Stuart Peters Ltd v Bell

Ms Bell was found to be unfairly dismissed by the appellant employer, Stuart Peters Limited. She had been constructively dismissed, resigning in response to conduct by the employer which the Employment Tribunal found had undermined the trust and confidence in the employment relationship. The Tribunal held that she was entitled to a six-month contractual notice period. In calculating unfair dismissal compensation, they found that she could effectively mitigate her loss by obtaining employment at the same level of remuneration at the end of the notice period. Apart from a small sum paid to reflect loss of statutory rights, the compensatory loss was therefore limited to the loss suffered during the notice period itself.

During the notice period Ms Bell found temporary work for a different employer covering a period of some three months. The employers asserted that in assessing loss, Ms Bell should give credit for those sums. The Employment Tribunal declined to offset these earnings against the compensatory award on the grounds that to do so would be inconsistent with the principle established by Sir John Donaldson, as he then was, presiding over the National Industrial Relations Court in Norton Tool Company Limited v Tewson [1972] ICR 501. That principle was affirmed more recently by the Court of Appeal in Langley v Burlo [2007] ICR 290.

It is not disputed that the effect of the principle is that if an employer summarily terminates the employee’s contract, then typically the tribunal is entitled to award compensation for the notice period by ignoring any remuneration received by the employee for work done for third parties in that period. In Norton Tool itself the employee was entitled to six weeks’ minimum statutory notice and he was dismissed without any pay in lieu. The National Industrial Relations Court held that he did not have to give credit for sums earned elsewhere during that period. As the court recognised, this is quite different from the situation in a wrongful dismissal claim, when such sums will have to be taken into account. Sir John Donaldson gave the reason for adopting the different principle as follows:

“Good industrial practice requires the employer either to give … notice or pay [the appropriate] wages in lieu. The employer was given neither. In an action for damages for wrongful, as opposed to unfair, dismissal he could have claimed that six weeks’ wages, but would have had to give credit for anything which he earned during the notice period. In the event he would have had to give credit for what he earned in the last two weeks, thus reducing his claim to about four weeks’ wages. But if he had been paid wages in lieu of notice at the time of his dismissal, he would not have had to make any repayment upon obtaining further employment during the notice period. In the context of compensation for unfair dismissal, we think that it is appropriate and in accordance with the intentions of Parliament that we should treat an employee as having suffered a loss in so far as he receives less than he would have received in accordance with good industrial practice. Accordingly, no deduction has been made from his earnings during the notice period.”

Subsequent cases have affirmed that credit will be given for any payment in lieu of notice given by the dismissing employer himself, and that the principle is not a rule of law so that what constitutes good industrial relations practice may vary depending, for example, upon the length of period of notice: see Addison v Babcock FATA Ltd [1987] ICR 173 (CA).

It was argued before the Court of Appeal in Burlo v Langley [2007] IRLR 145 that the approach in Norton Tool was not consistent with the decision of the House of Lords in Dunnachie v Kingston-upon-Hull City Council [2004] ICR 542. Their Lordships had held that section 123 of the Employment Rights’ Act 1996, which lays down the way in which a compensatory award should be assessed, only permitted compensation to be paid for financial loss flowing from the dismissal. The EAT in Burlo held that the Norton principle could not stand in the light of Dunnachie since it would result in an employer receiving compensation over and above the loss actually suffered: see [2006] ICR 850. The Court of Appeal disagreed. They concluded that Dunnachie had neither expressly nor by implication affected the Norton principle since that principle was not an issue before their Lordships. It was recognised that in future the House may indeed take the view that the principle was inconsistent with the reasoning in Dunnachie, but there had been no ruling to that effect and the court was bound by authority to apply the Norton principle, which remained good law. However, Smith LJ, whose judgment Mummery and Leveson LJJ agreed, observed that (para 59):

“However, the Court of Appeal in Babcock has in my view made clear there is in Norton Tools no wider principle by which newly formulated precepts of good industrial employment practice can be applied to the assessment of compensation under s.123 of the ERA 1996 if the result of such application would be an award greater than the loss caused to the employee as a consequence of the dismissal.”

The question arising in this appeal is whether the Norton principle applies where the dismissal relied upon is a constructive dismissal under section 95(1)(c) of the Employment Rights Act 1996 rather than a termination by the employer under section 95(1)(a). A constructive dismissal occurs where the termination is not brought about directly by the employer, but rather by the employee accepting a repudiatory breach of contract by the employer and resigning from employment.

The EAT agreed with the Employment Tribunal that it did. They held that there was no legitimate basis for distinguishing between a termination by the employer and a constructive dismissal. Both are equally dismissals within the meaning of section 95(1) of the ERA. Furthermore, there was no authority suggesting that good industrial relations’ practice varied as between the two forms of dismissal. The EAT was impressed by the argument that the calculation of the compensatory award in accordance with section 123 ought not to depend upon the form which the dismissal takes. The court considered that:

“good industrial relations practice should not produce a different result in a case of constructive dismissal than results in the application of the principle to direct dismissal.”

The employers submitted before us that this approach is wrong. The argument advanced by Mr Kohanzad, their legal representative, is that the only question is what good industrial relations practice requires, and that in turn requires first and foremost that there be an established industrial relations practice. He says that here there is none: in practice employers deal with the two situations quite differently. There were no authorities in which the Norton Tool principle had been applied to any constructive dismissal and it would be extending that principle now to take this step, contrary to the Court of Appeal’s decision in Burlo.

