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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Cerberus Software Ltd v Rowley [2001] EWCA Civ 78 (18 January 2001) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/78.html Cite as: [2001] IRLR 160, [2001] Emp LR 173, [2001] ICR 376, [2001] EWCA Civ 78

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EMPLOYMENT APPEAL TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL Thursday 18th January 2001

LORD JUSTICE WARD:

1. This is an interesting appeal on a troublesome little point of employment law. The issue in a nutshell is this: where a employer summarily dismisses or purports summarily to dismiss the employee on grounds of misconduct later held by the Industrial Tribunal to be unfounded is the employee's claim one for damages for wrongful dismissal subject to the employee's duty to mitigate his loss or is the employee entitled to assert a contractual right to payment in lieu of notice without credit having to be given for earnings received in new employment obtained within the period of notice.
2. The facts are these. The appellant, Cerberus Software Ltd. ("Cerberus"), is as its name indicates a computer software manufacturing company operating mainly in the field of communications and message preparation servicing world wide inter-bank financial transactions in particular. The respondent, Mr John Rowley, was first employed by Cerberus in November 1991 as their United Kingdom sales manager. He was ambitious and successful and on 1st March 1994 he was promoted to the position of sales and marketing director under a written contract of employment dated that day. It provided for his salary, share options, medical insurance, the use of a company motor car, a pension scheme funded by the employer and fully paid holidays. There was a confidentiality clause including a prohibition on removing company papers and there were also restrictions on his taking up competitive employment. The contract provided for grievance and disciplinary procedures. Relevantly for this appeal the termination of that employment was stipulated in these terms:-

"18. Termination of employment.

Employment under this contract shall continue unless and until determined by the employer under clause 17 above and Appendix 1 or by either party giving to the other not less than 6 months notice of termination.

Notice may only be given as to expire at the end of a monthly pay period. It is agreed that the employer may make a payment in lieu of notice to the employee. The employee shall not be entitled to any other benefit other than pay or money in lieu of such benefits in respect of any period for which he has been paid in lieu of notice".

3. By about the middle of the next year, 1995, the previously good working relationship between Mr Rowley and Mr Warburg, the "somewhat autocratic" managing director of Cerberus, began to break down. The Industrial Tribunal found that by June of 1996 Cerberus were intent upon dismissing Mr Rowley. Mr Warburg wrote to Mr Rowley on 13th June 1996 telling him he had been suspended without pay pending a disciplinary hearing to be held on 18th June on the ground that he "may have been guilty of very serious misconduct". Three specific allegations were made of disloyal conduct and a fourth of taking home copies of his own e-mails. The Industrial Tribunal found that the three principal allegations "were neither justified nor made in good faith in that neither Mr Henley (the company secretary) nor Mr Warburg believed that the misconduct alleged had actually occurred". They found that the fourth complaint was not misconduct nor was it a breach of the confidentiality clause.
4. The disciplinary hearing was duly held by Mr Progl, a newly appointed director. He recommended dismissal. The company acted upon the recommendation and summarily dismissed Mr Rowley by a letter to him from Mr Warburg dated 4th July 1996. In another damning finding, the Industrial Tribunal held that Mr Progl did not have in his mind reasonable grounds upon which to sustain a belief that misconduct occurred.
5. Mr Rowley obtained alternative employment on 1st August 1996. The Tribunal found that the value of his monthly emoluments from that employment was at least £215 a month greater than he was receiving at the date of his dismissal by Cerberus.
6. On 19th September 1996 he applied to the Industrial Tribunal complaining of (i) unfair dismissal and (ii) breach of contract. For extended reasons promulgated on 3rd November 1997 the Industrial Tribunal decided unanimously that Mr Rowley had been unfairly dismissed by Cerberus but adjourned the issue of remedies and the claim for breach of contract to a later date. They handed down that decision on 4th June 1998.
7. Dealing with the breach of contract claim the Industrial Tribunal held:-

"7. Notice Period

Under clause 18 of the contract the respondent is liable to give not less than six months' notice of termination of employment, to expire at the end of a monthly pay period. The clause also includes the provision that "it is agreed that the employer may make a payment in lieu of notice to the employee". The respondent has failed to satisfy the Tribunal that there was any conduct on the part of the applicant which justified his summary dismissal without notice. When he was dismissed on 26 June 1996, therefore, the applicant was entitled to six months' notice expiring at the end of a monthly pay period, i.e. on 31 December 1996.

