SUMMARY
REDUNDANCY – Fairness
CONTRACT OF EMPLOYMENT – Notice and pay in lieu
Employee entitled to three months notice of dismissal.
Dismissed for redundancy with four days notice. Letter of dismissal states
that payment will be made of statutory redundancy pay, holiday pay, and an ‘ex
gratia’ payment of a sum equivalent to three months’ gross salary. Claim by
employee for damages for dismissal without notice. Employer seeking to meet
the claim by reference to the ‘ex gratia payment’. Employment Tribunal allows
the employee’s claim. On a correct construction, the payment was truly ‘ex
gratia’. Appeal dismissed and Tribunal’s construction upheld.”
MR RECORDER LUBA QC
Introduction
1.
This appeal concerns the true legal nature of a payment made by an
employer to a former employee at the termination of her employment. Was it, as
the employee contended and the Employment Tribunal found, a payment made ex gratia
to the employee? Or was it, as the employers contended and seek to persuade us
on appeal, a payment that reflected or included compensation for monies that
she would otherwise have been entitled to receive by way of pay for a period of
notice?
The facts
2.
Ms O’Farrell worked for Publicis Consultants UK Ltd, to whom we
shall refer as ‘the company’, in the post of Director, Head of Corporate. Her
contract of employment provided at paragraphs 10.3‑10.5 arrangements
for “Notice after first six months”. Paragraph 10.3, so far as material, read:
“[...] your employment may be terminated by either party by
giving three calendar months’ written notice of termination.”
3.
Paragraph 10.4 is not presently relevant. Paragraph 10.5 reads:
“The company may at its absolute discretion require you not to
attend work during the whole or part of your notice period, and may at its
discretion relieve you of some or all of your contractual duties during that
period.”
4.
In 2008‑2009 a redundancy situation arose and Ms O’Farrell
was selected by the company for dismissal for redundancy. Her employment was
terminated by a letter dated 14 May 2009. Under the heading “Notice
of Termination of Employment – Redundancy” the following words appear in the
first paragraph:
“[...] we have decided to make your job role redundant, with
effect from Friday 15 May 2009.”
5.
That of course was the date following the date of the letter. After
setting out the circumstances of the redundancy situation, the letter continues
materially as follows:
“In terminating your employment on the grounds of redundancy you
will be paid up to and including Monday 18 May 2009 and in
addition you will receive the following severance package, which as you are
aware is in excess of your statutory entitlement:
·
Ex‑gratia Payment – You will receive an ex‑gratia
payment equivalent to three months’ salary. This payment amounts to £20,625.
The payment is free of Tax and NI deductions.
·
Statutory Redundancy Payment – You will receive a statutory
redundancy payment of £700. This payment is free of Tax and NI deduction.
·
Holiday pay – You will have 11 days’ accrued holiday pay; this
includes the 6 days you state were carried forward from 2008. This amounts to
£3,490; this payment is subject to Tax and NI deductions.”
6.
Having been dismissed, Ms O’Farrell complained to an Employment
Tribunal that her dismissal had been unfair. The Employment Tribunal at London
Central, chaired by Employment Judge Mrs N Walker, decided that
the dismissal had indeed been unfair. The correctness or otherwise of that decision
is not now in issue. Ms O’Farrell had also made money‑related
claims to the Employment Tribunal. The Tribunal dismissed her claim for breach
of contract arising out of a failure to pay her a bonus, but it allowed her claim
that the company was in breach of contract by failing to pay her notice pay.
The decision on the bonus payment is not in issue before us, but the company
pursues before us an appeal against the Judgment in respect of failure to pay
for a notice period.
The Employment Tribunal’s decision
7.
The relevant part of the Employment Tribunal’s reserved Judgment gives
its reasons for upholding the claim in respect of breach of contract, relating
to notice, at paragraphs 64‑66, which are in the following terms:
“64. The Tribunal then turned to the notice claim. It was
submitted by the Respondent that it was clear that the payment which had been
made as an ex gratia payment was meant to be a payment for the notice period
and the Respondent submitted that in that case, a payment had been made and no
further payment should be due. The Tribunal rejected the Respondent’s
submission on that point. We accept that the Respondent calculated that
payment by reference to the notice period but they chose to call it an ex
gratia payment.
65. There are employers who make an ex gratia payment in
addition to any other payments due. There is nothing in the letter which
explained to Ms O’Farrell that that was actually her notice payment. It
would have been perfectly possible for it to have been intended as an
additional severance payment over and above her entitlements. She certainly
never accepted it as anything other than an ex gratia payment and she is not
bound in any way. She is entirely free to make a claim for her notice
payment. However the Respondent calculated the ex gratia payment, it is clear
to the Tribunal that the Respondent has not paid a payment which was a payment
of notice pay by way of damages for their breach of contract in failing to let
Ms O’Farrell work her notice period, there being no payment in lieu
provision in the contract itself.
