When a company has exercised its contractual power to terminate an employee’s contract of employment with pay in lieu of notice (PILON) then subsequently discovers gross misconduct on the part of the employee, is it still obliged to honour the payment? This was the question before the Court of Appeal in Cavenagh v William Evans Ltd.
Duncan Cavenagh was the managing director of William Evans Ltd., which carries on the business of gun dealers and gunsmiths, on an annual salary of £130,000. The company had been making losses since 2003. In early 2010, following a restructuring of the business, Mr Cavenagh was told that the role of managing director was no longer needed and William Evans terminated his contract with six months’ PILON, as it was entitled to do under clause 11.5 of his employment contract. The company later discovered that Mr Cavenagh had wrongly procured the sum of £10,000 to be paid to his pension provider. Having uncovered his prior misconduct, it made no payments to him at all in respect of salary and benefits in kind in lieu of notice, on the basis that he had committed an act of gross misconduct which would have justified summary dismissal and so the company was entitled to treat the contract as at an end on the basis of a repudiatory breach.
Mr Cavenagh sought recovery of the sums he claimed were due to him.
William Evans sought to rely on the case of Boston Deep Sea Fishing and Ice Company v Ansell, in which a company was able to defend a claim for wrongful dismissal by relying on the managing director’s prior gross misconduct as a good ground for dismissal, even though this was only discovered after the commencement of the proceedings. Mr Cavenagh argued that the PILON had accrued as a debt on the day of termination and the company could not rely on Boston Deep Sea Fishing to avoid a contractual liability to pay an accrued debt.
The County Court rejected Mr Cavenagh’s submission. He appealed.
The Court of Appeal showed understanding for William Evans’ position. Mr Cavenagh served the company in a fiduciary capacity but chose to stay silent about facts that would have affected its decision on how to terminate his employment. Had it known about Mr Cavenagh’s misconduct, the company would have treated the contract as having been repudiated by him, with the result that he would have been summarily dismissed without PILON. However, the correct legal analysis, on the basis of the case as pleaded and the arguments put before the Court, was that the company had exercised its contractual power to terminate Mr Cavenagh’s contract without notice. The termination was lawful and a debt by the company to Mr Cavenagh thereby accrued. In the Court’s view, the situation in Boston Deep Sea Fishing was quite different, and neither the principles it laid down nor the general principles governing the termination of a service agreement by acceptance of an employee’s repudiatory breach provided William Evans with a defence to the claim for PILON.
Says <<CONTACT DETAILS>>, “In this case, the employee’s contract of employment did not contain any provision releasing the company from its contractual obligation to pay the debt in such circumstances. We can advise you to ensure that your employment contracts are robust in protecting your business interests should similar circumstances arise.”