Appeal No. UKEAT/0019/07/MAA 
   UKEAT/0020/07/MAA

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 23 April 2007

Before
HIS HONOUR JUDGE SEROTA QC
MR T HAYWOOD
MS G MILLS CBE

FLAMCO LTD	APPELLANT

MR R SMITH	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MR THOMAS COGHLIN
(of Counsel)
Instructed by:
Messrs.Cobbetts LLP
Ship Canal House
King Street
Manchester M2 4WB	
For the Respondent	MR JAMES BOYD
(of Counsel)
Instructed by:
Messrs. Sharp & Partners Solicitors
6 Weekday Cross
Nottingham NG1 2GF	

SUMMARY
Unfair Dismissal – Polkey deduction
Contract of Employment – Wrongful dismissal
The Employment Tribunal [as the parties now agree] approached the construction and application of a term in the contract of employment on an incorrect basis. Instead of determining whether the term in question was condition, warranty or intermediate term it should have considered whether it was term that made time of the essence, and if not whether the employer had given effective notice to make time of the essence.

Further the Employment Tribunal conflated a Polkey reduction with a reduction under S123(1) of the Employment Right Act1996

HIS HONOUR JUDGE SEROTA QC
1.	We have before us an appeal from two decisions of the Employment Tribunal at Liverpool chaired by Mr Robinson.  On 20 June 2006 it upheld the Claimant’s complaints for unfair dismissal and breach of contract.  It was in fact accepted that the dismissal was automatically unfair as there was no step 1 letter.  It was decided there should be no deduction by way of contribution or under Section 123(1) of the Act and the Claimant Mr Smith was awarded a total of £45,062 compensation including a 10% uplift but no deduction was made.  The matter was considered by Mr Justice Underhill, who stayed it for a short period of time to allow the time for appealing against remedy to expire, and then His Honour Judge Clark on 27 November 2006 and 1 January 2007 has referred issues to the Employment Appeal Tribunal for a full hearing.

2.	May we say at the outset that this morning we drew the parties’ attention to a passage in Chitty on Contracts dealing with time for performance;  and both Counsel have very helpfully agreed before us that the Employment Tribunal was asked to approach the question perhaps without reference to the principles dealing with determining whether time is of the essence of a contract and of the consequences;  and also both parties are in agreement that there is no reason in principle, depending of course on the facts of the case, why a deduction cannot be made today under Section 123(1) of the Act.  It might not be correct to describe this as a Polkey reduction; it might be better to describe this as a Section 123(1) reduction.

3.	The factual background to this case is relatively straightforward.  The Claimant was employed by the Respondent as, we are told, Managing Director, although the contract refers to him as being General Manager, from 1 September 2003 until a date in October 2005.  The Respondent, we believe, is engaged in the manufacturer of components for industrial and domestic central heating systems.  The contract between the Claimant and the Respondent is a fairly standard form for the employment of a senior executive;  and it was a term of that agreement, which we have at page 75 in our  bundle, that the offer of the employment was subject to the General Manager, that is Mr Smith, relocating to an area within an appropriate distance of the St Helens facilities within a period of 9 months; and though not particularly elegantly drafted but we think the parties understood what that obligation entailed.  Mr Smith had previously lived with his family in the general area of Nottingham.  The Respondent was based in St Helens.  We understand that on at least two occasions the time limit by which Mr Smith was to comply with that obligation was extended;  and for the period with which we are concerned Mr Smith continued to reside in Nottingham and commute a journey of some 5 hours round trip during the working week between Nottinghamshire and St Helens, and the Respondent paid hotel bills and also his travelling expenses.  

