Appeal No. UKEAT/0337/06/ZT

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal in London 
On 10 October 2006
Judgment handed down on 25 October 2006

Before
THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

(SITTING ALONE)

MR D R GLADWELL	         APPELLANT 

SECRETARY OF STATE FOR TRADE AND INDUSTRY	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	
Mr Oliver Duncan John Isaacs
(of Counsel)
Instructed by:
Messrs Nicholas Frimond
Solicitors
6 Riverview
Walnut Tree Close
GUILDFORD
Surrey
GU1 4UX

For the Respondent	
Mr Robert Alexander Kellar
(of Counsel)
Instructed by:
The Treasury Solicitor (Employment Law Team)
1 Kemble Street
LONDON
WC2B 4TS

SUMMARY

The appellant claimed payments from the Secretary of State for Trade and Industry when the company of which he was a director became insolvent.  The Secretary of State refused to make any payments holding that he was not an employee within the meaning of section 230 of the Employment Rights Act 1996.  The case at the Employment Tribunal was heard by a chairman alone who also found that he was not an employee.  The appellant contended that the decision was a nullity because the chairman had not given active consideration to the question whether a full tribunal should be constituted to hear the appeal.  Further, it was alleged that the Tribunal erred in law in determining that the appellant was not an employee, and had failed properly to apply the guidance laid down in Bottrill v Secretary of State for Trade and Industry [1999] IRLR 326. 
The EAT held that the Tribunal had erred in law in concluding that the appellant was not an employee.   On the constitution question the EAT held that the Employment Tribunal was properly constituted. Accordingly, the appeal was dismissed and the matter remitted to another Tribunal to reconsider the issue. The Tribunal considered the conflicting decisions in Sogbetun v LB Hackney [1998] ICR 1264 and Morgan and Rowly v Brith Gof Cyf [2001] ICR 978. 

THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT):

1.	The appellant in these proceedings, Mr Gladwell, was a director of the Phileas Fogg Travel Limited, which became insolvent. He was also at the time of that insolvency a shareholder owning 50% of the shares. On insolvency he was owed certain sums by the company and he sought to recover payments from the Secretary of State, the respondent to this appeal. The Secretary of State refused the payments on the grounds that the appellant was not an employee. That is a condition precedent to his claims to a redundancy payment and other claims which fall within the terms of s.184 of the Employment Rights Act 1996. The reference to the Tribunal was made pursuant to ss. 170 and 188 of the 1996 Act respectively. There is no need to set out those provisions. Suffice to say that in each case the issue is simply whether the appellant is an employee.

2.	The case was heard by the chairman alone. The parties had, however, been told in advance in a Notice of Hearing that this was the intention and they were given the opportunity to make representations if they wished the Tribunal to include lay members. Neither made any representations. The chairman heard evidence only from Mr Gladwell and he considered certain documents put before him.  He concluded that Mr Gladwell was not an employee.

3.	There are essentially two issues in this appeal.   The first is whether the chairman erred in concluding that the appellant was not an employee. The second is whether the chairman erred in law in failing to constitute a full panel, or at least to consider whether a full panel should be constituted. It is alleged that the Tribunal was improperly constituted because the case was heard by the chairman alone and it ought to have been heard by a full Tribunal.   I refer to them as the employee and constitution issues respectively.  They are wholly distinct issues and I will deal with them separately. 

The background

4.	The relevant findings of fact by the Tribunal are set out in paragraphs 10-20 of the Tribunal decision as follows:
“The claimant was one of three people who created the company, Phileas Fogg Travel Ltd (“the company”) in 1994. The other directors were Mr Aidan Whelan and Mr Karl Prentice. The shareholding of the company at that time was divided as to 36% to Mr Whelan and 28% to Mr Prentice. The claimant and Mr Whelan were full-time executive directors of the company, whereas Mr Prentice was a non-executive director.

In 1995 Mr D Turnbull joined the company as Sales Director and in 1998 another Sales Director, Mr K Whelan, joined the company and at that stage the Board consisted of five people. Mr K Whelan left the company in 2003 and Mr D Turnbull left in 2004.

The company’s business was as a travel agency and at one time had five offices. However, by at least March 2002 the company was experiencing financial difficulties. The claimant had a salary of £78,000.00 per annum but on 1 March 2002 this was reduced by agreement by £30,000.00 per annum and, therefore, as from that date his salary was £48,000.00 per annum.

In 2005 Mr Prentice sold his shares equally to Mr Aidan Whelan and the claimant, with the consequence that, as from that date, Mr Whelan and the Claimant each had a 50% shareholding.

At a time when the company was getting into financial difficulty, both the claimant and Mr A Whelan put a further £485,000.00 each into the company. This was recorded by way of issue of redeemable preference shares.

The company went into a Voluntary Creditors’ Liquidation on 28 November 2005. 

Throughout the life of the company the claimant worked full-time within the business of the company. The company used a payroll service and the claimant was paid after deduction of PAYE and national insurance contributions.