8. The applicant obtained alternative employment with Symtec Ltd. from 1 August 1996, but the Tribunal rejects the respondent's claim that the applicant is under a duty to mitigate his loss by giving credit for his earnings from his new employer. Where, as in this case, the contract of employment expressly provides that the employment may be terminated by the employer on payment of a sum in lieu of notice, a summary dismissal is a lawful act rather than being a breach of contract. In such circumstances, the duty to mitigate damage, including the obligation to give credit for actual earnings, does not arise because the claim for payment in lieu of notice is a claim for a sum due under the contract rather than for damages for wrongful dismissal. Abrahams v Performing Rights Society [1995] I.R.L.R. 487."

8. The Industrial Tribunal proceeded to calculate the sums due on the contract claim and awarded Mr Rowley damages for the period of suspension when he was without pay of £1,023.34, the reimbursement of some expenses in the sum of £338.49 and "Notice Pay and benefits in lieu of benefit due under the contract (gross)" in the sum of £21,348.21, a total of £22,710.04. He was also awarded a basic and a compensatory award for unfair dismissal in the total sum of £1,460. The company appealed.
9. The appeal was dismissed by the Employment Appeal Tribunal, the judgment being delivered by the President, Morison J., on 14th July 1999. In that judgment the Employment Appeal Tribunal ruminated about the four categories of "payment in lieu of notice" set out in the speech of Lord Browne-Wilkinson in Delaney v Staples [1992] I.C.R. 483, and about the meaning and effect of s. 86 of the Employment Rights Act 1996 providing for a statutory minimum period of notice calculated by reference to the length of service. Their reasoning is encapsulated in paragraphs. 20 to 22 which read as follows:-

"20. In this case, the outcome of the appeal does not depend upon whether the employers were or were not entitled lawfully to terminate the contract without notice. As we read the contract the employer had two choices, where he was not entitled to bring the contract to an end through misconduct: namely, either to give notice, or to give no notice but pay monies in lieu of notice. We reject the submission that there was a third choice. Nothing in the contract suggests that this is so; and there would be no need to imply such a term (indeed, it would not be appropriate to imply any term which permitted a party to a contract to commit a serious breach of its terms). The obvious interpretation of the contract is that by clause 18 the employee was being given the protection of a notice period or, otherwise, a payment "up front" regardless of any mitigation. If the employer chose to give no notice, then the employee was entitled to be paid in lieu. It is known to be the case that it is more difficult to find alternative employment whilst out of work than whilst in work. Payment in lieu, with the concomitant implication that the employee would have all his money in hand during what would have been his notice period, would be regarded as a palliative to the disadvantage of seeking other employment whilst unemployed. Had the employer wished, he could have made no mention of the right to terminate without notice, leaving the employee with his common law rights.

21. Thus, whether or not the employer broke the contract by the summary dismissal itself, he was in breach by not paying moneys in lieu of notice, which is what he had promised to pay in the event of such a termination. The monies in lieu of notice mean monies without deduction for mitigation. Either the monies in lieu were claimable as monies due under the contract or as damages for breach of contract. If the claim was truly for damages for breach, then he was entitled to be put in the position he would have been in had the breach not been committed: namely to receive the whole of his monies in lieu of notice without deduction. In neither event would the employer have been entitled to receive the benefit of the employee's mitigation of his damage; because the employer had promised to pay the whole sum and the breach was the non-payment of the sum due.

22. It seems to us, therefore, that there is neither merit nor legal support for the appellant's case and the appeal will be dismissed."

