Justice

Strand

London WC2

Thursday, 4 December 1997

B e f o r e:

LORD JUSTICE BELDAM

LORD JUSTICE POTTER

SIR JOHN BALCOMBE

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DIGITAL EQUIPMENT CO LTD

APPELLANT

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STEPHEN M CLEMENTS

RESPONDENT

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(Transcript of the handed down judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR D RICHARDSON (Instructed by Digital Equipment Co Ltd, Reading TG2 OTE) appeared on behalf of the Appellant

MR D CHRISTIE and MR J MAUGHAM appeared on behalf of the Respondent Pro Bono

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

Thursday, 4 December 1997

J U D G M E N T

LORD JUSTICE BELDAM: The appellant, Digital Equipment Ltd. (Digital) appeals from the order of the Employment Appeal Tribunal of 5th December 1996 dismissing its appeal from the decision of the Industrial Tribunal of 6th September 1995 and confirming a compensatory award of the maximum sum of £11,000 made to the respondent, Mr Clements, for unfair dismissal.

Mr Clements joined Digital as a project engineer on 21st September 1987. By 1992 he had been promoted to project manager and was working within the Public Administration Group. He was one of fifteen people in a team managed by Ms Williams. Nine of the fifteen members of the team were project managers whose job was not interchangeable with the other six. In January 1994 it became clear to Digital that its business no longer required nine project managers and that it would need to make two redundant. Mr Clements was one of the two selected for redundancy. His employment was terminated by reason of redundancy on 31st March 1994. He was paid 2 months and 3 weeks gross pay in lieu of notice, amounting to £6,326.92. In addition he received a redundancy payment of £22,325. At a hearing before the Industrial Tribunal (chairman Mr D. Teagle) held at Reading on 23rd January 1995 the Tribunal determined that although Mr Clements had been dismissed by reason of redundancy the procedure for consultation had not been fully carried out in his case and consequently he had been unfairly dismissed. The Tribunal determined that had a fair procedure and proper consultation taken place, there was in the circumstances a 50% chance that Mr Clements would have been among the project managers retained and not selected for redundancy. It held that an award of compensation should reflect that finding. The basic award, corresponding to statutory redundancy pay was, in the words of the Tribunal, subsumed in the redundancy payment made to Mr Clements. In order to give the parties an opportunity to agree if they could on the amount of the compensatory award, the Tribunal indicated that its award would cover the period from the date of dismissal to the date of the hearing and for nine months thereafter. As Mr Clements had received pay in lieu of notice, the compensatory award would be calculated from the third week in June 1994. The Tribunal continued:

“In arriving at the gross figure, that is the figure before deduction in respect of payment received, account will be taken of all aspects of remuneration including the company car, pension and life insurance and all other benefits actual or potential. Having arrived at that figure, it will be appropriate to deduct the severance payment made (sec. 74(7)) of the Employment Protection (Consolidation) Act 1978 and to halve the resulting figure and then if the result is more than £11,000 that figure will be the award, if less than £11,000, the actual figure arrived at.”

At subsequent hearings the Tribunal determined that Mr Clements’ loss over the period was £43,136 and the balance of the redundancy payment at £20,685. The question then arose how the Tribunal should in assessing the compensatory award take account of the finding that he had only a 50% chance of retaining his employment. How should the balance of the redundancy payment after deducting the basic award be brought into account?

For Mr Clements it was argued that the redundancy payment should be deducted from the £43,136 leaving a balance of £22,451; that figure should then be reduced by 50% giving a compensatory award of £11,275. This would result in the maximum of £11,000 being payable. Digital argued that the Tribunal should first reduce the loss by 50% leaving a compensatory award of £21,568 from which the Tribunal should then deduct the £20,685 leaving a balance of £883.

The Tribunal decided in Mr Clements’ favour.

Digital appealed to the Employment Appeal Tribunal and their appeal was heard by the Appeal Tribunal presided over by Lord Justice Mummery, then Mr Justice Mummery. On 4th June 1996 the Appeal Tribunal allowed Digital’s appeal and substituted a compensatory award of £883.

Mr Clements sought a review of the award on the ground that material decisions had not been brought to Mr Justice Mummery’s attention. Mr Justice Mummery granted the review and on 5th December 1996 the Appeal Tribunal presided over by Mr Justice Morison restored the decision of the Industrial Tribunal. From Mr Justice Morison’s decision, Digital now appeals to this court. The appeal has been heard two days after judgment was given by another Division of the court in Ministry of Defence v Wheeler & Ors ., (unreported) C. of A. 97/1795. Those appeals raised a similar question of the correct approach of an Industrial Tribunal to the calculation of a compensatory award for wrongful dismissal after a finding that a claimant had proved only a percentage chance that he would have continued in his employment had his dismissal not been unfair.