The claimant produced to me a document which was entitled “Contract of Employment” but which was undated. It stated that the contract of employment commenced on 1March 2002 and superseded any other contract. It gave a salary of £48,000.00 per annum. It did not appear that the last page was copied, and accordingly, I could not see any signatures. The claimant explained that the reason for the contract was the reduction in salary.

On RP1 form the claimant has stated he was entitled to 24 days’ holiday each year, the holiday year commencing on 1 January. He further stated that he had carried forward 24 days from the previous year and taken seven days’ holiday, leaving 35 days’ holiday owing. The contract of employment provided that the holiday year should be the calendar year and that the holiday entitlement would be 24 working days. It specifically prohibited carrying forward of holidays from one year to another.

In answer to a query about who had signed the contract of employment, the claimant stated that he would have signed it twice because “I was employer and employee”.

5.	Having set out the principle facts the Tribunal referred briefly to the submissions from the parties, and to certain material cases.  Its conclusions are summarised in 
paragraphs 24-28:
“I consider this to be a borderline case and there are a number of factors which indicate that the Claimant may be regarded as an employee.

Among those are that he worked full-time within the company, he was paid on a PAYE basis and he appears to have had set holidays.

On the other side of the coin, there is the substantial injection of capital when the business was in difficulties and the self-imposed reduction in salary.

I noted that there was a contract of employment produced to me. However, I did not give that document a great deal of weight in view of the fact that it was neither dated nor signed. Indeed, it appeared to me to be incomplete.

At the end of the day, I considered the question of control. It seemed to me that the Claimant was one of two joint controllers of the company and his statement that he was both employer and employee indicated to me his perception of his position. A person cannot be both employer and employee.

In all the circumstances, I consider that the Claimant was a Director and officeholder of the company and I am not satisfied, from the evidence that I have received, that he was an employee, as defined in the Employment Rights Act 1996.”

It follows that the appeals were rejected. 

The employee issue
The law.
6.	The definition of an employee is found in s.230 of the Employment Rights Act 1996. It provides that ‘employee’ means “an individual who has entered into or works under (or, where the employment has ceased), worked under a contract of employment”.  By sub-section 2 a contract of employment is defined as “a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing”.

7.	There are a number of authorities which have considered the question of whether a contract of employment arises in circumstances where the worker concerned is also a director and shareholder of a company. The most authoritative is the decision of the Court of Appeal in Secretary of State for Trade & Industry v Bottrill [1999] ICR 592. In that case Mr Bottrill was the managing director and the holder of the sole issued share in a company called Magnitek UK Limited. The original intention was that he should temporarily hold that shareholding and that subsequently the Magnitek group of companies in the USA would invest into the UK company and acquire 80% of the equity. 

8.	In August 1994, some six months after he became managing director, he signed a document headed “contract of employment.” This set out the standard elements found in such contracts such as duties, working hours, holiday and sick entitlement and so forth. He worked the hours stipulated in the contract and had PAYE and national insurance contributions deducted from his salary in the normal way. He did not receive directors’ fees. The company had to appoint a receiver in April 1996 and Mr Bottrill was dismissed. This was before the American group had made the proposed investment and whilst he remained controlling shareholder.  He sought from the Secretary of State a redundancy payment and other debts owed by the company pursuant to s.182 of the Employment Rights Act 1996 but the claim was rejected on the ground that he was not an employee. 

9.	The Employment Tribunal upheld his complaint against that ruling. It noted that his 100% shareholding was temporary; that he paid tax and national insurance as an employee; he had fixed hours; he was not engaged in any other employment; and that he had a contract which was signed and dated and indicated that he was an employee. 

10.	The EAT dismissed the Secretary of State’s appeal. In so doing, it had to consider an argument based upon an earlier EAT decision (Mummery P, presiding) in Buchan and Ivey v Secretary of State for Employment [1997] IRLR 80 in which the EAT had held that if an employee was also the sole or controlling shareholder of a company, and therefore as a consequence could prevent his own dismissal, then as a matter of law he could not be regarded as employee, at least for the purposes of these insolvency provisions in the Employment Rights Act 1996. The EAT thought that it would frustrate the purposes lying behind the legislation to permit such persons to be allowed to recover compensation from the state. 

11.	In Bottrill, the EAT - this time with a different President (Morrison J) presiding, refused to follow that decision. It concluded there was no reason in principle why even a controlling shareholder should not be treated as an employee. 

12.	The Court of Appeal agreed with that analysis and expressly disapproved of the Buchan case. Lord Woolf M.R, handing down the judgment of the Court (which included Peter Gibson and Mantell LJJ) said this (page 603A to C):

“We recognise the attractions of having in relation to the ERA a simple and clear test which will determine whether a shareholder or a director is an employee for the purposes of the Act or not. However, the Act does not provide such a test and it is far from obvious what Parliament would have intended the test to be. We do not find any justification for departing from the well-established position in the law of employment generally. That is whether or not an employer or employee relationship exists can only be decided by having regard to all the relevant facts. If an individual has a controlling shareholding, that is certainly a fact which is likely to be significant in all situations, and in some cases it may prove to be decisive. However, it is only one of the factors which are relevant and certainly is not to be taken as determinative without considering all the relevant circumstances.”

