LAW REPORT: 25 May 1995; Contract worker entitled to pay in lieu of notice

A person employed on a five-year fixed term contract under which he was entitled to two years' notice or payment of salary in lieu, and whose contract was then extended for a further two years "under the terms of his existing contract", was still entitled to the same period of notice or pay in lieu as under the earlier contract. If he was dismissed during the two-year extension period, he was entitled, in lieu of notice, to payment of his salary up to the end of that period.

The Court of Appeal dismissed an appeal by the defendant, Performing Right Society Ltd, against the decision of Sir Michael Davies, sitting as a deputy High Court judge on 26 May 1994, affirming the determination by Master Tennant of an issue of law under under Order 14A of the Rules of the Supreme Court, striking out so much of the defence as asserted that the plaintiff, Robert Abrahams, who was suing for pay in lieu of notice under his contract of employment, was under a duty to mitigate his losses.

The plaintiff had been employed by the defendants on a five-year contract under which, in the event of termination of employment, either at the end of the five-year period or at any time during the last two years, he was entitled to two years' notice of termination or an equivalent payment in lieu.

The five years expired on 31 March 1992. The parties negotiated but failed to agree on a new contract. Instead, they agreed that the plaintiff should remain in his post for a further two years "under the terms of his existing contract".

Seven months later, on 14 October 1992, the defendant terminated the plaintiff's employment.

The plaintiff contended that the same terms as to notice or pay in lieu applied to the two-year extension as under the earlier contract; that the defendant had lawfully elected to terminate his employment before the expiry of the two-year notice period, and that it was bound to pay him in lieu of notice for the remainder of that period.

Having a contractual right to such payment, he was under no obligation to mitigate his loss or give credit for actual or imputed earnings during the remainder period.

The defendant contended that the new contract was for a fixed term of two years, during which either the defendant was not entitled to give notice or was to be treated as having already given two years' notice; that its earlier dismissal of the plaintiff was wrongful, and that the plaintiff was obliged to claim damages for wrongful dismissal.

Ian Hunter QC and Andrew Hochhauser (Simmons & Simmons) for the defendant; Nigel Davis QC (Hamin Slowe) for the plaintiff.

LORD JUSTICE HUTCHISON said the plaintiff's contentions were correct. Construing the contract of employment in its context, there was no basis for excluding the provisions as to notice and payment in lieu. The pleadings did not assert there were other terms in the contract. The words used by the parties were clear. The termination of the contract was lawful and left the plaintiff with a right to payment in lieu.

The next question was whether the sum claimed was money due under a contract, as the plaintiff claimed, or liquidated damages, as the defendant contended.

In Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 the Court of Appeal affirmed that a contract of employment, which provided that the employee's contract could be determined by six months' notice or the payment of six months' salary in lieu, offered alternative methods of lawful termination. The defendant's argument that the money in lieu was damages for breach of contract was erroneous.

In Delaney v Staples [1992] 1 AC 687 at 692, Lord Browne-Wilkinson said the phrase "payment in lieu of notice" was commonly used to describe various types of payment. Where the contract of employment provided that the employment might be terminated by notice or, on payment of a sum in lieu of notice, summarily, then if the employer summarily dismissed the employee he was not in breach of contract provided he made the payment in lieu.

His Lordship concluded that the provision in the contract for payment in lieu gave rise to a contractual entitlement.

Even if the payment in lieu were to be regarded as liquidated damages, there would be no duty to mitigate.

LORD JUSTICE ALDOUS concurred.