Appeal No. UKEAT/0813/03/TM

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 7 January 2004

Before
HIS HONOUR JUDGE ANSELL
MS J DRAKE
MR P GAMMON MBE

GRAHAM McEWING	APPELLANT

SOMOA LIMITED	RESPONDENT

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellant	MR CARLO BREEN
(Of Counsel)
Instructed by:
Messrs Betesh Fox & Co
16-17 Ralli Courts
West Riverside
Manchester
M3 5FT	
For the Respondent	RESPONDENT NOT REPRESENTED	

JUDGE ANSELL

1.	This is an appeal from a decision of an Employment Tribunal sitting at Manchester on 5 August 2003 who in a decision promulgated to the parties on 14 August dismissed the applications made by the employee Mr McEwing against his former employer, Somoa Ltd alleging unfair dismissal and unlawful deduction of wages on the grounds that the employment contract was tainted with illegality and therefore unenforceable in respect of the statutory rights.  

2.	The illegality alleged and dealt with in a fairly brief form within the Extended Reasons appeared to relate primarily to an acquisition by the employee and other employees of computers for their use and benefit through the company.  In other words that the company on behalf of the employee acquired the computer using possibly commercial discounts, put it through their books, and the employee was only required to pay the net price in other words did not have to pay the VAT provided that he settled the account within that particular VAT quarter.   

3.	It also appears from the Tribunal’s decision that:

“The arrangement was not confined to the computer the same thing applied when he acquired a car and to invoices for various works done to the car;”

However, that finding arose applied when recording comments made by the Appellant to the Tribunal.  It is unfortunate that the Tribunal did not take specific evidence on these matters and come to specific findings as to the nature of the illegality both in respect of the acquisition of the computer and also the circumstances surrounding the acquisition of the car and any subsequent works done to that car.

4.	Indeed, when we questioned Counsel on behalf of the Appellant to-day in respect of the car matters there was a degree of vagueness.  We do not criticise him for the lack of detail concerning the car.  But it only serves to highlight the fact that it was regrettable that no detailed evidence and detailed findings were made by the Tribunal on that aspect.
 
5.	Even more importantly there were no detailed findings made by the Tribunal in respect of the state of knowledge of the employee in respect of any illegality that arose from these transactions.  In paragraph 4 it is recorded that the Applicant told the Tribunal, in conversations between the employee and the chairman and not in any formal evidence, that at the time he entered into agreement to acquire the computer he was not aware that it was illegal but he knows that now.

6.	It is true that in paragraph 5 the Tribunal refer to them being not unsympathetic as to his position, and but there is no specific finding in relation to his state of mind in respect of either the computer, the car or the car repairs.  The nature of the fraud is obvious.  First of all the company are putting through their books what are non-business expenses but more importantly the employee is not having to pay the VAT.  It is being paid effectively by the company although of course they have the opportunity to set that off against any balancing VAT that they have received.

7.	The really important features as far as an employee is concerned are that he is getting a benefit from his employers.  In other words the payment of VAT of the product is the company’s liability and effectively this is an additional benefit that he is receiving on which he is not paying tax or national insurance.  So quite clearly the nature of the illegality can be looked at in a number of ways and it is not suggested here on his behalf that it was anything other than an illegal act in terms of a possible fraud either on the Customs and Excise or on the Inland Revenue.

8.	The conclusions of the Tribunal were that the contract of employment was tainted by illegality being one or more schemes which were a fraud on HM Customs & Excise in the way they exonerated this employee on more than one occasion from a liability to pay VAT which ought to have been paid and accounted for to the Customs & Excise in the normal course of things.  

9.	Just pausing there it could be argued, that the VAT was paid albeit that it was paid, by the company through their scheme rather than the employee as we have commented already.  A better way of looking at the fraud possibly is that there was a failure to pay income tax and national insurance on the benefit that he was receiving.

10.	They went on to say that because the contract in respect of the computer and the other items was ancillary to and existed only because of the contract of employment between the parties and is central to the contract between the parties and its termination; it is tainted by illegality and no part of it is therefore enforceable.

11.	It is argued today that that is an incorrect view taken by the Tribunal of what the law is with regard to contracts where the contract of employment is not illegal as formed but becomes potentially illegal in the method of its performance.  It is well-known law that there are three categories of cases where illegality might render a contract enforceable.  

12.	In two cases a contract can be carried on enforceable from the outset.  One is where the contract is entered into with intention of committing the legal act.  The other is where the contract is expressly or implicitly prohibited by statute.  The third category of case which is the one that were concerned with here is where there is a contract which is lawful when made in other words the employment contract but is illegally performed.  However, cases make it clear that in order for the employee not to be able to sue on that contract or to take action it is requirement that he must have knowingly participated in that illegal performance.  This requirement can be seen set out in a well-known case of Newland v Simons & Willer (Hairdressers) Ltd [1981] IRLR 359.  That was a case where a hairdresser was being paid cash in hand out of the till and the facts recorded that the Revenue did not receive proper deductions or national insurance.  The Tribunal had found that the employee was ignorant of any illegality when she entered into the contract but that from when she received a P60 in April 1979 she either knew or ought to have known that proper deductions were not being accounted for.  The contract was therefore from that stage tainted with illegality but she nevertheless continued to accept her wages on the same basis as before and thereby participated in the illegality.