13.	Later in the judgment Lord Woolf made certain comments (not, he emphasised, rigid guidelines) which the Court suggested may be of assistance to parties in future cases (p.604A-E):
“The first question which the tribunal is likely to wish to consider is whether there is or has been a genuine contract between the company and the shareholder. In this context, how and for what reasons the contract came into existence (for example whether the contract was made at a time when insolvency loomed) and what each party actually did pursuant to the contract are likely to be relevant considerations.

If the tribunal concludes that the contract is not a sham, it is likely to wish to consider next whether the contract, which may well have been labelled a contract of employment, actually gave rise to an employer/employee relationship. In this context, of the various factors usually regarded as relevant (see, for example, Chitty on Contracts 27th edn (1994) para. 37-008), the degree of control exercised by the company over the shareholder employee is always important. This is not the same question as that relating to whether there is a controlling shareholding. The tribunal may think it appropriate to consider whether there are directors other than or in addition to the shareholder employee and whether the constitution of the company gives that shareholder rights such that he is in reality answerable only to himself and incapable of being dismissed. If he is a director, it may be relevant to consider whether he is able under the Articles of Association to vote on matters in which he is personally interested, such as the termination of his contract of employment. Again, the actual conduct of the parties pursuant to the terms of the contract is likely to be relevant. It is for the tribunal as an industrial jury to take all relevant factors into account in reaching its conclusion, giving such weight to them as it considers appropriate.”

14.	The final observation reiterates the well-established principle that it is for the Tribunal at first instance to weigh the relevant factors.  An appellate court can only interfere if the Tribunal has misdirected itself or arrived at a conclusion which cannot reasonably be supported.

15.	The Court of Appeal also referred to a decision of the Inner House of the Court of Session in Fleming v Secretary of State for Trade & Industry [1997] IRLR 682. That case confirms that financial matters may be relevant considerations for a tribunal to take into account. For example, in the Fleming case itself, Lord Coulsfield, giving the judgment of the Inner House of the Court of Session, considered that it was material in that case that the director had drawn no salary during the last month of the company’s existence and that he had personally guaranteed its obligations. 

16.	The Bottrill observations have been applied in a number of subsequent cases. Perhaps most relevant is another decision of the Court of Appeal in Connolly v Sellars Arenascene Ltd [2001] ICR 760. Mr Connolly formed a sports promotion business, EGP, and had the majority shareholding. Arenascene was a 99% subsidiary of EGP, with Mr Connolly owning the other share. Clearly, therefore, he controlled both businesses. He entered into a service agreement with EGP by which he was to act as chairman and managing director of EGP and Arenascene. A formal agreement was drafted by solicitors and signed by him. Subsequently he sold his shareholding in both companies to IRH plc, and became employed by them as director and chief executive of EGP and Arenascene. He was dismissed in June 1992 when IRH went into receivership.

17.	It was not disputed that he had a contract with IRH but the issue arose as to whether he had continuity of employment sufficient to bring a claim for unfair dismissal. That depended upon whether he was an employee prior to the sale to IRH.
18.	The Tribunal found that he was not an employee prior to the sale.  It accepted that the service agreement entered into with EGM was not a sham, but it considered that it did not give rise to an employment relationship.

19.	The EAT upheld Mr Connolly’s appeal, concluding that it had placed too much reliance on Mr Connolly’s controlling shareholding, and the Court of Appeal dismissed the further appeal from the EAT. The Court recognized that being a controlling shareholder was a significant factor, but concluded that the Tribunal had placed too much reliance on the controlling shareholding and thereby had effectively nullified the finding that the service agreement was not a sham, and also the finding that he had “behaved as an employee”.

20.  Pill LJ, with whose judgment Chadwick LJ and Wright J agreed, analysed the potential relevance of the controlling shareholding in the following way (para 16):

“I acknowledge that the fact that the respondent has a controlling shareholding is a significant factor in deciding whether he is an employee but, in considering whether the agreement gave rise to an employer/employee relationship, the tribunal have attached to that factor a significance which excludes a proper consideration of other relevant factors. They refer to the respondent being at pains to ‘retain overall absolute control’ and to his retention of ‘ultimate control’. That they have misunderstood the relevance of the shareholding appears from their reliance upon the respondent’s ‘interest as shareholder over and above that of employee and [that he] stood to gain if the company prospered’. There are many situations in which people who are undoubtedly employees of a company stand to gain if the company prospers. Moreover, they appear to regard the skills contributed by the respondent as being inconsistent with a position as employee. They state that he was ‘an accomplished and expert entrepreneur operating a number of businesses’, that he had built up businesses ‘from scratch’, that the businesses ‘represented his personal ingenuity and success’ and that he was a key individual’. In the circumstances of this case, I do not consider that the presence of those skills and the achievement of that success by the respondent militate against his being an employee.”