In the Ministry of Defence v Wheeler & Ors , supra, the question arose in the context of unfair dismissal by the Ministry of members of the Armed Forces because of their pregnancy. In each case the amount of the loss suffered by the service women depended upon a comparison between their earning capacity after returning to civilian employment and the amount they could have expected to receive had they completed their engagements in the forces. In the case of Mrs Wheeler, the first of the respondents, the Tribunal found that if she had been permitted to return to the Army following maternity leave she would certainly have done so but by the time of the hearing she had given birth to a second child and the Tribunal assessed her chance of returning to the army following maternity leave as 85% and the chance that she would have completed her full twenty-two year engagement at 20%.

In the other cases before the court the chances of the service women were similarly assessed on a percentage basis. All the service women had, after their dismissal, obtained civilian employment for differing periods but their rates of pay were lower so that aside from questions of chance their loss was the difference between the sums they actually earned and the sums they would have earned had they not been discharged from the Forces.

The Ministry of Defence argued that the Tribunal should in each case have applied the percentages found to the sums they would have earned in the armed forces and having done so should have deducted the sums actually earned. For the service women it was argued that this was unfair. The effect of the Tribunal’s finding was that they had lost the opportunity or chance of earning the difference between their civilian earnings and the earnings they would have had in the Armed Forces. The percentage chance should therefore be applied to the difference between the actual and expected earnings.

In its judgment the court illustrated the different result produced by the two approaches. It took the simple example of a service woman who was earning £10,000 per annum in the services and on leaving established a civilian earning capacity of £5,000. On the assumption that she had a 50% chance of returning to service life following the birth of her child, the Ministry of Defence’s argument would result in her being held to have suffered no loss at all, i.e. 50% of her service earnings of £10,000 = £5,000, less £5,000 = Nil. On the service woman’s argument, her loss was £10,000 minus £5,000 = £5,000, which reduced by the factor of 50%, would be £2,500.

This simple example was sufficient to persuade the court that the Ministry of Defence’s method of calculation could not be correct and accordingly the court held that the service women’s loss should be calculated on the basis for which they contended.

The court drew attention to a number of conflicting cases which had been decided under the employment legislation. Among the cases to which the court was referred were the decisions of Mr Justice Mummery and Mr Justice Morison in the instant case. Of those decisions the court said:

“In the two Digital Equipment cases apparently conflicting conclusions were arrived at. The payment in issue in that case was a severance payment and not money subsequently earned mitigating the loss, and different considerations may apply to severance payments depending upon whether the payment was made in lieu of earnings or as compensation in respect of an overall loss.”

In this appeal it was agreed that the payments made in lieu of earnings should be and had been taken into account against the loss. The basic award which was intended to equal the statutory redundancy entitlement had been taken into account by deduction from the redundancy payment which was made on a scale far more generous than the statutory requirement. The question which the court has to decide is whether an Industrial Tribunal is required to treat such a payment differently from the way the court treated the loss of earnings claim in Ministry of Defence v Wheeler.

At the first hearing before the Employment Appeal Tribunal, Mr Justice Mummery approached the question as one to be decided in accordance with the language of sec. 74 of the Employment Protection (Consolidation) Act 1978. He held that the loss sustained by an employee under that section must be determined under sec. 74(1) before deducting the payment by the employer to the employee of any sum in excess of the statutory redundancy payment pursuant to sec. 74(7). He further held that reduction of the compensation by a percentage representing the chance that the applicant would still have lost his employment even if the redundancy procedure had been fair was part of the process of determining what loss had been sustained by the employee and the extent to which that loss was attributable to the actions of the employer within the meaning of sec. 74(1). The Industrial Tribunal should have calculated the loss accordingly and should then have reduced the compensatory award by the amount of the excess of the redundancy payment.

Mr Justice Morison, on the other hand, whilst accepting that the statutory scheme for compensation for unfair dismissal in sec. 74 provided a complete code for the assessment of compensation and limited the amount which a dismissed employee might recover, nevertheless thought that the statute followed the general principles applied by the law in assessing damages and that those principles should be applied in the case of assessment of loss under sec. 74(1).

The question for us to decide is whether the language used in sec. 74 of the Employment Protection (Consolidation) Act 1978 shows that Parliament intended that payments made by employers, which exceed the statutory redundancy payment, should be deducted after the Tribunal had decided the amount of the compensatory award under sec. 74(1).

In other words, did Parliament intend that redundancy payments which exceeded the statutory redundancy payment should go to reduce the compensatory award or merely that they should be taken into account in deciding the loss on which the compensatory award should be based?