66. [...] the Tribunal are satisfied that an ex gratia payment
is a gift or payment made by favour and it is not a payment made on account of
any legal obligation. In those circumstances, as we have said, the payment
that was made could not amount to a payment of the notice pay and that payment
is still outstanding.”
The appeal
8.
The ground of appeal before us is essentially that the Employment
Tribunal misconstrued the terms of the dismissal letter of
14 May 2009 in relation to the nature of the payments therein
referred-to. The company contends that the only available and indeed true
construction is that the payments made to Ms O’Farrell and referred to in
that letter embraced or exhausted her entitlement to pay in respect of the
notice period. It is common ground before us that Ms O’Farrell was
dismissed by the letter of 14 May 2009 with effect from
18 May 2009 (four day’s notice) in circumstances that were in breach of
a contract that otherwise entitled her to three months notice. The issue is
whether, as the Employment Tribunal found, she remains entitled to compensation
for that breach, or whether, on a true construction of the letter of
14 May 2009, she has already been paid at the appropriate amount.
9.
Both counsel are agreed that the task for this Employment Appeal
Tribunal is to determine, on a true construction, the meaning of the words used
by the company in its letter. Do they mean on the one hand, in effect, ‘we are
hereby paying you for your period of notice’? or do they mean, on the other
hand, ‘we are hereby paying you a sum other than the monies to which you would
be entitled by way of pay in lieu of notice’? Mr Cooper, for the Respondent
was initially inclined to persuade us that the true construction of the letter
of 14 May 2009 was a question of fact for the Tribunal which
could only be re-opened by this Employment Appeal Tribunal in exceptional
circumstances. On reflection, that submission was not pursued. Mr Cooper accepted
that the letter in question was open to be construed as a matter of law
as readily by ourselves as it had been by the Employment Tribunal. He
confirmed before us that beyond the documents that we have been invited to
consider there was no additional further evidential material available to the
Tribunal on this question which is not available to us. The task for us
therefore is to consider and find the correct construction of the letter of
14 May 2009 as a matter of law.
10.
We were reminded by both counsel of the proper approach to the
construction of documents set out by the House of Lords in Investors
Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. In a now famous passage, Lord Hoffmann in that case set the course
of English law relating to the construction of documents on a new path. At
page 912H he set out a series of now familiar principles to be utilised in
the interpretation of documents. He said:
“The principles may be summarised as follows:
(1) Interpretation is the ascertainment of the meaning which the
document would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in the
situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce
as the ‘matrix of fact,’ but this phrase is, if anything, an understated
description of what the background may include. Subject to the requirement
that it should have been reasonably available to the parties and to the
exception to be mentioned next, it includes absolutely anything which would
have affected the way in which the language of the document would have been
understood by a reasonable man.
(3) The law excludes from the admissible background the previous
negotiations of the parties and their declarations of subjective intent. They
are admissible only in an action for rectification. The law makes this
distinction for reasons of practical policy and, in this respect only, legal
interpretation differs from the way we would interpret utterances in ordinary
life. The boundaries of this exception are in some respects unclear. But this
is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would
convey to a reasonable man is not the same thing as the meaning of its words. The
meaning of words is a matter of dictionaries and grammars; the meaning of the
document is what the parties using those words against the relevant background
would reasonably have been understood to mean. The background may not merely
enable the reasonable man to choose between the possible meanings of words
which are ambiguous but even (as occasionally happens in ordinary life) to
conclude that the parties must, for whatever reason, have used the wrong words
or syntax. (See Mannai Investments Co. Ltd. v Eagle Star Life Assurance Co. Ltd
[1997] 2 WLR 945.)
(5) The ‘rule’ that words should be given their ‘natural and
ordinary meaning’ reflects the common sense proposition that we do not easily
accept that people have made linguistic mistakes, particularly in formal
documents. On the other hand, if one would nevertheless conclude from the
background that something must have gone wrong with the language, the law does
not require judges to attribute to the parties an intention which they plainly
could not have had. Lord Diplock made this point more vigorously when he said
in The Antaios Compania Neviera SA v Salen Rederierna
AB 1985 1 AC 191, 201:
‘[...] if detailed semantic and syntactical analysis of
words in a commercial contract is going to lead to a conclusion that flouts
business commonsense, it must be made to yield to business commonsense.’”
11.