The grounds of appeal.
21.	There are three elements in the appeal directed towards the decision of the Tribunal that there was no contract of employment. First, it is submitted that the Tribunal failed properly to assess the significance of the written, albeit incomplete, contract of employment. Second, it is alleged that they did not have regard to all the facts as set out in Bottrill. Finally it is contended, particularly by reference to para 27 of the decision, that the Tribunal effectively treated the fact that the appellant had joint control as conclusive of the case. 

22.	The appellant contends that the chairman, following the comments in Bottrill, ought to have determined whether there was a contract of employment in existence and whether or not it was a sham. It is submitted that the Tribunal failed to determine that preliminary question. It ought to have considered the elements of the contract and considered how far they were in fact reflected in the way the job was done. 

 23.	I do not accept that submission. As Mr Kellar, counsel for the respondent, in my judgment rightly contends, the Tribunal was entitled to take the view that it would give little weight to an undated and unsigned contract. It was not saying that this was a sham. Nor was it thereby denying that there might be a contract that could be inferred from all the surrounding circumstances.  But it was not prepared to accept that there was a properly formulated formal contract in existence. 

24.	The alternative ground is that all the matters referred to in Bottrill were not taken into consideration. For example, it is said that no express reference was made to the fact that the appellant did not work elsewhere or that the company set targets for him, or that there was no indication that he was paid by a director’s fee.
25.	These are not legitimate grounds of complaint. The Tribunal set out, albeit relatively succinctly, the principal issues weighing one way and the other. It is not necessary to set out each and every point addressed in argument.

26.	However, the appellant does make a third and, in my judgment, more telling submission. He contends that the Tribunal, although ostensibly weighing up all relevant factors, has in fact placed decisive weight on the fact that the claimant was a joint controller. He relies upon the Tribunal’s observation at para 27 that he had joint control and that “a person cannot be both employer and employee”, and also upon the weight placed by the Tribunal on the fact that Mr Gladwell perceived himself to be both employer and employee.  That, as Mr Isaacs pointed out, was said in the context of the appellant explaining that had the employment contract been formalised he would have signed both for himself and the company.  Mr Isaacs contends that a similar answer could be given by many a director, some of whom would certainly have contracts of employment with their companies.

27.	Mr Kellar contends that if one looks at the Tribunal decision, it states in terms that it has had regard to all the relevant circumstances and it set out various other factors militating both for and against there being a contract of employment.  This was merely one factor, albeit an important factor, which the Tribunal took into consideration and on which it was entitled to place significant weight.  If it had fallen into the Buchan trap and treated this as effectively negating the other matters, it would not have needed to make reference to them at all. Nor would it have made the comment that this was a “borderline case”.

28.	I recognise the force of those submissions. Plainly, ostensibly at least, the Tribunal has simply weighed various competing factors, as it is required to do.  However, I have come to the conclusion that para 27 does strongly suggest that the Tribunal saw the question of control as being effectively decisive. I am not satisfied that it was seen merely as a significant, even a very significant, factor weighing the scales firmly in one direction.  The statement that a person cannot be both employer and employee suggests that the Tribunal did in fact treat the question of control (or in this case joint control) as likely to be inconsistent with the status as an employee.  That is inconsistent with the authorities and effectively reinstates, or at least comes close to reinstating, the Buchan case which the Court of Appeal chose not to follow. A majority shareholder will in practice act as the employer, making decisions on behalf of the company in which he has shares, but that does not prevent him being an employee, as Bottrill and subsequent cases show.  

29.	Particularly material here is the Sellars Arenascene Ltd case in which the Court of Appeal concluded that the Employment Tribunal had given the fact that the employee had a controlling shareholder “a significance which excludes a proper consideration of other relevant factors” (para 16). In essence I think that accurately summarises the error which the Tribunal made here, notwithstanding that certain passages in the judgment would suggest otherwise.

30.	 I am far from saying that the Tribunal would inevitably have concluded that the relationship was one of employer/employee had it not fallen into this error. Accordingly, whilst I have found that the Tribunal did place too much significance on the control issue, to the extent of excluding a proper consideration of the other factors. I think that the appropriate order would be to remit the case to another Tribunal for the issue to be reconsidered.

The constitution issue
31.	That leads to the second principal ground of appeal, which is whether the Tribunal was properly constituted. The case was heard by the regional chairman, Mr Peters. It is submitted that it ought to have been heard by a full Tribunal because it raised a difficult issue of law. Alternatively, it is said that in any event there should have been a proper consideration of whether or not a full Tribunal should be constituted to hear the case, and there is no evidence that any such decision was taken at all, and certainly no reasons for any such decision have been vouchsafed by the Tribunal.