10. The Employment Appeal Tribunal gave leave to appeal to us. Mr Rowley, who appears before us in person, supports the decision and relies, understandably enough, on the concluding paragraph which draws attention to the lack of merit in the appellant's case. He draws attention to the findings of the Industrial Tribunal that the company had acted in bad faith and had purported to dismiss him for misconduct when in fact, as the Tribunal found, they had no genuine belief that any such misconduct had occurred. He submits in his written submission to us:-

"Therefore there can be no other explanation for their actions except that they believed (as I did) that they were contractually committed to pay me six months' salary in lieu of notice if they wished me to leave the company immediately. As a result they contrived and fabricated a way to remove me from the company which they believed would relieve them of this contractual commitment. If they had dismissed me from the company legally, i.e. without unfair dismissal and they had required me to leave the company immediately on dismissal then they were contractually committed to pay me six months' salary in lieu of notice without mitigation. It cannot therefore be right that committing an illegal act, i.e. unfair dismissal would relieve them of this contractual commitment."

11. I have considerable sympathy for the respondent. On the findings of the Tribunal, the company engaged in a deplorable charade in a shameful effort to avoid the truth and reality of their actions which were wrongfully to dismiss their employee. I would wish to help Mr Rowley if I can.
12. The difficulty I have is that his submission depends upon his being able to establish that Cerberus were "contractually committed to pay me six months' salary in lieu of notice". That was the basis of the finding of the Employment Appeal Tribunal who took the view that "if the employer chose to give no notice, then the employee was entitled to be paid in lieu", or, as expressed in paragraph 21 of the decision, "whether or not the employer broke the contract by the summary dismissal itself, he was in breach by not paying moneys in lieu of notice which is what he had promised to pay in the event of such a termination." I have added the emphasis. The Employment Appeal Tribunal were there upholding the essential finding of the Industrial Tribunal that "the claim for payment in lieu of notice is a claim for a sum due under the contract rather than for damages for wrongful dismissal." Again I add the emphasis. The question of law which arises in this appeal is whether the Industrial Tribunal were correct in that analysis.
13. The Industrial Tribunal clearly drew support from Abrahams v Performing Rights Society Ltd. [1995] ICR 1028 but failed to analyse whether the contractual provisions in that case were truly comparable to the contract in the case before us. Mr Abrahams was employed on terms 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". His statement of claim asserted that the defendant terminated his employment without notice and that it was thus liable to pay him in lieu of notice. By its defence the defendant asserted that the plaintiff was under a duty to mitigate his loss. The plaintiff successfully applied to the Master to have that part of the defence struck out and an appeal against that order was dismissed. On the defendant's further appeal to the Court of Appeal, Hutchison L.J. concluded that the plaintiff had a right to payment in lieu which was a contractual entitlement, not in the nature of a claim for liquidated damages.
14. The contract before us is in very different terms. It gives either party the right to terminate the contract on not less than six months' notice of termination but the all important words are "it is agreed that the employer may make a payment in lieu of notice to the employee". In my judgment that means that the employer is given the right to elect whether or not to make a payment in lieu of notice. Where the company is given the choice whether to pay or not to pay. The language is totally inconsistent with a contractual right given to the employee to insist that he be paid six months' salary in lieu of notice. In my judgment the Industrial Tribunal and the Employment Appeal Tribunal erred in so construing this contract. This contract expressly provided that the employment would continue unless and until determined by either party giving the other not less than six months' notice of termination. The company ignored that and chose to terminate summarily. In doing so it was in breach of the obligation to give six months' notice. In his particulars of complaint to the Industrial Tribunal Mr Rowley relied upon that breach. He pleaded:-

"4. I was summarily dismissed on 26th June 1996 which dismissal was substantially and procedurally unfair and in breach of contract. My contract of employment provides for six months' notice." I add the emphasis.

