Cerberus Software Ltd v Rowley

Where an employment contract permits, but does not require, an employer to make a payment in lieu of notice, the clause gives the employer an option. It does not create an employee’s contractual entitlement to the full notice payment.

Summary dismissal contrary to the notice clause is a breach of contract. The employee’s claim is therefore for damages for wrongful dismissal, subject to mitigation. Damages comprise the remuneration package that would have been received during the contractual notice period, less earnings or employment-related benefits actually received during that period. A differently worded clause may create a contractual debt.

Cerberus summarily dismissed its sales and marketing director after allegations of misconduct which the Industrial Tribunal found unfounded and made in bad faith. The contract required six months’ notice but stated that the employer may make a payment in lieu of notice.

The Industrial Tribunal found unfair dismissal and awarded the full six months’ notice pay despite the employee obtaining better-paid employment shortly afterwards. The Employment Appeal Tribunal dismissed Cerberus’s appeal. The central issue before the Court of Appeal was whether clause 18 created an enforceable debt for payment in lieu of notice or merely gave rise to damages for breach of contract subject to mitigation.

By a majority, the appeal was allowed. Ward LJ and Jonathan Parker LJ held that clause 18 was permissive. The word “may” gave Cerberus the choice whether to make a payment in lieu of notice. It did not give Mr Rowley a contractual right to insist on six months’ salary as a debt.

1. Because the contract required six months’ notice, the summary dismissal without proper grounds breached the notice obligation. The claim was consequently for damages for wrongful dismissal.
2. The ordinary measure of damages applied. The starting point was the remuneration package which would have been received during the six-month notice period, subject to credit for earnings and other employment-related benefits actually received. Mr Rowley had to mitigate his loss by obtaining alternative employment.
3. Abrahams v Performing Rights Society Ltd [1995] ICR 1028 was distinguishable because its contractual terms expressly created an entitlement to notice or an equivalent payment in lieu. Clause 18 contained no equivalent promise.
4. Jonathan Parker LJ relied on Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 at p. 293 for the six-month contractual period as the starting point for assessing loss.

The award of £21,348.21 for the contractual notice period was set aside. The appropriate damages were to be substituted for the period from dismissal until the commencement of the new employment, with the figure to be agreed. Sedley LJ dissented. He considered that the circumstances supported an elective analysis under which the employee could affirm the contract and claim salary as a debt, and would have dismissed the appeal. The court did not resolve the wider question whether wrongful dismissal automatically ends the employment relationship.

• Court of Appeal: The appeal was allowed by majority. Ward LJ and Jonathan Parker LJ displaced the Employment Appeal Tribunal’s approach; Sedley LJ dissented. [2001] EWCA Civ 78
• Employment Appeal Tribunal: Cerberus’s appeal was dismissed and the Industrial Tribunal’s award was upheld.
• Industrial Tribunal: The tribunal found unfair dismissal and awarded compensation, including six months’ notice pay without credit for the respondent’s new earnings.