Cavenagh v William Evans Ltd

Where an employer unequivocally elects to terminate an employment contract under an express power requiring payment in lieu of notice, the stipulated payment accrues as a contractual debt. In the absence of a contractual release or another properly pleaded ground, the employer cannot escape that debt by later discovering earlier gross misconduct which could have justified summary dismissal.

The principle permitting after-discovered misconduct to justify an otherwise wrongful dismissal concerns claims for damages. It does not provide a defence to an accrued debt arising from a lawful contractual termination. Where contractual and common law rights of termination have different consequences, the employer’s communication must be construed objectively to determine which right it elected to exercise.

The appellant was the respondent company’s managing director. His service agreement permitted the company to terminate his appointment immediately by paying six months’ salary and contractual benefits in lieu of notice. The company exercised that power when making his position redundant, but subsequently discovered that he had procured an unauthorised £10,000 pension payment before termination.

The Southampton County Court accepted that the misconduct would have justified summary dismissal. It held that the company could rely on the subsequently discovered misconduct as a complete defence to the claim for payment in lieu and dismissed the claim.

Permission to appeal was limited to whether the after-discovered gross misconduct enabled the company to avoid the contractual liability arising from its earlier termination decision.

1. Appeal allowed unanimously. The company’s letter unequivocally exercised its contractual power to terminate the appointment immediately with payment in lieu of notice. That lawful termination created an accrued debt for six months’ pay in lieu: per Mummery LJ, with whom Tomlinson and Hallett LJJ agreed.

2. Where a contract and the general law provide alternative termination rights having different legal consequences, the terminating party must elect between them. The communication is construed objectively by asking how a reasonable recipient would understand it. The letter could only be understood as an election to terminate under the contractual clause. It could not be read as acceptance at common law of the employee’s unknown repudiatory breach.

3. Having made that election, the company could not resile from its contractual consequences by later attempting to accept an earlier repudiation of which it was unaware when the contract ended. The agreement contained no term releasing the company from its accrued payment obligation upon later discovery of misconduct. No other pleaded contractual, fiduciary or mistake-based ground displaced the debt.

4. Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 permits an employer to justify an otherwise wrongful dismissal, and defeat a claim for damages, by relying at trial on serious misconduct discovered after dismissal. It does not establish that subsequently discovered misconduct extinguishes a debt already accrued through a lawful contractual termination.

5. Tomlinson LJ added that describing the dismissal as redundancy did not alter the contractual analysis. Termination under the payment-in-lieu clause and termination through acceptance of repudiatory breach produced materially different consequences. The former secured the clean break for which both parties had bargained, while allocating to the employer the risk that grounds for summary termination might later be discovered.

6. The order dismissing the claim for payment in lieu was therefore set aside. The counterclaim concerning the unauthorised £10,000 payment was unaffected because liability for repayment had been accepted.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The court held that the contractual termination created an accrued debt which was not defeated by subsequently discovered misconduct: [2012] EWCA Civ 697.

2. Southampton County Court: HHJ Linda Sullivan QC dismissed the claim for £65,000 and associated pension sums, holding that the employee’s prior gross misconduct provided a complete defence. The Court of Appeal set that decision aside.