32.	The circumstances in which the case was selected to be heard by the chairman were as follows.  The parties were in the usual way sent a “Notice of a Claim and Notice of Hearing” setting out certain information.  This included the place and date of hearing and continued: 

“The hearing will be by a chairman sitting alone.  If you think it should be heard by a tribunal which includes lay members, please inform us in writing, giving your reasons.  A chairman will usually only direct a hearing by a full tribunal if the claim involves complicated factual issues.”

33.	The notice was signed on behalf of the Regional Secretary.  This was in accordance with what I understand to be an established practice whereby listing and allocation to a chairman or a panel is a decision taken on behalf of the regional chairman by the regional secretary.   Neither party did make any submissions.  The matter was not again specifically raised with the parties at the substantive hearing and the chairman did not raise it of his own motion.

The law.
34.	The relevant statutory provision is s.4 of the Industrial Tribunals Act 1996.  In so far as is relevant it provides:

“Section 4(1) Subject to the following provisions of this section [and to section 7(3A)], proceedings before an employment tribunal shall be heard by – 

(a) the person who, in accordance with regulations made under section 1(1), is the Chairman, and

(b) two other members, or (with the consent of the parties) one other member, selected as the other members (or member) in accordance with regulations so made.

(2) Subject to subsection (5), the proceedings specified in subsection (3) shall be heard by the person mentioned in subsection (1)(a) alone.

(3) The proceedings referred to in subsection (2) are -
[the subsection then lists the relevant proceedings.  They include the claims in this case, which fall under para.(c)]

(5) Proceedings specified in subsection (3) shall be heard in accordance with subsection (1) if a person who, in accordance with regulations made under subsection 1(1), may be the Chairman of an employment tribunal, having regard to –

(a)	whether there is a likelihood of a dispute arising on the facts which makes it desirable for the proceedings to be heard in accordance with subsection (1),

(b)	whether there is a likelihood of an issue of law arising which would make it desirable for the proceedings to be heard in accordance with subsection (2),

(c)	any views of any of the parties as to whether or not the  proceedings ought to be heard in accordance with either of those subsections, and

(d)	whether there are other proceedings which might be heard concurrently but which are not proceedings specified in subsection (3),

decides at any stage of the proceedings that the proceedings are to be heard in accordance with subsection (1).”

35.	The basic scheme is relatively straightforward.  If the subject matter falls within subsection 3, then the case must be heard by a chairman alone unless the chairman requires a full panel to be constituted, having regard to the factors set out in subsection 5.  Where issues of fact are in play, this points in favour of a full panel; where the issues are of law, it points the other way.

36.	What is the effect if there is no evidence that the chairman has directed his mind to the question whether a full panel should be constituted or not?  Unfortunately the authorities on this issue do not speak with one voice. In Sogbetun v London Borough of Hackney  [1998] ICR 1264 the Employment Tribunal chairman directed that the case of unfair dismissal should be heard by a chairman sitting alone instead of a full Tribunal. The parties were asked if they had any objection to that course of action. Both positively indicated in writing that they did not object, so the case went ahead. (It is specifically provided in subsection 3 that one category of case which can be heard by a chairman alone is where the parties have given their written consent to the case so proceeding.)  On appeal it was submitted that the case should not have been determined by the chairman sitting alone, notwithstanding the agreement of both parties. 

37.	The Employment Appeal Tribunal (Morison P presiding) upheld the appeal. It held that the chairman had not exercised his discretion under s.4 (5), or if he had done so, he had done so improperly. The Tribunal held that no reasonable chairman properly exercising his discretion could have concluded otherwise than that this was a case where a full Tribunal should be constituted. This was so notwithstanding the apparent agreement of the parties. The error, according to the Tribunal, was fundamental: it went to jurisdiction and rendered the decision a nullity. In the course of giving the decision of the Tribunal, Mr Justice Morrison said this:
“The question then arises as to whether we can, and should, interfere with the decision of the industrial tribunal on the grounds that it was not properly constituted, when both parties have consented to what the Chairman did and never invited him to reconsider his position. It seems to us that the answer to the question depends upon whether we take the view that the way the tribunal was constituted is itself a jurisdictional issue. If it is, then the decision of a tribunal which has acted without jurisdiction can be challenged on that ground whether or not the parties consented or acquiesced.

