Appeal No. UKEAT/0069/05/DM

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 25 October 2005

Before
THE HONOURABLE MR JUSTICE BURTON LANGSTAFF
MS K BILGAN
PROFESSOR D WICKENS OBE

SECESSION LTD t/a FREUD	APPELLANT

MRS R BELLINGHAM 	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MR DAVID FREUD
(Representative)	
For the Respondent	MRS ROSANNA BELLINGHAM
(the Respondent in Person)	

Summary

Contract of Employment: Implied Term/Variation/Incorporation

Whether the ET was entitled to conclude that a term was to be implied in the employee’s contract of employment to the effect that she was entitled to be paid full pay during periods of sick leave: Lord Hoffmann’s approach in Carmichael applied, Dunn v Calder distinguished.  

Whether ET sufficiently dealt with employer’s case that the employee was not entitled to claim constructive dismissal

THE HONOURABLE MR JUSTICE LANGSTAFF

1.	This appeal raises the interesting question whether terms as to payment in a contract may be implied by conduct.  The employer appeals against the Decision of the London (Central) Employment Tribunal, Extended Reasons for which were given on 26 November 2004.  Amongst other things, the Tribunal upheld the Claimant’s complaint that she had been constructively dismissed by her employer in circumstances which I shall describe.  They rejected a complaint that she had made a disclosure which was protected by the Public Interest Disclosure Act.  

2.	The circumstances, which I take from the Employment Tribunal’s Decision, were these so far as relevant to the present appeal.  The Claimant was employed for almost 15 years from 20 May 1989 until 12 February 2004 when she resigned.  She had become effectively the group financial controller of Freud Lemos Ltd which was the holding company of the Appellant, Secession Ltd.  As the name suggested, Freud Lemos was a company which, essentially, had two principal movers, Mr Freud and Mr Lemos.  They had initially been happy to work together but, in 2002 or thereabouts, fell out and inevitably relations within the company became strained causing some employees to favour one and others perhaps the other.  Mrs Bellingham, the Respondent, tended to favour Mr Lemos in the disputes which they had, but she remained in employment in a company with Mr Freud as its principal mover after those disputes had come to the Companies Court for resolution.  

3.	The Claimant had habitually had long Christmas holidays.  The latest of these ran from 19 December 2003 to 8 January 2004.  Her employer learned on 7 January that she was in hospital; she had fallen sick and a certificate for one month’s absence from work was sent by her general practitioner by fax to her employer on 14 January 2004.  The Claimant was paid monthly.  She contacted the employer by letter of 2 February, having been concerned that her pay cheque for January 2004 had not arrived.  On 4 February she wrote again in a letter which has not been before us in the bundle, but which was before the Tribunal.  She is particularly concerned because a sizeable direct debit fell to be paid on 6 February.  On 6 February she received a cheque for £286.03 and not £2,140 as she had expected.  Her employer, the Appellant, said this was statutory sick pay for the period when she had been off sick less the first three days for which she would have no pay at all.  

4.	The situation was reviewed by the Tribunal when it considered the letter of resignation which the Claimant wrote in response to these events.  She said in that letter addressed to Mr Freud and dated 12 February:
“In the 15 years I have worked for the group you had only once paid statutory sick pay to a salaried employee and that was to Richard Hope-Hawkins whom you wanted to leave.  
I gave you my holiday dates in your office and asked you if it would be alright for me to have my usual long Christmas when you were moving offices which you had not told me about until then.  You said it would be fine and my work would be moved without me.
I was due back on the 7th and was very ill and went to the doctor.  Gerry [I suppose that is a reference to her husband] told you that day that I was ill.  Since you had decided to cause me the hardship and additional anxiety resulting from only paying SSP, you should have paid holiday pay for the first week and this has been chased to no avail.
You have now told Gerry you will only pay holiday pay if I resign.
I resign”
and she signed it off.  

5.	The Tribunal had to concern itself with conflicting evidence essentially in the areas of concern indicated by that letter.  At paragraph 18, it said this:
“Mrs Bellingham had no contract of employment and this is not disputed.  Her understanding was that she would be paid for all periods of sickness at her full contractual rate.  We accept this.  Mrs Bellingham was not in the same category as the bar staff or managers who came later.  We accept her evidence that in earlier periods of absence she had been paid in full and was entitled to receive full pay when she was sick.  There was no suggestion prior to this date that such payments were discretionary or subject to a cap.  A provision the Respondent relied on in the contract of employment does not apply to Mrs Bellingham as she was not subject to that contract.  Their failure to pay her salary for January and up and until her resignation on 13 February was a breach of the implied terms of her contract”.  
The Tribunal went on in the following paragraph to express its satisfaction that the Claimant’s resignation had been in response to what it described as “this breach”.  