15. That, in my judgment, is the correct analysis. The claim was for damages for breach of contract, i.e. damages for wrongful dismissal. The measure of damages is the amount that the employee would have earned had the employment continued according to contract but then the ordinary rule applies that the employee must minimise his loss by using due diligence to find other employment.
16. We did not hear argument on what may still be a difficult question which is whether a wrongful dismissal puts an end to the status of the dismissed employee as an employee and confines him to a remedy in damages for breach of contract or whether, if the employee clearly indicates that he does not accept the employer's breach as a termination of the contract, it should not remain on foot and enforceable so far as obligations which do not of necessity depend on the existence of the relationship of master and servant. These arguments were canvassed in this court in Gunton v Richmond-upon-Thames London Borough Council [1981] Ch. 448 and Boyo v Lambeth London Borough Council [1994] ICR 727. I do not find it necessary to wade through those murky waters for the purposes of this appeal. Mr Rowley has never contended that his employment continued after his summary dismissal. He appears to have accepted the fact that he was dismissed - though he complains of the wrongfulness (and unfairness) of his employer's actions. He realistically accepted that his employment had ended and he diligently and commendably set about finding alternative employment. So the point does not appear to me to arise at all in this appeal.
17. I readily understand Mr Rowley's incredulity that his employers might be permitted to behave with bad faith yet not pay for it. The answer, in my view, is that in other circumstances the employer might have to pay dearly for such appalling conduct. Such an employer is not only in breach of contract giving rise to a claim for damages for breach of contract at common law. In addition the employee has the statutory remedy for unfair dismissal as the Industrial Tribunal have found in this case. The fact that the compensation for unfair dismissal is limited on the facts of this case to the basic award and the modest compensatory award may seem to Mr Rowley not to be punitive enough but it is, unfortunately for him, as much as the law permits him to recover. If he had not been successful in finding alternative employment, then his employer would have been liable to compensate him for the time he was out of work beyond the six months' period of notice, i. e. he would recover more than would be awarded under his common law claim. The fact remains that he did find better paid employment shortly after his unhappy experiences with Cerberus and the damages awarded to him for breach of contract have to be mitigated accordingly Unfortunately for him the compensation for unfair dismissal was not much but was as much as the law allows. He was shabbily treated but in my judgment his employer's appeal must be allowed and the award of £21,348.21 for the employer's liability to him under his contract of employment payable gross awarded by the Industrial Tribunal must be set aside. There should be substituted for it the appropriate amount of damages for breach of contract for the period from the date of dismissal to the commencement of the new employment. I would invite Counsel and Mr Rowley to agree this figure so that the proper award can be made.
18. In conclusion I would like to say this. The company may have won its appeal but they win no plaudits for their behaviour. The treatment of Mr Rowley was a travesty of good industrial relations. This employer will not find me at all sympathetic if it applies for its costs of the appeal. For my part I would waive the ordinary rule that hand-down judgments are not disclosed to the client until an hour before the hearing. I would encourage Mr Dineen, whose submissions in the appeal were impressively made, to take early instructions on the question of costs.

LORD JUSTICE SEDLEY:

The problem

19. This appeal raises a fundamental issue of employment law. Mr Rowley had been employed by Cerberus Software Ltd since 1994 as a sales and marketing director. His contract contained, as is common, a confidentiality clause and restrictive covenants running for 6 months after the termination of employment "howsoever the termination of such employment is occasioned". It also contained a termination clause which included the following:

"Employment under this contract shall continue unless and until determined by … either party giving to the other not less than six months notice of termination.

…It is agreed that the employer may make a payment in lieu of notice to the employee…."

20. Mr Rowley was dismissed summarily in June 1996 upon allegations of misconduct which an Employment Tribunal later found not only to have been unfounded but to have been advanced in bad faith. It awarded him compensation calculated upon the full six months of his notice entitlement, notwithstanding that he had obtained better-paid work elsewhere by the beginning of August 1996. Its reasons were clear and succinct:

"Where, as in this case, the contract of employment expressly provides that the employment may be terminated by the employer on payment of a sum in lieu of notice, a summary dismissal is a lawful act rather than being a breach of contract. In such circumstances the duty to mitigate damage, including the obligation to give credit for actual earnings, does not arise because the claim for payment in lieu of notice is a claim for a sum due under the contract rather than damages for wrongful dismissal."

