Appeal No. EAT/457/94

	EMPLOYMENT APPEAL TRIBUNAL
	58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

		At the Tribunal
		On 5 May 1995

	Before

	HIS HONOUR JUDGE J HULL QC

	MR T S BATHO

	MRS E HART

POMPHREY OF SITTINGBOURNE LTD	APPELLANTS

MR D P REED	RESPONDENT

	Transcript of Proceedings

	JUDGMENT

Revised

	APPEARANCES

For the Appellants	MR M TRIGG
Solicitor
Gill Turner & Tucker
Colman House
King Street
Maidstone
Kent
ME14 1JE

For the Respondent	MR H BARTON
(Of Counsel)
Andrew McCooey & Co
Solicitors
15 London Road
Sittingbourne
Kent
ME10 1NQ

	JUDGE HULL QC:   In this case Mr Reed was a very long-serving employee of the Appellants, Pomphrey of Sittingbourne Ltd (I will call them the employers).  They run a motor business and he is described variously in his application as a mechanic or motor technician.

	He was born in 1949.  He is 45 now and he has spent the greater part of his adult life in the employment of the employers.  The employment began on 27 October 1969 and as far as we know continued without incident.  No doubt he became more and more skilled as his experience increased.  Then, on 24 May 1993, he reported sick.  He had pain in his neck, headaches and his balance was affected.  

	There was a certain amount of mystery about the precise nature of his illness.  There was a report from his general practitioner; there was no suggestion he was malingering or anything like that.  He was unfit for work and on 28 September there was a report from a consultant, who thought that he should, in due course, be fit to return to work.  This was undoubtedly a long period of illness.  

	The employers were entitled, particularly as apparently they were under financial pressure, to consider whether they should dispense with Mr Reed's services on the ground of incapacity.  Of course, that was first and foremost a matter for them and if they conducted themselves fairly they were certainly entitled to consider that and, if necessary, to act on that.

	There was a meeting on 3 November between the employers and Mr Reed and his wife.  I think it was the lady who is the Accountant to the firm who represented the employers on that occasion.  

	We do not need to go into the details.  The conclusion was reached, in due course when Mr Reed complained to the Industrial Tribunal that all was not conducted fairly, not in the sense of any deliberate unfairness (and certainly there was no attempt at misleading the Tribunal by the employers or anything of that sort); but what had happened was that it was not made plain to Mr Reed that the employers were actively considering at this meeting and, before it and after it, the question whether his employment should be terminated.  

	And so they found that when his employment ended on 31 December he had, indeed, been unfairly dismissed.  He had been at that time with the employers for more than 24 years, so he was, on any view, entitled to consideration and care in this matter which was a misfortune which had overtaken him in early middle age.

	He complained to the Industrial Tribunal on 18 January 1994 that he had been unfairly dismissed and the response of the employers was that he had been dismissed for long-term ill-health.  And then the Industrial Tribunal sat on 10 March at Ashford under the chairmanship of Mr May, with two industrial members.  They found, as I say, that he had been unfairly dismissed and they made a basic award of £4,432.50.  Included in that sum was £240 in respect of his loss of statutory rights, a relatively small conventional award.  They promulgated their decision on 31 March and the employers appealed to us by Notice of Appeal dated 27 April 1994.  

	The matter has been made very plain to us by Mr Trigg this morning.  The appeal is simply proceeding on the ground that the employers made payments to the employee which should, as a matter of right and justice and in accordance with law, be set off against that basic award.  What is relied upon is the letter which the employers wrote about this matter to Mr Reed on 12 November 1993, shortly after the meeting I have referred to.  
Mrs Jerram's letter said:

		"....

		As discussed it is now necessary for a decision to be made regarding the continuance of your employment with us.  The doctors certificate indicates that you will not be fit to return to work until, at the earliest, 21st February 1994. In these circumstances we feel we have no alternative but to terminate your employment with us as at 31st December 1993.  At that time you will be paid 12 weeks salary in lieu of notice plus accrued holiday pay.  I have calculated that the payment will be as follows".

	Then Mrs Jerram sets out the annual basic salary and divides it and says 12 weeks salary is £2,340.  Then she adds on holiday pay entitlement which is accrued and she says that she allows £585 for that and the total severance payment will be £2,925. 