Mr Scott, appearing for the company, placed particular emphasis on
principle 4; that is to say, that the person upon whom falls the task of
interpreting the document should not feel trapped by the dictionary or
grammatical interpretation of the words the parties have used. He was critical
of the Employment Tribunal’s emphasis on the literal or dictionary meaning of
‘ex gratia’. For his part, Mr Cooper urged our attention to
principles 1 and 2, and in particular the fact that the
principals start in Lord Hoffmann’s list with instruction to discern the
meaning which the document would convey to a reasonable person.
12.
Beyond the reference to Investors Compensation Scheme
as an agreed starting point, we received divergent but helpful submissions from
the respective counsel in the appeal. For the company, Mr Scott
particularly relied on the context in which the letter of 14 May 2009
had come to be written. He suggested that there were other documents that
would assist us in understanding the context and properly interpreting the
letter of 14 May 2009. He took us first to a letter of
6 April 2009, which was sent to Ms O’Farrell and received by her
over a month before the ultimate dismissal letter. That letter had borne the
heading: “Provisional Selection for Redundancy.” After outlining the
circumstances of the redundancy, that letter had continued with the following
text:
“We will contact you again on 14 April to let you know if
there is a change to our proposals and we will confirm our final decision to
you in writing on 16 April 2009 and if we confirm redundancy then
your notice period would commence from Monday 20 April 2009.
If your job role is confirmed for redundancy you have a three‑month
notice period and we will be placing you on garden leave from the start of your
notice period, 20 April until 15 May 2009. During this time we
would require you to be available to complete and assist with work activities
as designated by the Company. You can work from home during this period.
We would not require you to work the remainder of your notice
period and we would provide you with the following severance package:
a) An ex gratia payment equivalent to
8 weeks’ salary which amounts to: £12,692. This payment will be free of tax
and NI deductions.
b) Statutory Redundancy Pay: £700.
Also free of tax and NI deductions. Total: £13,392.
c) You will also receive payment for
holiday accrued but not taken; this will be subject to tax and NI deductions.”
13.
Mr Scott submitted that this text was part of the essential factual
matrix, and enabled us to construe the letter of 14 May 2009 in
favour of the company and contrary to the construction that had been given by
the Employment Tribunal. We were next shown by way of what was said to be the
“factual matrix” a draft letter of 24 April 2009 which was not in
fact sent by the company to the employee, but was nevertheless sought to be
relied upon by Mr Scott. In the event we accept Mr Cooper’s
submission that this could not form part of the true contextual matrix as it
was only a document in the hands of one party and knowledge of it did not pass
to the other.
14.
Mr Scott further submitted that there were other pointers to the
correct construction of the letter of 14 May 2009. First, he
emphasised - in opening his oral submissions before us - that the payment had
been calculated by reference to the contractual notice period, as indeed the
Employment Tribunal had itself found (see Judgment paragraph [64]). Second,
that it exceeded rather than fell short of the total sum that the Company was
otherwise liable to pay. Thirdly, Mr Scott submitted that although the
words “ex gratia” had been used, the Employment Tribunal had been wrong to
focus, particularly in paragraph [66], on their literal or dictionary
meaning rather than on the substance of what had occurred in the relevant
dealings between the parties. Fourth, he submitted, it was common industrial
practice to call payments made to employees, dismissed without being required
to work out their notice, “ex gratia” payments, even though what they were
being paid was that to which they were otherwise entitled. In sum, he
contended in his oral submissions, supplementing his helpful skeleton argument,
that the Employment Tribunal had not correctly approached the question of
construction, but had been misled by focussing far too heavily on the label “ex
gratia” rather than on the true context.
15.
Mr Cooper, having acknowledged that he could not pursue properly
the submission at paragraph 8 of his skeleton argument (see paragraph 9
above), then developed his paragraphs 9‑25 through succinct oral
submissions before us, taking issue with the submissions of Mr Scott in
turn.
Discussion and conclusion
16.
We have not found it possible to accede to the company’s submissions.
We consider that the Employment Tribunal were correct in the decision that they
reached, essentially for the reasons that they gave. We have reached that
conclusion largely by adoption of the compelling argument advanced in the oral
and written submissions of Mr Cooper for Ms O’Farrell. Expressed
shortly in our own words, our reasons are as follows.
17.