21. The Tribunal referred to Abrahams v Performing Rights Society [1995] ICR 1028 (C.A.) as its authority. Abrahams, however, was a case in which the contractual arrangement was such that payment of salary in lieu of notice upon summary termination of the applicant's employment was expressly provided for. The result was that the sum was a debt from which no deduction for actual or potential mitigation fell to be made. The first question is whether it was so in the present case, or whether any payment due to Mr Rowley was damages. The second question is whether, if the payment was damages, it was subject to the mitigation rule.
22. The Employment Appeal Tribunal upheld the Employment Tribunal's decision. It did so without direct reliance on Abrahams, but by reasoning which replicated it. Morison P said:

"20. In this case, the outcome of the appeal does not depend upon whether the employers were or were not entitled lawfully to terminate the contract without notice. As we read the contract the employer had two choices, where he was not entitled to bring the contract to an end through misconduct: namely, either to give notice, or to give no notice but pay monies in lieu of notice. We reject the submission that there was a third choice. Nothing in the contract suggests that that is so; and there would be no need to imply such a term [indeed, it would not be appropriate to imply any term which permitted a party to a contract to commit a serious breach of its terms]. The obvious interpretation of the contract is that by clause 18 the employee was being given the protection of a notice period or, otherwise, a payment 'up front' regardless of any mitigation. If the employer chose to give no notice, then the employee was entitled to be paid in lieu. It is known to be the case that it is more difficult to find alternative employment whilst out of work than whilst in work. Payment in lieu, with the concomitant implication that the employee would have all his money in hand during what would have been his notice period, would be regarded as a palliative to the disadvantage of seeking other employment whilst unemployed. Had the employer wished, he could have made no mention of the right to terminate without notice, leaving the employee with his common law rights.

21. Thus, whether or not the employer broke the contract by the summary dismissal itself, he was in breach by not paying monies in lieu of notice, which is what he had promised to pay in the event of such a termination. The monies in lieu of notice mean monies without deduction for mitigation. Either the monies in lieu were claimable as monies due under the contract or as damages for breach of contract. If the claim was truly for damages for breach, then he was entitled to be put into the position he would have been in had the breach not been committed: namely to receive the whole of his monies in lieu of notice without deduction. In neither event would the employer have been entitled to receive the benefit of the employee's mitigation of his damage; because the employer had promised to pay the whole sum and the breach was the non-payment of the sum due."

The argument

23. For Cerberus, Mr Dineen's argument before us, as below, is that this reading of Mr Rowley's contract is unsustainable. The meaning of the termination clause, he says, is that Cerberus, but not Mr Rowley, is given the option of a payment of money in lieu of notice. If Cerberus elects to do so it cannot, he accepts, recoup any of it if within the notice period Mr Rowley finds other paid employment, since it has elected to pay a contractual lump sum. But if Cerberus elects neither to give due notice nor to pay the full salary in lieu, but simply to dismiss summarily, it is Mr Dineen's submission that the damages it must pay for its breach of contract fall to be reduced by anything Mr Rowley earns in the succeeding 6 months. Thus in the present case Mr Rowley's loss ceased on 1 August 1996, entitling him only to about 5 weeks' salary by way of damages.
24. The Employment Appeal Tribunal's rejection of Mr Dineen's "third way", while plainly correct as a construction of the termination clause, does not answer his proposition that it is always open to a contracting party to break the contract provided it is willing to pay the price fixed by law for doing so. Cerberus does in this sense have three heads – two which bark and one which bites. The argued difference between this case and Abrahams is that there termination by summary dismissal was provided for within the contract, while here it is, on Mr Dineen's traditional analysis, a breach. The apparently technical distinction carries with it the real difference that the former creates a quantified debt while the latter creates a right to damages, and damages, unlike debt, are ordinarily capable of reduction by mitigation.
25. This argument carries with it, as Mr Dineen in his turn had to accept, at least three corollaries. One is that if the employer can limit the damages to the period of time for which the employee is out of work, he is also entitled to deduct damages for any period of time during which he can credibly assert that the employee ought to have been in new employment. A second, by parity of reasoning, is that at the moment of wrongful dismissal he can pay the employee off with a sum calculated by reference not to the contractual period of notice but to the employer's estimate of the state of the job market, making the contractual option of paying full salary in lieu of notice pointless. The third corollary, which follows from these, is that an employer who breaks his contract can expect to do better – frequently a great deal better - than one who abides by the contract and gives notice or pays the full six months salary instead. Thus the order which this court proposes to make will necessarily give Cerberus the benefit of Mr Rowley's net extra earnings (some £250 in this case) beyond the lost monthly salary, since this is part of the sum by which Mr Rowley recouped the loss.