4.	It is clear that the Respondent became increasingly unhappy about what was happening, and an important email was sent to Mr Smith on 4 May 2005, which we have at page 76 in our bundle.  The Respondent considered that Mr Smith should be within a travelling time of 1 hour from the St Helens office.  The email was sent after a meeting with the Commercial Director of the Flamco Group, Mr Mannus, and it continues in this vein:

“You informed me that you are now travelling home each night which is a round trip of approximately five hours.  
As I stated to you this is not a satisfactory situation both from the companies perspective and for your health and safety.  We are therefore insisting that your honor your contract and make arrangements to live within the locality of the Office.  We realize that you need some time to make arrangements and even though we have already extended your contractual requirements twice we are prepared to give a further extension of six months.  This means that we require you, in order to perform your function as Managing Director, to have made arrangements and to be living within the agreed distance to Flamco UK by no later than October 31st 2005.”
5.	Mr Smith emailed Mr Mannus on 23 September 2005 to the effect that he had found a property to rent in the locality, and Mr Mannus asked for details prior to a meeting to take place on 28 September.  We understand, and again we make no comment as to the legal significance of this, that Mr Smith in fact had arranged to live with his mother who lived in Nantwich, which is approximately 1 hour from the office in St Helens, during the working week and weekends he would spend at his home in Nottingham.

6.	At the meeting on 28 September 2005 Mr Mannus gave Mr Smith notice of termination without warning on the grounds that he had not been relocated.  He was placed on garden leave, and he was replaced very soon afterwards as Managing Director by a gentleman who had dinner coincidentally with Mr Mannus on 28 September 2005.  Mr Smith appealed against his dismissal;  and the appeal was heard after the appointment of his successor.  The appeal was dismissed.

7.	The Employment Tribunal set out the facts as we have just referred to them.  It noted that the dismissal was automatically unfair by agreement with the parties because of procedural defects.  The Employment Tribunal stated that it did not accept that the requirement to relocate was a fundamental part of the contract necessary for the performance of Mr Smith’s duties and it had difficulty in seeing how this could affect the implied term of trust and confidence.  There was no substantial reason for dismissal and the reason was regarded as trivial:  it was unfair both substantially and procedurally.  At paragraph 42 of its decision the Employment Tribunal said:

“42.	 Mr Smith was not warned that he would be dismissed and he was dismissed in a summary way without being given his full contractual entitlement to notice.  He had performed well enough to turn the company around yet he was dismissed for a breach of a relatively small part of his overall package that had been provided to him some two years earlier.”

8.	The Employment Tribunal then went on at paragraphs 44 and 45 to criticise Mr Smith because:
“45.	…he could have made more effort to relocate.  He should have realised the sort of cost to him of relocation and made proper arrangements at the outset to cover those expenses.  He did not tell his employers at the relevant time, for some unaccountable reason, that he was prepared to move in with his Mother in Nantwich but chose to be vague by saying that he had accommodation to go to.
46.	By his inaction and attitude he may well have upset his employers.”

The Employment Tribunal was not unanimous as to whether there should be a contribution but by a majority it was decided there should not;  although the majority accepted that Mr Smith’s delay at relocation was a catalyst for the Respondent to consider dismissal.

9.	The Employment Tribunal in the remedies decision appear to have stated in terms that as to whether the principles of Polkey should apply, and they say this:

“As this was an automatically unfair dismissal the Polkey principles Post-1st October 2004 had no impact upon the decision on liability or remedy”  

It also in considering whether there should be some deduction under Section 123 said:
“…we could not guess what would have happened at the end of October 2005 if, by that point, Mr Smith had not relocated.”

10.	The company knew even when Mr Smith was dismissed at the end of September that he was preparing to at least rent accommodation close to his place of work.  It understood that would not mean his family coming up from the Midlands with him.  The early dismissal of Mr Smith at the end of September was for a reason which the company could not come to fairly.  It could not know what would have happened by the end of October.
11.	The case for the Respondent had been that the Claimant would have been dismissed by the end of October and therefore there should be what was described as a ‘Polkey’ deduction.  Strictly speaking, the Polkey deduction applies to events that pertain as at the date of dismissal;  matters that might have arisen after the actual date of dismissal are of course caught by Section 123(1).  The parties agree that there is no reason in principle why that kind of deduction were it the case, for example, that the Respondent at the end of October would have been able to dismiss the Claimant for failure to relocate, that is a matter in principle, of course if the appropriate facts are established, that would enable an Employment Tribunal, as is now accepted, to reduce his compensation.  The Employment Tribunal did record at paragraph 15 that the Respondent felt that the Claimant by not moving had committed a serious breach of the terms of his contract and they had to dismiss him, although they did not make clear they had that in mind.  