As Lord Hoffmann indicates, the starting point in any exercise of
the construction of documents must be with the words the parties have used. We
have already set out the relevant wording of the letter of
14 May 2009. The language used conveys to the ordinary reader, on
our assessment, that three payments are being made by the employer. Two are
payments that the employer is making because it must make them; that is to say,
the statutory entitlement to redundancy pay, and the contractual entitlement to
holiday pay. The third payment referred to in the letter of
14 May 2009 is in contrast a payment described in terms as “ex gratia
payment”; that is to say, on its ordinary construction, a payment made freely
and not under obligation. Accordingly, as the Employment Tribunal correctly
found, the words ‘ex gratia’ ordinarily import the sense of something being
paid by way of gift or favour. Nothing in the language used in the letter of
14 May 2009 suggests or implies that that payment is in fact another
form of payment that the company is legally obliged to make, ie a payment for a
period of notice. To the contrary, the letter refers in terms to the payments
as comprising monies in “excess of” the recipient’s entitlements. That
language is wholly inconsistent, in our judgment, with the proposition that the
payments are each and all amounts to which the recipient is otherwise entitled.
That in our judgment is the proper starting point for the construction of the
document.
18.
We then turn to deal with Mr Scott’s submissions in relation to the
contextual matrix. In our judgment, nothing in the material we have been shown
drives us to a conclusion other than that the construction of the document
based on its ordinary words is the correct construction. At the forefront of
Mr Scott’s argument was the earlier letter of 6 April 2009. As
we have indicated, it was his submission that this gave the message as to the
alternative construction of the letter of 14 May 2009 from that which
we have already identified by way of ordinary meaning of the language. We are
unable to accept Mr Scott’s submissions about the letter of 6 April 2009.
We are persuaded by Mr Cooper’s analysis that, on a true construction of
the language from that letter which we have already extracted, it was dealing
with a wholly different circumstance; that is to say, a premise in which the
employee would not be summarily dismissed but would be being dismissed with
three months of notice. In a rather confusing paragraph, the letter of
6 April 2009 gives a mixed message to the recipient as to what is to
be required of her during the three months’ notice period. As to the first
part thereof, between 20 April 2009 and 15 May 2009, she is
both told that she is going to be on garden leave but also simultaneously told
that she may be required to work; but unambiguously the letter continues by an
indication that she will not be required to work “the remainder of [her] notice
period.” That would suggest, we consider, to any reader that she was going to
be given three months’ notice period as per her contractual entitlement. Only on
the expiry of that would her employment determine. It is in that context that
the letter of 6 April 2009 continues, “[...] and we would provide you
with the following severance package.”
19.
When invited in exchanges to say whether the subsequent letter of
14 May 2009 was more or less generous than what was proposed in the
letter of 6 April 2009, Mr Scott’s submission was that it was more
generous. In our judgment, it can only be construed as more generous if the
construction given to the language is the ordinary meaning of the words that we
have already identified and that the Tribunal themselves adopted. In those
circumstances, the main platform for Mr Scott’s contention that the letter
of 14 May 2009 bears an alternative construction in line with his
submission falls away. That is the result even without dealing with
Mr Cooper’s further distinction between the two letters, in that the
letter of 6 April 2009 refers to eight weeks’ payment when in fact on
a proper calculation of the dates there would have been an entitlement to nine
weeks’ pay.
20.
Finally, even if the company had on this appeal satisfied us that there
was some ambiguity in the construction of the letter of 14 May 2009,
we consider that Ms O’Farrell would have been entitled to rely on the contra
preferentem rule for a construction which advantaged her. This was, it
must be recalled, the company’s own unilateral document. If it was capable of
two meanings, it had to be read (applying that rule) with the construction
least favourable to the author. We were referred by both parties to the decision
of this Appeal Tribunal in Bevan Ashford v Malin
[1995] ICR 453 and the Judgment given therein by the then President,
Mummery J, as he then was. In that case the task for this Appeal Tribunal
was to construe a unilateral written disciplinary warning. It was suggested by
Mr Scott that the scope of the authority ought therefore to be confined to
a penal type of communication, such as a warning, and was of no assistance in
construing a document such as the letter of 14 May 2009.
Mr Cooper submitted that, in one sense, a dismissal letter was a more
penal communication than a warning letter, and therefore emphasised the justification
for a contra preferentem construction. In the event, we are not
assisted by the decision in Bevan Ashford. The contra preferentem
rule arises from the fact that the communication was unilateral and generated
by one party only; it is not necessary to add to it the epithet ‘penal’. The
application of the contra preferentem rule would therefore have resulted
in our upholding Ms O’Farrell’s claim, even if there had been an
ambiguity, which we find there was not. In the circumstances, reliance on that
rule is not required.
21.
In our judgment, it is tolerably plain what the letter of
14 May 2009 said, and what the words used would, in the context in
which they came to be written, be taken to mean by any reasonable and objective
reader. That is to say that the first of the payments to which that letter
referred was a payment made free of any legal obligation to pay it, rather than
as a payment the company was otherwise ordinarily and contractually obliged to
make. In the result, for those reasons, we would dismiss the appeal.