	So that is what Mrs Jerram wrote on that date.  And Mr Trigg's argument goes like this.  He says the authorities show that, in general, an employer is entitled to set off against the claim of the employee for unfair dismissal such sums as the employer has paid in respect of the dismissal.  There are a great number of authorities on this topic.  In so far as the employer says, "This is an ex-gratia payment.  Here is £5,000 which I pay you ex-gratia on the occasion of your leaving the Company", the authorities show that the Industrial Tribunal should be willing to consider whether that should be set off and should, in general, conclude, if there is no more than that an ex gratia payment has been made, that it is intended by the employer to cover liabilities in respect of the dismissal.

	It may, of course, be damages for unlawful dismissal, damages recoverable in a common-law court.  There may also be claims by the employee in the Industrial Tribunal for the basic award, a compensatory award and perhaps other awards too.  The Tribunal must look at this ex-gratia payment (if that is what it is) and if the fair view is that it is intended to cover these liabilities, must give effect to that by setting off the sum against the award or the part of the award which it, on a fair view, covers.  We have been referred to Chelsea Football Club & Athletic Co Ltd  v  Heath, where that is a point which is made very plainly by this Tribunal, under the chairmanship of Slynn J.  That case is reported in 1981 in the Industrial Cases Reports at page 326 (H).  And in giving its judgment this Tribunal said:

		"It seems to us to take the clearest example first, that if an employer admits that he has unfairly dismissed an employee and pays him an amount specifically referable to the basic award for which he is liable automatically under the Act (subject to questions of contribution), the employee is still entitled to go to an industrial tribunal.  He is entitled, by reason of the provisions of section 140, to ask for a declaration that he has been unfairly dismissed and that he was entitled to the basic award.  On the other hand it seems to us that the employer is entitled by way of defence, to say, `Yes, I admit unfair dismissal; yes, I admit liability to pay the basic award.  But I have paid the basic award'". 

	And so they say in those circumstances the Industrial Tribunal is not obliged, in spite of the wording of the statute, to make a further award.  

		"If the employer, [they say] instead of admitting liability, denies that there has been an unfair dismissal but pays to the employee a sum on the basis that if the employer is wrong that will be the amount of the basic award to which the employee is entitled if he is right in saying that he has been unfairly dismissed, and if the matter then comes before an industrial tribunal and the employer is found to have unfairly dismissed his former employee, then it seems to us again that the employer is entitled to make the same answer.  He can say, `I  have paid the amount of the liability on the footing that that is the figure, if I am liable.  I have been held to be liable and payment is an answer.'  In such a case it seems to us that the industrial tribunal is not required to make such an award".

	And then they go on:

		"The case is more difficult where a general payment is made and in each individual case it is a question of construction [construction of course means first and foremost looking at the document] as to whether the payment made is to be taken to have included any rights which the employee might have under the provisions of the statute.  If the employer makes a general payment - particularly if it is made ex gratia - he will risk the argument that he has not paid something which is referable to the liability for the basic award should he be held to have dismissed unfairly.  But it seems to us that there can be cases in which a payment is made and which is, as a matter of construction or of fact, to be taken as including such rights as the employee may have under the statute, even if entitlement to the moneys is initially denied by the employer."  

	And then they go on to look at the facts of that case.

	So we have to apply that and other cases.  It is easier perhaps, in general, to apply an ex gratia payment to the compensatory award, if there is going to be a compensatory award, because that looks to actual loss whereas the basic award, of course, is giving effect to something which has been said in the Court of Appeal to be like a right of property which accrues to an employee throughout his employment.  After his first two years, as time goes on, his right to a redundancy payment, or his right to a basic award if he is unfairly dismissed, becomes more and more valuable.  So that is a matter which arises, on the face of it, independently of proof of future loss.  It is in each case, as we accept, a question of construction.

	Here the employers, so far from saying "We are making a general ex gratia award", so far from saying, "We are making a payment which is intended to cover your basic award or your compensatory award, if any, or any other awards you may receive in the Industrial Tribunal" did not do anything of the sort.  They said: 

		"We are terminating your employment.  You will be paid 12 weeks salary in lieu of notice plus accrued holiday pay". 