Mr Elesinnla, counsel for Ms Bell, supports the decision of the EAT and submits that Burlo did not seek to limit the Norton Tool principle to any particular form of dismissal, and it would be unjust to draw fine distinctions depending upon the form which the dismissal takes. The key feature of the Norton principle, he submits, is that there is a finding of unfair dismissal; thereafter the employer should pay compensation for the full notice period. He also contends that this approach is in accordance with the injunction in section 123 that a tribunal should award “such sums as is just and equitable in all the circumstances having regard to the loss”. It was plainly just and equitable to treat these two forms of dismissal in the same way.

This is a short point. However, in my judgment, the key question is what good industrial relations practice requires. I read the Norton Tools case as establishing that an employer who chooses to bring the contract to an end without giving the notice which the contract requires should, absent gross misconduct, in the normal way offer to pay payment in lieu of notice at the time of dismissal. That is good industrial relations practice. Where that is done the employee who obtains employment elsewhere during the notice period is not required to pay back to the employer any part of the pay in lieu he has received. That analysis is consistent with the way in which Browne Wilkinson J, as he then was, understood the Norton principle in TEA Industrial Products Ltd v Locke [1984] ICR 228 at page 234E.

The Norton principle establishes that an employer who fails to comply with that practice should not be in a better position than he would have been in if he had followed the practice. To give effect to that, he is obliged to pay fully for the loss incurred by the employee in the notice period and is not allowed to claim the benefit of any sums which the employee earns by way of mitigation in that period. I accept, as Mr Elesinnla emphasises, that this will be so even where the employer genuinely believes that he is entitled to dismiss summarily for gross misconduct. Indeed, those were the facts of Norton Toolitself. He then takes the consequences of getting his assessment wrong. An explanation as to why this practice was adopted was given by Ralph Gibson LJ in the Addison case at page 817G-H. He said this:

“I do not doubt that the industrial practice referred to was a good practice and right to be applied in a case such as Norton Tool, and such a case must be typical of a very large proportion of the cases coming before industrial tribunals. In such a case the employer, if he was acting fairly, would pay the sum due in lieu of notice. It is usually convenient for the employer if the dismissed employee leaves the premises and if the wages for the whole period are paid in advance; and it is convenient for the employee to be released to look for other work; and the immediate receipt of wages for the period of notice, coupled with the chance of getting other employment during that period, may soften a little the blow of losing employment.”

It is simply not the case, however, that the same practice applies in circumstances where the employer is in repudiatory breach of contract which is subsequently accepted by an employee. The considerations identified by Ralph Gibson LJ do not arise. Nor is it the case that in a large proportion of constructive dismissal cases coming before employment tribunals a payment in lieu would have been paid. Indeed, it would plainly not be appropriate for the employer to give pay in lieu at the time of the alleged repudiatory breach. He is purporting to keep the contract alive and he is willing to continue to pay the wages. Furthermore, the employee may want to keep the contract alive. He may be willing to tolerate the breach and do no more about it. Alternatively, he may wish to sue for damages but remain in employment. Nor is it a general practice, let alone good practice, for the employer to make a payment in lieu of notice at the point when an employee resigns in response to an alleged repudiatory breach. There would typically be a real dispute as to whether there has been any repudiatory breach or not.

It seems to me that what may be good industrial relations practice when termination is triggered deliberately by the employer will be different to the practice -- or more accurately, the lack of any practice -- which occurs where it is triggered by an employee. It is not that a different legal rule applies to constructive dismissals as would apply to terminations by the employer, but simply that the relevant practice differs as between the two forms of dismissal.

I appreciate that this does lead to differences in compensation between those constructively dismissed and those whose contracts are terminated by the employer. But that is a consequence of the nature and scope of the Norton principle; it is not that section 123 is being differently interpreted. The Norton principle is not designed to give full compensation during what would have been the notice period had the contract been terminated on notice. Rather it is to uphold expectations that will result from the application of good industrial relations practice where the employer has chosen to terminate the contract with no (or inadequate) notice, even where he genuinely believes that he is entitled to do so. As the Court of Appeal emphasised in Burlo, the Norton principle should not now be extended, and in my judgment the decisions of the two Tribunals below illegitimately do extend it.

Nor can I accept Mr Elesinnla’s argument that compensation can be awarded in these circumstances on the basis that it is just and equitable to apply the same rule. In Dunnachie the House of Lords emphasised that the just and equitable principle cannot be used to award more than the actual loss suffered by the employee. Norton must be treated as a limited exception to that principle whose scope cannot be extended. So I reject this alternative basis for seeking to uphold the EAT’s decision.

I accept that this does mean that an employer who by definition has committed an act in breach of contract nevertheless avoids the scope of the Norton principle. But that is because this limited exception to the general principle that the compensation must reflect actual loss is rooted in good practice rather than in wider considerations of justice or logic.

I would only add that a dismissal by the employer can occur notwithstanding that he has not in terms told the employer to go. So an employer who has demonstrated by his conduct that he is unequivocally treating the contract as an end, for example by refusing to pay wages, will be terminating the contract and in such cases the Norton principle will apply. That would not be a constructive dismissal, which envisages the employer being willing to continue the contract and to pay the wages. That is not, however, this case.

For these reasons, and notwithstanding the attractive way in which Mr Elesinnla put his submissions, I would allow the appeal and hold that credit has to be given for the sums earned in the temporary employment carried out during the notice period.

At first blush it may seem odd that an employer should be able to rely on the absence of an established good industrial relations practice to deal with his proven bad industrial relations act in the form of his repudiatory breach. However, this area of law is not always conspicuously consistent. I agree that, for the reasons given by Elias LJ, we should not extend the Norton principle as it was explained in Burlo to a case of constructive dismissal and I too would allow the appeal.

I also agree.