12.	The Employment Tribunal disagreed with the Respondent’s case that failure to relocate was a substantial reason.  At paragraphs 17 and 18 the Employment Tribunal said:

“17.	When an employer has dismissed for a substantively fair reason but has failed to follow a fair procedure the compensatory award may be reduced.  
 18.	We cannot accept that there should be a reduction.  We were of the view that this dismissal was wholly unfair and that not only was it automatically unfair (which was conceded in any event) but it was a dismissal which was unfair in itself.”

13.	We make two important points.  This case in the skeleton arguments and before the Employment Tribunal appears to have been argued on the basis that the Employment Tribunal should apply a contractual test to determine whether the Claimant’s obligation to relocate within six months was a condition of the contract, breach of which would entitle the Respondent to dismiss him whether it was an innominate or indeterminate term that might in certain circumstances, or whether it was, what is described classically as a ‘warranty’, something that gives no rise to the right to terminate the agreement where there has been a breach but gives rise only to a claim for damages.  It seems to us that this in fact is not a correct analysis of the law.  The correct analysis of the law in our opinion, as now is accepted, is for the Employment Tribunal to ask itself the question in relation to that particular provision, ‘Is this a provision of which time was of the essence?’  If the answer is ‘yes it was’ then the term becomes a condition of the contract and failure to perform by the stipulated time entitles the innocent party to treat the contract as discharged.  On the facts found by the Employment Tribunal it is likely that it would have found that time was not of the essence.  Accordingly it would need to go on to consider whether the term was a condition or ‘non-essential term’.  If it was a condition, then failure to comply with the notice would be a repudiatory breach.  If the term were non-essential, then service of the notice would as Chitty S21-17 puts it ‘bring to an end the interference of equity with the legal rights of the parties’ so that the entitlement of the innocent party to terminate future performance of the contract is then governed solely by ordinary common law rules’.  It is certainly arguable, and we say no more because this is a matter in our opinion for the Employment Tribunal, that the term fell into this category; and it would then be a matter for the Employment Tribunal to determine if it was and whether in fact the Respondent by its email of 4 May 2005, to which we have referred, had given the appropriate notice to make time of the essence.  If it had done so this of course is clearly highly material to the issue of compensation.  It seems reasonably clear that, firstly, this dismissal was automatically unfair for procedural reasons.  Equally, it seems that the Respondent having, on any showing, given the Claimant until the end of October to relocate would not have been entitled to dismiss fairly before that date, nor would it have been entitled as a matter of contract law to determine his employment prior to that in the absence of what might be regarded as a clear anticipatory breach;  but these are matters which will have to be investigated by the Employment Tribunal applying the law as we have to referred to it, which is helpfully set out in between paragraphs 21.09 and 21.019 of Chitty on Contracts (29th Edition).  Again, this now appears to be a matter upon which Counsel are agreed.  Counsel also appear to agree that it is, at least in principle, notwithstanding recent changes of the law, proper for an Employment Tribunal to reduce compensation if the appropriate facts are made out under Section 123(1) and it is more appropriate to refer to that than to refer to a Polkey reduction.

14.	One of the matters that needed to be considered was the order that we should make.  Whether this is a matter that should have been remitted to the same Employment Tribunal or whether, as the parties now agree, it should be remitted for rehearing; and we have some comfort in knowing that the evidence in the case took only half a day and we doubt whether it will take even that because the issues are now more refined when the matter goes back to the Employment Tribunal.  We would, having had regard in any event, although we have not heard submissions on the point, to the judgment of Mr Justice Burton in the Sinclair Roche & Temperley v Heard and Fellows [2004] IRLR 763 case have regrettably come to the conclusion that this is a case which would have to be remitted to a rehearing because the Employment Tribunal probably because of the way in which the case was approached by the parties approached the substantive issue on wholly wrong principles, and in those circumstances we would almost certainly have remitted the matter for a full hearing.  We think in case it is of any assistance to the Employment Tribunal that a transcript of this judgment should be prepared.