Lavarack v Woods of Colchester Ltd

Damages for wrongful dismissal compensate the employee for the money and money’s-worth benefits that would have been obtained by performance of the employer’s legal obligations. The assessment may reflect the probability of external events on which contractual benefits depend. It cannot include a voluntary future benefit which the employer was not contractually bound to confer.

Where a contract permits more than one mode of performance, damages are assessed on the mode least burdensome to the employer. Benefits earned through work made possible by the dismissal must be credited in mitigation. Purely collateral investment gains need not be brought into account.

Lavarack v Woods of Colchester Ltd concerned damages after an employee was dismissed summarily from a fixed-term service agreement. His remuneration included a salary and a discretionary bonus determined by the company’s directors.

Master Jacob assessed damages at £2,945. The employee appealed, contending that the assessment was too low. The company cross-appealed. The disputed issues included whether damages should include a probable salary increase after the employer abolished its bonus scheme, and whether the employee’s gains from post-dismissal employment and investments reduced his loss.

1. Appeal and cross-appeal allowed. The court varied Master Jacob’s award to £7,768, with interest. Lord Justice Diplock and Lord Justice Russell formed the majority on the disputed £2,000 item.

2. Lord Justice Diplock held that damages for breach of contract are assessed by assuming performance of the employer’s legal obligations, and no more. The assessment may account for the probability of extraneous events affecting the value of those obligations. It cannot include remuneration under an imagined future agreement which the employer might voluntarily have made.

3. The employer had no contractual duty to continue the bonus scheme after 31 March 1965, or to increase the employee’s salary when it was abolished. The employee could therefore recover his contractual salary, and the bonus already declared for 1964/65, but not £2,000 for a probable future salary increase. Lord Justice Russell agreed.

4. The court accepted that earnings and capital improvement attributable to the employee’s work for Martindale were to be credited in mitigation. The gain represented value produced by work made possible by the dismissal. By contrast, profits from the employee’s investment in Ventilation were collateral investment gains. They were not attributable to released working time and were not deductible.

5. The Master of the Rolls dissented on the £2,000 item. He would have treated the loss of the expected replacement salary as loss of a substantial chance of future remuneration. The majority held that this approach impermissibly exceeded the employer’s contractual obligations.

• Court of Appeal: Appeal and cross-appeal allowed. Master Jacob’s assessment was varied to £7,768.
• Master Jacob: Assessed damages for wrongful dismissal at £2,945.