Colen & Anor v Cebrian (UK) Ltd.

Illegality in the performance of a lawful employment contract does not automatically make the contract unenforceable. The employer bears the burden of proving either an unlawful contract or participation in sufficiently serious illegal performance to turn a lawful contract into an illegal one. Enforceability also depends on whether the claimant must rely on the illegality to establish the claim.

A contract may lawfully entitle a husband and wife working as a team to joint commission. If their individual shares are unspecified, the tribunal must determine a reasonable division rather than reject their claims for uncertainty.

Two employees claimed commission, damages for wrongful dismissal and compensation for unfair dismissal. The Employment Tribunal found that the husband alone was contractually entitled to commission, that payments to his wife constituted tax evasion, and that both employment contracts were unenforceable for illegality.

The Employment Appeal Tribunal reversed that decision, finding a joint contractual entitlement to commission. The employer appealed. The principal questions were the nature of the commission agreement, whether its formation or performance involved illegality, and whether any illegality prevented the Employment Tribunal from determining the employees’ claims.

1. Appeal dismissed unanimously. The Employment Tribunal’s decision was fundamentally flawed. The Employment Appeal Tribunal’s order was varied to declare that the contracts were not tainted by illegality and provided for commission of 10% to be paid jointly to the two employees. The assessment of their individual entitlements was remitted to the Employment Tribunal.
2. Per Waller LJ, with whom Peter Gibson and Carnwath LJJ agreed, the evidence did not support a finding that the wife’s joint entitlement to commission ended in 1988. The employer accepted that a joint entitlement had existed before then and produced no sufficient evidence of a later variation. The burden of proving the alleged illegality rested on the employer, not the employees.
3. A court must distinguish between a contract unlawful at formation, a lawful contract intended to be performed unlawfully, and a lawful contract affected by later illegal performance. A lawful contract does not automatically become unenforceable because an unlawful act occurs during performance. Where the claimant participated in illegal performance, the questions include whether that conduct was sufficiently serious to turn the contract into an illegal contract and whether the claimant must rely on it to establish the claim.
4. A contract under which a husband and wife work as a team for joint commission is lawful. The employer’s obligation is to pay the joint commission. Although tax law may require an allocation between individual employees, the evidence did not establish conduct sufficient to make the contracts unenforceable. Nor did either employee need to rely on an unlawful method of past payment to establish an entitlement to unpaid commission.
5. The absence of agreed individual proportions did not defeat the claims. The Employment Tribunal must determine reasonable shares by reference to the employees’ respective contributions. If no other lawful basis is established, equal division may be appropriate. It must also assess their respective notice periods and commission losses.

1. Court of Appeal (Civil Division): The employer’s appeal was dismissed unanimously. The Employment Appeal Tribunal’s order was varied to state that the contracts were not tainted by illegality and provided for 10% commission to be paid jointly. The assessment of individual entitlements was remitted.
2. Employment Appeal Tribunal: On 7 November 2002 the tribunal allowed the employees’ appeal, holding that the evidence established a shared contractual entitlement to commission.
3. Employment Tribunal: On 17 July 2001 the tribunal held that the employment contracts were tainted by a fraud on the Revenue and dismissed both employees’ claims.