The law

26. If this is the law, there is something wrong with it. Mr Dineen urges us to say that it is the law and to leave it alone, reminding us that hard cases make bad law. My concern is that bad law makes hard cases, of which this will be one if the appeal succeeds. So it may be useful to examine the legal premises of Mr Dineen's argument.
27. The principle that a claimant's damages should not exceed his real losses is a bedrock of our law. It does not matter whether it is expressed as a duty within reason to mitigate one's losses or as a refusal to compensate people for losses which are their responsibility rather than the defendant's: in either case the law does no more than reflect a simple ethical principle. The same is true of the principle that people ought to honour their contracts. The law enforces it by making those who break their contracts place the innocent party in as nearly the same position as if it had been honoured. Applied to someone like Mr Rowley this means, one would suppose, that if Cerberus were going to break their agreement to give him 6 months' notice or 6 months' salary in lieu by summarily dismissing him, they would be made to pay him the 6 months' salary regardless of what he then did. If an officious bystander had asked about it when the contract of employment was being signed, that is without doubt what both parties would have told him.
28. Why then should it be the case that by breaking the contract rather than honouring it Cerberus have put the onus on Mr Rowley to find another job as quickly as practicable and to give them the benefit of what he earns in it? To say that it is because the breach has turned the debt into damages is to explain nothing: it is merely to make it possible to substitute one principle of law for another. The question is which should prevail. It is a question which arises in a context which is not morally neutral, for it is both a cogent and an ethically attractive analysis that an employee who does not voluntarily acquiesce in an entirely unjustified summary dismissal has not accepted the repudiation: he may not be able to force the employer to let him work out the period of notice, but what he can do is insist on being paid his salary. In this perfectly realistic manner he is affirming the contract and claiming a debt under it. This in my view is what happened with Mr Rowley.
29. The Employment Appeal Tribunal, as has been seen, took the view that this was equally so whether the conduct of Cerberus was regarded as an election under the contract or as a violation of it. It is a real misfortune that Mr Rowley has not had legal representation at any level in this process, because there lies behind the first limb of this proposition one of the great unresolved questions of employment law: is it ever open to a wrongfully dismissed employee to affirm the contract and sue for wages? We invited Mr Dineen's help about it, but it went pretty much unaddressed before us.
30. By providing for termination on notice, whether expressly or by common-law or statutory implication (Employment Rights Act 1996, s.86), a contract of employment specifies in advance the protection to which each party is entitled upon the other's election to end the relationship. In this it is not of course unique; but where it has been conventionally regarded as exceptional is that a wrongfully dismissed employee lacks the choice which an innocent party ordinarily has of insisting on performance. In contract law generally an unaccepted repudiation may be, as Asquith LJ said it was (Howard v Pickford Tool Co Ltd [1951] 1 KB 417, 421), a thing writ in water; but in the case of a summary dismissal the conventional wisdom is that it is carved in stone (Sanders v Ernest Neale Ltd [1974] ICR 565), since an employee cannot make his employer give him work any more than his employer can compel him to work. There is in consequence a longstanding and formally unresolved debate as to whether the contract of employment should be regarded as a legal exception to the general rule. But the useful discussion of the "automatic" and "elective" theories of job termination in Deakin and Morris, Labour Law (2nd edition, 1998) paras. 5.3.3, 5.3.4 and 5.3.6 includes this telling passage at pp. 417-8:-

"There is also support for the elective theory from the point of view of authority. It was accepted by a majority of the Court of Appeal in Gunton v. Richmond-upon-Thames London Borough Council [1980] ICR 755 and was approved after extensive analyses at first instance in Thomas Marshall (Exports) Ltd v. Guinle [1979] Ch 227 and Dietman v. Brent London Borough Council [1987] ICR 737. Numerous decisions in which employees have been granted declarations or injunctions to prevent employers acting in breach of disciplinary procedures also depend on the application of the elective theory, including the decision of the House of Lords in McClelland v. Northern Ireland General Health Services Board [1957] 1 WLR 594; it is not clear if or how far these decisions constitute some kind of exceptional category. In Rigby v. Ferodo Ltd. [1988] ICR 29 the House of Lords declined to decide the matter, in a case not directly concerned with dismissal but with a cut in wages imposed, in breach of contract, by the employer. However, Lord Oliver said:

I entirely fail to see how the continuance of the primary contractual obligation can be made to depend on the subjective desire of the contract-breaker and I do not understand what is meant by the injured party having no alternative but to accept the breach … I can see no reason in law or in logic why, leaving aside for the moment the extreme case of outright dismissal or walk-out, a contract of employment should be on any different footing from any other contract…

Despite this the application of the elective theory continues to be controversial, and it is unfortunate that the House of Lords did not choose to clarify the law when it could arguably have done so in Rigby v. Ferodo Ltd. More recently, in Boyo v. Lambeth London Borough Council [1995] IRLR 50 a unanimous Court of Appeal took the opportunity to case fresh doubt on the elective theory, while at the same time feeling bound to apply the majority ruling in an earlier judgment of the Court of Appeal, Gunton v. Richmond-upon-Thames London Borough Council. Gunton, according to the Court in Boyo, had produced law distinctly lacking in rhyme and reason, and was not to be preferred, in principle, to the judgment of Sir John Donaldson P in Sanders v. Ernest A Neale Ltd. [1974] ICR 565 Laying out the case for the automatic theory. Given such dicta, the future of the elective theory can hardly be regarded as assured."

31. In this situation, and unequipped with argument on the issue, we cannot in this court resolve the debate. Having, however, set out earlier why in my judgment this case offers strong support to the elective theory of termination, it is only fair to acknowledge some of its attendant problems. The duty to give notice is bilateral. If an employee leaves without giving notice he may be liable in law for any damage his sudden departure causes the employer during the notice period. Why should the ordinary obligation to mitigate damage should not operate here? And if here, why not in the obverse situation where there is a summary dismissal? While many employees are readily replaceable, some are not; and for either to leave without notice may be said to confront the employer with a repudiation which he may not accept but still has to live with. Can he, for instance, take on a replacement at the departing employee's expense for as many weeks as the latter should have given notice? Can he charge an irreplaceable employee who leaves suddenly with the predictable losses caused by his departure? In the former case the answer ought to be no, since the loss will have been fully mitigated by not having to pay the departed employee's salary – but only if the mitigation rule applies, as plainly it should. In the latter case, likewise, it is not easy to see why the employer should not be required to do what he can to mitigate his loss before suing the indispensable ex-employee. So why not then an employee who is wrongfully dismissed? Perhaps because while, on my preferred analysis, such an employee is owed a debt under the contract of employment which is not therefore susceptible of mitigation, the employer is owed services which can only be quantified as damages, and damages fall to be mitigated. There is also the question why the employee, who would not be free to work for another employer if he were working out his notice or on so-called garden leave^[1], should be free to do so, and to keep the money, if he is paid salary in lieu of notice. This, however, brings us back to the initial clash of two principles of law: either this has to happen, giving the employee in some sense a windfall, or the opposite has to happen, giving the employer a very definite windfall. (I say "in some sense" in relation to the employee because it begs the question whether the obligation to pay is independent of any recoupment; whereas for the employer recoupment is very definitely a reward for his own wrongful act.) These issues are nevertheless, as I accept, problematical.
32. What, with all respect to Mr Dineen's argument, is not problematical is the fiscal difference between money recovered as debt and money recovered as damages. If it be the case that the former attracts tax and the latter does not, it is because that is how the Treasury has persuaded Parliament to arrange things for the present. It has nothing to do with the legal merits of the case. No more, in my view, has the fact that the employee upon summary dismissal may be relieved of his restrictive covenants (though in the case of Mr Rowley's contract, contrary to Mr Dineen's submission, the covenant appears to survive: see paragraph 1 above). Any immediate advantage it gives him in the job market will not only be fortuitous but – if Mr Dineen is right – will go into the pocket of the delinquent employer.
33. Both the automatic and the elective analysis, it should be emphasised, suppose a summary dismissal which is unjustified. An employee who, by contrast, has given grounds for summary dismissal is in no position to resist termination or to stand on the termination provisions because it is he, not the employer, who is guilty of repudiatory conduct and the dismissal is the employer's acceptance of it as a terminal event.
34. But the "automatic" theory, that the repudiation is effective independently of the employee's will, does not necessarily produce a different result in a case such as the present. As each Tribunal below with its fund of legal knowledge and practical experience has held, by not letting him work out his notice (that is, by summarily dismissing him without good grounds) Cerberus had elected under this particular termination clause to pay Mr Rowley his salary in lieu and so had created a debt. I see no difficulty whatever with this construction of the clause: it carries into effect the parties' plain intentions and it meets the undoubted morality of the situation. For my part, therefore, I would adopt as much of the analysis of the Employment Appeal Tribunal as holds that, in the absence of any grounds for summary dismissal, the contract itself gave Cerberus only the choice of giving notice or paying in lieu. This in turn corresponds with the Employment Tribunal's reasoning. It locates the case, though on different facts, in the same category as Abrahams. It means, too, that the judgment of the two specialist tribunals on what is a mixed question of fact and law is respected.
35. Accordingly, for my part, I would dismiss this appeal.