	So they were themselves appropriating or hypothecating (whatever word one likes to use) this award to salary in lieu of notice and, of course, the holiday pay.  Any person making a payment to any other person is entitled to say what their payment is for.  It is a fundamental principle of the common law that the payer is entitled to appropriate.  If he does not appropriate then the payee is entitled to appropriate to any lawful debt which is, or may be, paid and here the employers were expressly appropriating this payment, in terms, to salary in lieu of notice and holiday pay.  There is no dispute that the holiday pay was, in the view of the employers at any rate, fairly payable.  We have heard nothing about that.  But it is said, by Mr Trigg on behalf of the employers: 

		"Well, in fact, as we now realise, no salary in lieu of notice was payable.  Mr Reed, unhappily, through his illness, had got to the stage which he was not due any salary from the employers under the terms of his contract".

	So that, as was candidly admitted on his behalf before the Industrial Tribunal, no compensatory award was payable because there was no realistic prospect that in the period of the future to which the award would relate he would in fact earn any money.  
 
	The fact was that, whether or not he would earn in the future, the employers had chosen to say that they were paying salary in lieu of notice.  Whatever his claim to salary would be worth, they were entitled to say that that was what it was for, and if they said what this payment was for, they were entitled to have that wish, which they reduced to writing, respected.  

	Moreover it does not stop there because in our view the employee, notwithstanding that while the contract continues he is not entitled to be paid anything because he is not working, is entitled, if his employers choose to terminate the contract in that way, to be paid salary in lieu of notice.  That is a contractual right.  The employers could, as Mr Trigg very well points out, have said, "We are breaking your contract.  We are summarily dismissing you", and they would only have been liable to a claim for damages.  The primary element in that claim for damages would have been a claim, no doubt, for 12 weeks salary, 12 weeks notice being the period of notice to which Mr Reed was entitled by statute, if his contract did not expressly provide for it.  "And under that claim for damages", says Mr Trigg, "he would have received nothing, because precisely the considerations which led the Industrial Tribunal to make no compensatory award would lead the court to say he has not established any loss".

	It appears to us that that argument is entirely beside the point.  The fact that he would, on a claim for damages, recover nothing or would probably do so, does not affect his contractual rights or his employer's contractual rights.  They were entitled to do it in this way and the fact that as good employers they chose to terminate with pay in lieu of notice is not a source of surprise.  On the contrary, they wished to observe their contract and not to break their contract.

	As we have pointed out in argument, if the unhappy prognosis about the illness proved false and if, as sometimes happens, the employee recovered unexpectedly, he would be entitled, if he was given notice, to turn up at work during the notice period and say, "I wish to go on with my work.  I am still employed and I am entitled, therefore, to salary because I am presenting myself for work" and the employers then would have had to pay him for that work.  

	It seems to us completely wrong to say that because the likelihood was that he would earn no pay, therefore the employers were entitled to terminate the contract, not with pay in lieu of notice, but without pay in lieu of notice.  It is, in our view, a fallacious view and one which is contrary to law.  The right to terminate with pay in lieu of notice is a contractual right and the employers were entitled to exercise it and did exercise it and having exercised it, they cannot be allowed, in our view, to resile from the matter.  They have paid money in lieu of notice and not pay on account of basic award.  

	In those circumstances, it seems to us that this right to set off, which was asserted in front of the Industrial Tribunal by Mrs Jerram, is bound to fail and we think that the same result would follow even if Mr Trigg were right in saying that the employers were, in strict law, entitled to terminate the contract with pay of nil in lieu of 12 weeks notice.  

	If the employers expressly appropriate a payment to something which they are not obliged to pay, but they choose to do so, then that is in the strict sense not an ex-gratia payment.  They are paying something in respect of something which they are not obliged to pay and perhaps, if you like, compromising any possible claim for that 12 weeks pay.   Having chosen to do that they cannot, in our view, turn round and say, "Ah, we were probably mistaken to do that and we can now appropriate the sum post hoc (so to speak), even after the hearing in front of the Industrial Tribunal and (say) the appeal to the Appeal Tribunal.  We are entitled now to resile from our appropriation and reappropriate this money to the basic award".  It seems to us that that is contrary to principle.  Not only was this appropriation validly made by the employers but it was so accepted by the employee and he accepted the termination on that basis.

	It seems to us (with great respect to Mr Trigg who, if we may say so, struggled with great moderation and clarity against the logic of the situation) that we cannot give effect to this argument. 

	We have been greatly helped by the argument which we heard.  Nonetheless, we cannot possibly accede to it and this appeal has to be dismissed.