The industrial tribunal is a creature of statute, whose jurisdiction derives solely from the statutory provisions conferring jurisdiction upon it. As we have attempted to show, the jurisdiction for a tribunal to adjudicate on cases where the Chairman sits alone requires the exercise of a judicial discretion. If, in a ‘sit-alone’ case, a tribunal Chairman had never exercised his discretion at all under subsection (5), it seems to us that the tribunal would not have been constituted in accordance with the statute. If a tribunal was improperly constituted, then it seems to us that it cannot have arrived at a lawful decision. Its decision would be a nullity. On that basis, whether or not the parties had consented to or acquiesced in what happened, the EAT should remit the case back for consideration by a tribunal properly constituted. Parties cannot confer jurisdiction on a statutory tribunal such as this, either by consent or through the doctrine of estoppel. Further, the EAT draws a distinction between a jurisdiction issue and other issues when the question arises as to whether a point not taken below can be argued on an appeal. That is entirely consistent with the thesis that a jurisdiction question arises regardless of whether the jurisdiction point has been previously spotted or simply abandoned or neglected. The EAT will often be required to consider whether the tribunal has properly accepted jurisdiction over a dispute: for example, whether a complaint was presented within three months of the effective date of termination. Although there might be concurrent jurisdiction with the Crown Office were a tribunal to act beyond its powers, we do not doubt that we can and should deal with such a case.

In principle, it seems to us that the answer would be no different in a case where a Chairman purported to exercise his discretion but did so perversely or by reason of a misdirection in law. If the exercise of the discretion was defective in law, then in our judgment the EAT can and should intervene and remit the case back for a hearing before a properly constituted tribunal.

Further, we are of the view that the parties and the appellate courts are entitled to know why an unidentified or an identified Chairman has exercised his discretion under subsection (5). A short statement of the reasons for his conclusions is all that is required. These will show what particular factors he took into account when deciding as he did. The need to give reasons will, we think, be of assistance to chairmen called upon to exercise their discretion because it will help them to focus their attention on the factors which Parliament require them to take into account.”

38.	That approach was followed with certain qualifications by another division of the EAT (Charles J presiding) in the case of Post Office v Howell [2000] IRLR 224. That case involved unlawful deduction from wages, as opposed to unfair dismissal. The parties expected the case to be heard by a full Employment Tribunal but in fact when they arrived at the hearing they found that a chairman sitting alone had been allocated to hear it. Neither side raised any objection. There was no overt consideration by the chairman as to whether he should sit alone. The employee’s complaint was upheld and the employers appealed on the ground that the matter should have been heard by a full Tribunal, or at least there should have been a proper exercise of discretion by the chairman as to whether to constitute a full Tribunal or not. 

39.	The EAT upheld the appeal on that latter ground. It found that the chairman had a mandatory obligation to consider the exercise of power under s.4(5). However, it did so, as it made clear at para 27 of the decision, as a matter of comity.  It considered that it ought to follow the Sogbetun case rather than reach an inconsistent decision at the same level which would create difficulties for Employment Tribunals. But the dictates of comity went only so far; they did not lead the Tribunal to follow precisely the analysis of Mr Justice Morison. The Tribunal in the Post Office case was not prepared to treat the failure to exercise a discretion as involving a negation of the jurisdiction of the Tribunal, nor did such a failure render the decision a nullity. However, it was, the Tribunal considered, an error of law. In this case the Tribunal took the view that there were factual disputes which made it highly desirable that the case should be heard by a full Tribunal and they remitted the matter accordingly. 

40.	Subsequent cases have taken a similar approach, including a decision of the EAT in Scotland, Harman v Town & Country Veterinary Group EAT/71/01, and a more recent decision of this Tribunal (Mr Justice Douglas Brown presiding) in Clarke v Arriva Kent (Thameside) Limited EAT/0341/00. 

41.  In the latter case it was held that where a chairman had allocated a case to a chairman sitting alone, without reasons and without the parties being invited to express any views on the matter, this constituted an error of law.  That error was repeated by the chairman at the substantive hearing who also failed to give reasons for hearing the case alone.  In fact both chairmen did, after the appeal was lodged, indicate that they had each considered the matter and chosen to exercise the discretion against constituting a panel, giving brief reasons for that view.  The EAT however held that there was an error of law by each chairman in failing to give reasons and failing to canvass the views of the parties.  Douglas Brown J commented that it did not matter whether the error could properly be described as jurisdictional rendering the decision a nullity or not; the effect of the error of law was that the case had to be heard afresh.  (The significance of whether the hearing was properly described as a nullity or not could, very exceptionally, be relevant as Charles J pointed out in Howell.  However, this is not such a case. I heard no argument on this point and would prefer to express no view on it.)

42.	The EAT in Clarke also held that the chairman at the hearing was under a continuing duty to keep the question of the constitution of the Tribunal under consideration - that being reflected in the words “at any stage of the proceedings” in s.4(5). The Tribunal further held that this was an obvious case where the matter should be heard by a full Tribunal.

43.	It should be noted, however, that in the Clarke case the Tribunal was referred only to the Sogbetun and Post Office authorities However, prior to that decision there had been decided another decision of the Employment Appeal Tribunal which had chosen not to follow the Sogbetun approach at all. In Morgan and Rowly v Brith Gof Cyf [2001] ICR 978 the issue before the Tribunal concerned a breach of contract claim. This is a matter which pursuant to s.4(2) must be heard by a chairman alone but subject to subsection 5. The appellant alleged that the claim should have been heard by a full panel. The court considered Sogbetun. It noted that there were certain distinctions between the two cases.  First, Sogbetun was concerned with unfair dismissal whereas this case was concerned with breach of contract, matters which habitually go before a single judge in the county court or the high court. Second, the issue of the constitution of the panel had been raised in Sogbetun but none of the parties had addressed the matter in this case.