LORD JUSTICE JONATHAN PARKER:

36. I agree with Ward LJ that this appeal should be allowed for the reasons given in his judgment, which I have had the opportunity of reading in draft.
37. In my judgment the conclusion reached by the Employment Tribunal, and confirmed by the Employment Appeal Tribunal, fails to take proper account of the fact that clause 18 of the respondent's contract of employment did not oblige the appellant to make a payment in lieu of notice: it merely enabled it to do so. It follows that the respondent cannot sue for the sum payable in lieu of notice as a sum due under the contract: i.e. as a debt. His remedy is damages for wrongful dismissal. The correct measure of damages, as the Employment Appeal Tribunal expressly accepted in paragraph 3 of its judgment, is:

"…. the loss of the remuneration package which he would, but for his dismissal, have received during the period of notice, less any earnings or other employment-related benefits which the employee actually received during that period."

38. The Employment Appeal Tribunal continued:

"By that measure, the employee is put into the position he would have been in had his employers terminated the employment without breach, namely on full notice; it being assumed that the employers would have performed the contract in the way most favourable to themselves."

39. In my judgment those are the correct principles to be applied in this case.
40. In paragraph 20 of its judgment, however, the Employment Appeal Tribunal said this:

"The obvious interpretation of the contract is that by clause 18 the employee was being given the protection of a notice period or, otherwise, a payment "up front" regardless of any mitigation. If the employer chose to give no notice, then the employee was entitled to be paid in lieu."

41. For my part, I cannot interpret clause 18 as having that effect, given that its reference to a payment in lieu of notice is permissive rather than mandatory ("the Employer may make a payment in lieu of notice …." (my emphasis)). I find myself in the same difficulty in relation to the Employment Appeal Tribunal's reference (in paragraph 21 of its judgment) to a payment in lieu of notice as being "what he [the employer] had promised to pay in the event of such a termination". I can find no such promise in clause 18.
42. Nor, with respect to Sedley LJ (whose judgment I have also read in draft), can I see any basis for treating the appellant's wrongful dismissal of the respondent as a deemed election by the appellant to make a payment in lieu of notice.
43. As to damages, the starting-point is assessing what the respondent has lost by reason of the appellant's breach of contract in wrongfully dismissing him is six months' gross pay: six months being the shortest period during which the appellant, acting lawfully under the contract, was obliged to continue the respondent's employment (see Lavarack v.Woods of Colchester Ltd [1967] 1 QB 278 at 293 per Diplock LJ). However, the respondent must plainly give credit for what he has earned elsewhere during that period, since otherwise he will have been compensated for a loss which in the event he did not suffer. The fact that the resulting net sum will necessarily be less (by the amount of that credit) than the amount of a full payment in lieu of notice is, in my judgment, immaterial, given that the appellant was under no contractual obligation to make such a payment.
44. Accordingly, I would allow this appeal.
ORDER: Appeal Allowed, leave to appeal granted. Costs argument to be submitted in visiting in 7 day. Reply in 7 days. (Order does not form part of approved Judgment)

Note 1    A concept with unexplored contractual ramifications: see Deakin and Morris, Labour Law (2nd ed.) p.360.    [Back]