Redundancy payments were introduced by the Redundancy Payments Act 1965. Much has been written about the policy of the legislation and the economic aims which it sought to achieve. Whatever the purpose, the provision of the payments to which both government and employers contributed was the invention of statute. The Industrial Relations Act 1971 created the right of employees not to be unfairly dismissed. By sec. 24(5)(b) of that Act if an employer purported to dismiss an employee on grounds of redundancy but selected an employee for dismissal in contravention of customary arrangements or agreed procedures, such dismissal was to be regarded as unfair. An employee was by sec. 106 entitled to complain to an industrial Tribunal of unfair dismissal and by sec. 106(3)(b) was given the remedy of an award of compensation to be paid to him by the employer. Dismissal in such circumstances was an unfair industrial practice. Sec. 118 imposed a limit on the compensation awarded. In 1972 the National Industrial Relations Court presided over by Lord Donaldson, then Sir John Donaldson, had to consider to what extent that court in awarding compensation for unfair dismissal could take into account the value of accrued redundancy protection. In Norton Tool Co. Ltd. v Tewson [1972] ICR 501 Lord Donaldson held that the guiding principle was set out in sec. 116(1) of the Industrial Relations Act 1971.

“... the amount of the compensation shall ... be such amount as the court or tribunal considers just and equitable in all the circumstances, having regard to the loss sustained by the aggrieved party in consequence of the matters to which the complaint relates, insofar as that loss was attributable to action taken by or on behalf of the party in default.”

At page 504 Lord Donaldson pointed out that the Industrial Relations Act 1971 had created an entirely new cause of action, namely the unfair industrial practice of unfair dismissal. He said:

“The measure of compensation for that statutory wrong is itself the creature of statute and is to be found in the Act of 1971 and nowhere else .” (Emphasis added).

Of the loss of rights to a redundancy payment Lord Donaldson said at page 507B:

“The loss of rights under the Redundancy Payments Act 1965 is much more serious. The employee is aged 50 and had been continuously employed for 11 years. Accordingly, if he had been dismissed on account of redundancy, he would have received about £380. In other words, he had a paid up insurance policy against dismissal by reason of redundancy which was worth this amount and would have increased in value at the rate of £38 per annum, until it reached a maximum of perhaps £800.”

After considering whether the employee in that case was more or less likely to be made redundant in his new employment and whether if he was he would have less protection because of the normal practice of “last in, first out”, the court considered it just and equitable in that case to award approximately one-half of his accrued protection in respect of redundancy.

The provisions relating to unfair dismissal contained in the 1971 Act were re-enacted and the remedy for unfair dismissal was continued by Schedule 1, Part 2, of the Trade Union and Labour Relations Act 1974. Sec. 116 of the 1971 Act had set out the general principles of the assessment of compensation for unfair dismissal. It was re-enacted by para. 19 of Part 3 of Schedule 1 of the Trade Union and Labour Relations Act 1974.

The employment protection legislation was further consolidated by the Employment Protection Act 1975. In that Act the rules for calculation of compensation were contained in secs. 73-76. The compensation was now to be divided into two parts: a basic award (sec. 74) and a compensatory award (sec. 76). The basic award under sec. 74 corresponded to the statutory redundancy payment. Under regulations made pursuant to para. 29 of Schedule 1 of the Trade Union and Labour Relations Act 1974, an employee could be entitled to compensation both for unfair dismissal and for redundancy. The effect of sec. 74(1)(c) and sec. 75(8) was that the employee did not receive double compensation through both a basic award and a redundancy payment. The method of calculation of the compensatory award was set out in Sec. 76. This substantially reproduced para. 19(1) of Schedule 1 of the Trade Union and Labour Relations Act and is reproduced as sec. 74 in the Employment Protection (Consolidation) Act 1978. (As amended by the Employment Act 1982 and the Trade Union Reform and Employment Rights Act 1993).

“74. Calculation of compensatory award.

(1) Subject to subsection (8) and section 76, the amount of the compensatory award shall be such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer.

(2) The said loss shall be taken to include -

(a) any expenses reasonably incurred by the complainant in consequence of the dismissal, and

(b) subject to subsection (3), loss of any benefit which he might reasonably be expected to have had but for the dismissal.

(3) The said loss, in respect of any loss of any entitlement or potential entitlement to, or expectation of, a payment on account of dismissal by reason of redundancy, whether in pursuance of Part VI or otherwise, shall include only the loss referable to the amount, if any, by which the amount of that payment would have exceeded the amount of a basic award (apart from any reduction under section 73(7A) to (9)) in respect of the same dismissal.

(4) In ascertaining the said loss the tribunal shall apply the same rule concerning the duty of a person to mitigate his loss as applies to damages recoverable under the common law of England and Wales or of Scotland, as the case may be.