44.	Having referred to certain passages in the decision of the Employment Appeal Tribunal in Sogbetun, the EAT with the then President, Mr Justice Lindsay, presiding, held that it did not properly represent the law. It noted that in the Post Office case Charles J had followed Sogbetun as a matter of comity, at least in so far as Sogbetun established that a discretion should always be exercised.  Mr Justice Lindsay identified what he perceived to be the error in the Sogbetun in the following terms:

“The fallacy, as we would respectfully see it, in Sogbetun is to be found in that first passage on 1268 where it says:

“Because of the words “Subject to subsection (5)” it is our view that if a Chairman sits on his own that is because he has declined to exercise his discretion to refer the matter to a full tribunal. Therefore, whenever a Chairman sits on his own he must have exercised his discretion under subsection (5), albeit negatively.”

Rather the case is that unless the Chairman has decided to go to a panel of three the matter is inescapably proper only for a hearing by a panel of one under section 4(2). There is a danger that the approach adopted in Sogbetun really rewrites the statute by making it operate as if it provided that unless the Chairman had duly declined to choose a panel of three, there should be a panel of three. But that is not what the section provides. Parliament could, of course, have expressly cast upon a Chairman an obligation in every case to consider whether the matters described in subsection (5)(a), (b), (c) and (d) pointed towards a hearing in front of a panel of three. Parliament could have provided that that was to apply in every breach of contract case or to some breaches of contract cases, and distinctions might have needed to have been drawn between different categories. But it is a very strange way to frame an obligation on a Chairman which is said to require him to decide something by framing it by saying “if the Chairman decides”, which is the formula that subsection (5) adopts. If Parliament had meant to cast a duty upon a Chairman invariably to consider the sort of matters that are raised in subsection (5) it would say “the Chairman must decide” or “the Chairman shall decide” or something along those lines and not begin, as it does, by saying “if the Chairman decides”.

45.	In short, the conclusion of the Tribunal in that case is that there is no mandatory obligation for the chairman to consider the matter at all. Mr Justice Lindsay continued as follows (para 28):
“It is no doubt desirable for a Chairman to reflect upon sub-section (5), even if he is not invited to do so. And certainly, of course, if he is addressed on the subject or it is raised in the papers, well then, he has to turn his mind to the issues described in sub-section (5). Whenever there is real doubt on the question, it must always, in our view, be better for him to prefer a panel of three. But it is not, in our view, an error of law on a Chairman’s part, when dealing with a case which is a sub-Section (3) case and the point is not being raised by anyone, not to turn his mind to subsection (5). Nor is it an error of law for him not to have expressed openly the considerations that he might tacitly have had in mind. Suppose this, as a rather extreme example: at the end of a hearing of a subsection (3) case where no one at any stage had raised the issue of whether there should be one person or three hearing it but where it had been heard by the Chairman alone, that at the end of the hearing, after he had given his decision, the Chairman made some remark such as “I had not thought at all of subsection (5) but now I see I could have sat with others” or even, “Now I see that it would have been preferable for me to sit with others” or something along those lines. That, surely, would not represent a nullification of his decision. Again, so far we reiterate that we adopt the reasoning of The Post Office v Howell cited earlier. But nor would it either, in our view, represent an error of law in relation to the hypothetical Chairman’s decision in the case such as to entitle the Employment Appeal Tribunal to interfere with that decision. It would not be a material error of law. It would really be more a somewhat disturbing and startling admission of ignorance on the hypothetical Chairman’s part but not, truly speaking, a relevant error of law.”

Analysis.
46.	It seems to me that the starting point is to recognise that there is a discretion conferred upon the chairman.  Like all discretions, it is one which he has to consider exercising in an appropriate case. As Lindsay J pointed out, however, the default position for cases falling within subsection (3) is that the case is to be heard by a chairman alone unless he directs otherwise having had regard to the factors set out in subsection (5).   

47.	I see nothing wrong in the Tribunal Office operating a standard practice, as directed by the regional chairman in accordance with s.4(2), that all cases in that category are listed before a chairman alone but the parties are given an opportunity of making representations as to why a full panel should be constituted.  Plainly if representations are made then the allocation direction will have to be reconsidered and brief reasons given for the decision.  I also agree with the Tribunal in Clarke that s.4(5) requires that the discretion is one to be kept under review.  

48.	It is important that the chairman charged with hearing the case should have regard to the possibility that the situation may have changed from when the original decision to have the matter heard by a chairman alone was taken.  I have no doubt that in practice the chairman allocated the case will know of the practice and be alert to the continuing duty to consider calling a panel.