13.	From the head note of the Employment Appeal Tribunal decision (May J was presiding) a majority of EAT found that where a contract of employment is being performed illegally by the employer whether the employee is in turn affected by that illegal performance depends on whether he was a party to or knew of his employer’s illegality.  If he did take part in or continued working knowing of the illegal mode of performance by his employer of his contract employment, then he too is affected by that illegality and cannot rely upon his statutory rights to which he would otherwise be entitled under the relevant employment legislation.

14.	 In determining whether the employee was a party to the illegality the test is whether looked at subjectively the employee in fact knew or came to know of the illegality.  The essential question is ‘Has the employee knowingly been a party to a deception on the Revenue?’  Later on in the head note the majority said this, ‘Tribunals are not required in these circumstances to weigh the public policy of protecting the Revenue on the one hand against the public policy of protecting the employee or the other and to decide in each particular case which of the two claims of public policy should be given precedence.  Parliament never intended to give the statutory rights provided for by the relevant employment legislation to those who knowingly were breaking the law by committing or participating in a fraud on the Revenue.’  That passage would seem to us to encompass not only frauds connected directly with the payment of wages but possibly ancillary activities such as took place in this case.  

15.	At paragraph 24 of the Newland decision the majority set out the view in this way:

“where both employer and employee knowingly commit an illegality by way of a fraud on the Revenue in the payment and receipt of the employee’s remuneration under the contract of employment, which is an essential part of such a contract, then we think that there can be no doubt that this does turn it into a sort of contract, that is prohibited by statute or Common Law, and consequently the employee is precluded from enforcing any employment rights she might otherwise have against her employer.  The incidence of income tax frauds, both large and small, is so rife that they cannot be brushed on one side and the blame for them always laid only at the feet of the employers.” 

We emphasise those words “an essential part of such a contract” and raise the doubt as to whether it could be argued on the facts of this case that the transactions involving the computer and the cars were an essential part of the contract.

16.	However, if public policy dictates that employees and employers cannot commit frauds on the Revenue then what happened here would seem to be caught by that overall public policy.  In any event what is key in the decision making and what is absent from this Tribunal decision is first of all clear findings of fact from evidence taken by the Tribunal as to precisely what the illegality was and much more importantly whether there was participation and knowing participation of the employee in that fraud.  Without those findings it seems to us that the Tribunal cannot then begin to come to a conclusion on the tests propounded in the Newland case and we are somewhat confused by the approach they took in paragraph 6 in seeking to distinguish the main contract with ancillary contracts.  It may well be that they had in mind that passage that we have referred to in Newland which talks about the illegality going to an essential part of such a contract but it seems to us that it is important for them to make clear findings of fact on the state of mind of the employee.

17.	This approach has recently been endorsed in the most recent authority dealing with illegality, namely Colen & Anor v Cebrian (UK) Limited, a decision of the Court of Appeal on appeal from this Court given on 20 November 2003, not yet reported but the neutral citation number is [2003] EWCA Civ 1676.  In paragraph 21 of the main judgment given by Waller LJ he sets out the three types of illegality that we have already referred to.  He then in paragraph 22 referred to two cases and said this:

“In Coral Leisure Group Ltd v Barnet [1981] ICR 503, the Employment Appeal Tribunal asked itself the question whether any taint of illegality affecting part of the contract necessarily rendered the whole contract unenforceable by a party who knew of the illegality.  In the case of a contract not for an illegal purpose or prohibited by statute the appeal tribunal answered that question in the negative, holding that the fact that the employee in the course of his employment committed an unlawful act did not prevent him from asserting thereafter his contract of employment against his employer.”

The judge then went on to a the summary of Newland v Simons citing the particular passage from May J in that decision:

““We have no doubt that Parliament never intended to give the statutory rights provided for by the relevant employment legislation to those who were knowingly breaking the law by committing or participating in a fraud on the revenue.””

And then Waller LJ in paragraph 23 went on as follows:

“23.	 The above passages demonstrate that an analysis needs to be done as to what the party’s intentions were from time to time.  If the contract was unlawful at its formation or if there was an intention to perform the contract unlawfully as at the date of the contract, then the contract will be unenforceable.  If at the date of the contract the contract was perfectly lawful and it was intended to perform it lawfully, the effect of some act of illegal performance is not automatically to render the contract unenforceable.  If the contract is ultimately performed illegally and the party seeking to enforce takes part in the illegality, that may render the contract unenforceable at his instigation.  But not every act of illegality in performance even participated in by the enforcer, will have that effect.  If the person seeking to enforce the contract has to rely on his illegal action in order to succeed then the court will not assist him.  But if he does not have to do so, then in my view the question is whether the method of performance chosen and the degree of participation in that illegal performance is such as to turn as to “turn the contract into an illegal contract””

He goes on to say ‘not every illegality and performance would turn the contract into an illegal contract’.

18.	Thus it seems clear to us that this matter will have to be remitted back to the same Tribunal for further consideration of this issue.  We would invite them particularly to make specific findings about the nature of the illegality and secondly the knowledge of the employee in respect of each and every act of illegality raised and that then at the end of the day to come to a conclusion about whether there was a knowing act of illegality which rendered this contract unenforceable.  It may well be that if they come to the conclusion that there were knowing acts of illegality perpetrated against either the Revenue and/or the Customs and Excise they will have little difficulty in coming to the conclusion that it was an unenforceable contract albeit that the illegality did not involve the actual payment of wages itself but was a stage removed from that.  That however will be a matter for the Tribunal to determine having come to their findings of fact.