(5) In determining, for the purposes of subsection (1), how far any loss sustained by the complainant was attributable to action taken by the employer no account shall be taken of any pressure which, by calling, organising, procuring or financing a strike or other industrial action, or threatening to do so, was exercised on the employer to dismiss the employee, and that question shall be determined as if no such pressure had been exercised.

(6) Where the tribunal finds that the dismissal was to any extent caused or contributed to by any action of the complainant it shall reduce the amount of the compensatory award by such proportion as it considers just and equitable having regard to that finding.

(7) If the amount of any payment made by the employer to the employee on the ground that the dismissal was by reason of redundancy, whether in pursuance of Part VI or otherwise, exceeds the amount of the basic award which would be payable but for section 73(9) that excess shall go to reduce the amount of the compensatory award.

(8) Subsection (1) is subject also to section 75 except that, in the case of an award of compensation under section 71(2)(a) where an addition award falls to be made, the limit imposed by section 75 may be exceeded to the extent necessary to enable the award fully to reflect the amount specified as payable under section 69(2)(a) or (4)(d), as the case may be, if that limit would otherwise reduce the amount of the compensatory award when added to the additional award.”

Secs. 72-76 of the 1978 Act contain the present statutory code of compensation. The method of calculating the compensatory award is that laid down by the statute. See sec. 72 of the Act which requires that the compensatory award shall be calculated in accordance with sec. 74. Sec. 74 requires the award to be such amount as the Tribunal considers just and equitable having regard to the loss sustained by the complainant in consequence of the dismissal insofar as that loss is attributable to the action taken by the employer. The loss is to be taken to include expenses incurred in consequence of the dismissal and loss of any benefit which he might reasonably be expected to have had but for the dismissal.

Sec. 74(3) preserves the type of award made to the complainant in Norton Machine Tool v Tewson (supra) in respect of the loss of entitlement or potential entitlement to or expectation of a payment by reason of redundancy.

Sec. 74(4) requires the Tribunal to apply the common law rule of mitigation of loss as it applies to damages recoverable under the common law in ascertaining “the said loss”, an express provision which would be unnecessary if the general principles of the assessment of damages were applicable in any event.

It was not suggested that in arriving at the loss of £43,136 sustained by Mr Clements and attributable to Digital’s action, the Tribunal had omitted to take into account any of the factors in the relevant subsections of sec. 74.

In contrast sec. 74(7) expressly provides that the excess of a redundancy payment made by an employer to an employee:

“Shall go to reduce the amount of the compensatory award.”

For Mr Clements, Mr Christie argued that there was no logical reason to treat the compensatory award as different from the loss of which it was made up, nor the excess of the redundancy payment from the loss of rights in sec. 74(3). The ordinary common law rules for the assessment of damages should be applied as they had been in the case of Ministry of Defence v Wheeler . On that basis the court should deduct all sums received as a result of the wrong for which the compensation is paid from the amount of loss sustained before applying the percentage chance that Mr Clements would have retained his job. Although Digital would in the result only receive credit for 50% of the excess of the redundancy payment, this was not unfair because it followed that Mr Clements had a 50% chance of receiving it if his selection for redundancy had been fair. Further it was undesirable that there should be a different way of dealing with redundancy payments because it could cause confusion to Industrial Tribunals.

These are powerful submissions but I think that Parliament has drawn a clear distinction in the treatment of the excess of redundancy payments which have actually been made by an employer and the other elements which go to make up the loss.

A clear distinction is drawn in the sub-sections of sec. 74 between the said loss, that is “the loss sustained by the complainant in consequence of the dismissal” which is to make up the amount of the compensatory award and, on the other hand, the compensatory award itself. Thus in my view the section provides that the excess of the redundancy payment over the basic award is not to be taken into account in ascertaining the loss but is to go to “reduce the amount of the compensatory award”.

Approaching the interpretation of sec. 74 even as a whole I think it clear that Parliament intended that the employer who paid compensation for redundancy on a more generous scale than the statutory scale was to be entitled to full credit for the additional payment against the amount of the loss which made up the compensatory award.

We were told in the course of argument that since the introduction of redundancy payments in 1965 it has become the practice of most large employers to provide for and to make payments well in excess of the statutory minimum. Mr Richardson for Digital suggested that Parliament may well have wished by according them special treatment not to discourage the making of such increased payments by depriving the employer of the full benefit of them should he be found to have selected an employee for redundancy in breach of good industrial practice. Whether that is so or not, it seems to me the language used by Parliament is clear and if the result is unintended it must be for Parliament to correct it. For these reasons I would allow the appeal.

LORD JUSTICE POTTER: I agree.

SIR JOHN BALCOMBE: I also agree.

ORDER: Appeal allowed; no order as to costs; leave to appeal to the House of Lords.