49.	In practical terms there will be many cases for which a chairman sitting alone is qualified where there is nothing about the case which causes that chairman to consider that this might be a situation where the full panel would be appropriate. In those circumstances the discretion will be exercised if only in a negative sense, as Morison J described it.  There is in my judgment no legal duty for the judge at the substantive hearing to invite any observations from the parties.  Having said that, it would usually be prudent for the chairman to do so, and to make a very brief statement to the effect that he had considered the matter and to give reasons in short form for his decision.

50.	Furthermore, I do not consider that the chairman who fails to give reasons for not departing from the usual rule is thereby committing an error of law, unless the issue has been raised explicitly by one of the parties.  If and when the decision (or apparent lack of it) is challenged on appeal, and the appeal raises a real issue as to whether a full panel should have been called or not, then it is open to the EAT to ask for reasons as to why the discretion was exercised as it was. 

51.	I would not, therefore, endorse the approach in Clarke, based upon Sogbetun, that the failure of the chairman in that case to give reasons or canvass the views of the parties of itself amounted to an error of law which could not be remedied by reasons given later, although the decision itself in Clarke could be justified on the basis that there was a perverse exercise of discretion.  The procedure adopted in Clarke, seeking the reasons from the chairmen after the appeal had been lodged, was in my view entirely appropriate given that there were concerns about whether a panel should have been constituted.   However, in my judgment there would need to be a good case for thinking that the chairman may have failed to consider the matter at all, or to have exercised the discretion perversely, before the EAT will require reasons.  It is not necessary, in my judgment, in every case where this point is taken on appeal to require what would in practice often be formulaic reasons.

52.	I would, however, respectfully disagree with Lindsay J that the only circumstance in which a chairman is obliged actively to consider exercising his discretion is if the parties raise the issue.  Litigants in person may occasionally be unaware of the possibility of a different constitution (although they should have been alerted to the possibility in the Notice of Hearing); perhaps more significantly, they may not appreciate the potential merits of that course.  So there must be some cases where the chairman hearing the case should actively consider exercising the discretion even where the issue has not been drawn to his attention.  

53.	Equally, I agree with Morison J that the fact that the parties have positively agreed to the jurisdiction of the chairman sitting alone does not inevitably and in all cases preclude a successful challenge. However, it will do so unless the case is manifestly one where a panel should have been constituted whatever the views of the parties.  Sogbetun was an exceptional case of that nature.    In almost all surmisable circumstances, however, the failure by the parties to object when given the opportunity, and a fortiori their active consent, especially where they are legally represented, will make a perversity challenge impossible to sustain.

 54.	Sometimes it will be clear once the case is ready for trial that the area of factual dispute is such that a panel should be constituted. The inevitable delays are then an unfortunate but inevitable consequence of that decision. At the same time, the chairman reviewing the matter at the hearing is in my view entitled to take account of the fact that there will be extra costs and delay, and perhaps additional difficulties for witnesses, if the matter is then adjourned. The factors set out in s.4(5) are not in my judgment the only factors to which a chairman can have regard.  

55.	There is always the obligation to deal with the case justly which inevitably involves dealing with it expeditiously and having regard to cost. In this context that obligation is not derived directly from rule 3 of the Employment Tribunal rules, which require giving effect to the overriding objective, since that duty relates only to the exercise of powers conferred by those rules.  But I have no doubt that a similar obligation should be read into the exercise of the discretion conferred on the Tribunal pursuant to s.4 .

Applying the principles to this case.
56.	Turning to the appeal in this case, I do not think there was anything to alert the chairman to consider that this was a case where a panel should have been called.  The issue was not raised by either party and indeed they chose not to make any observations in writing even when they had the opportunity to do so.  There was no significant issue of primary fact, and only one witness, namely Mr Gladwell himself.  The real issue was what legal construction should be placed on what were largely undisputed facts. Indeed, the appellant accepted that the case raised an issue of law, but that is a factor in favour of a chairman only, not in favour of the panel, as he argued.  

57.	This was plainly a case for which a chairman alone was suited, and there was nothing in the case which ought to have caused the chairman hearing the matter even to have raised the issue as to whether a panel should be called.  It might have been prudent to do so, as I have said, but the failure to do so betrayed no error of law. I have no doubt that it would not conceivably have led to a panel being called even had the views of the parties been canvassed.

58.	Accordingly, I am not prepared to assume any failure to exercise the relevant discretion because of either the failure at the hearing to raise the matter or to give reasons why no panel was chosen.  There is really nothing at all to suggest either that the section 4 discretion was not exercised or was improperly exercised.  It does not even justify seeking further observations from the chairman.  Accordingly, the appeal on this ground fails.

Disposal
59.	However, for reasons given, the appeal succeeds on the employment issue and the case should be remitted to a different Tribunal to determine whether Mr Gladwell was an employee or not.