6.	The words used in paragraph 18 require further explanation.  The opening sentence should not be read, it was agreed, as meaning that Mrs Bellingham had no contract of employment.  She could hardly have been an employee if that were so.  It meant that there was no dispute that she had no contract in writing.  Accordingly, the issue for a tribunal would be: what where the terms which it could and should, on the evidence, find that that contract contained?  When it said in the second sentence “her understanding was that she would be paid for all periods of sickness at the full contractual rate” that was, it appears, by way of contrast to the position as the employer’s evidence would have had it, which is reviewed at paragraph 17.  There, the Tribunal set out the employer’s case that she was not entitled to receive full pay during sick leave and that the “Respondent’s contract of employment” (a reference to the written contract of employment which was standard form for some others in the Respondent’s employment) provides that only SSP would be paid with any other payment being at the employer’s discretion.  

7.	Mrs Freud, a witness called for the company, said that Mrs Bellingham’s understanding was that full pay was paid only at the employer’s discretion but that “her enquiries had shown that when two managers had been sick, they had, as a discretion, been paid full pay for the four days they were away”.  Indeed, in the first witness statement which she made and which was put before the Tribunal as evidence in chief, Mrs Freud set out at paragraph 3 conclusions to that effect.  It is plain to us that the way in which the Tribunal dealt (at the end of paragraph 17) with the case made for the employer is a reference to that evidence, although it does not in terms identify the source of it.  It was the Tribunal’s conclusion, contrasting that evidence given for the employer with the evidence given by Mrs Bellingham, that they would accept Mrs Bellingham’s evidence. That is the third sentence at paragraph 18.

8.	The fourth sentence is a reference to the fact that there had been a dispute between Mrs Bellingham and her employer as to whether she was rightly to be regarded as the group financial manager or, as the employer would have had it, a book-keeper.  The Tribunal preferred the former.  

9.	The fifth sentence, we understand, is a reference to evidence which she told us she gave at the Tribunal that she had, on earlier occasions, been paid in full when she had had substantial periods of absence: one of three weeks in 2003 and one of a week earlier when she had broken her toe.  The next sentence referring there being no suggestion prior to “this date”, requires one to focus on what is meant by “this date”.  Again, it appears to be common ground that that must relate to the date of her absence at the start of 2004.  So there had, as matter of fact found by the Tribunal, that there had been no suggestion to her that such payments – and again it must be to her – were discretionary or subject to a cap.  I say “must have been to her” because the form of contract which some others in the employer’s employment entered into did, indeed, have a discretionary clause, at least for some members of staff.  Other members of staff had no such discretionary entitlement at all.  

10.	The finding which the Tribunal came to was that the failure to pay full pay for the period of sickness absence in January 2004 was a breach of the implied terms of the contract, and having set out subsequently in its Decision the law, relying in particular upon the case in the Court of Appeal of Western Excavating (ECC) Ltd v Sharp [1978] IRLR 27, it concluded that the failure to pay Mrs Bellingham sick pay in January to 13 February 2004 - and by that they meant full pay during a period of sickness amounted to a repudiatory breach of a contract of employment.  This was a fundamental breach, they said, entitling her to resign and treat herself as dismissed and she did in fact resign in response to that breach.  They went on to conclude that, in all the circumstances of the case, was an unfair dismissal.  

11.	The Tribunal awarded the total sum of £1,031.45 net because almost immediately, Mrs Bellingham began work for Mr Lemos who by now was working separately from Mr Freud and the company.  That sum was a miscalculation on the part of the Tribunal which inspired a cross-appeal.  Although the cross-appeal was out of time, leave was given by this Tribunal under the chairmanship of Mr Justice Bean on 14 July 2005 to proceed with the cross-appeal to that extent.  Before him, he recorded a concession as having been made, that the figure of £1,031.45 should be altered to £2,236.22.  

12.	Today Mr Freud, who appeared in person for the employer, and has put his submissions to us with clarity and with moderation, told us that he did not concede the figure of £2,236.22 but merely that there had been a mistake in the calculation, and that upon revisiting the calculation, he would contend for a figure which was £42.46 less.  Upon it being pointed out in reply by Mrs Bellingham, who appeared in person, and has similarly put what she has had to say to us with courtesy and moderation, that is an error which arises, if it is an error, from the use of a different divisor, using 262 working days for the leap year of 2004 rather than the 261 by reference to which earlier calculations, to which she took us, by the employer in respect of the same leap year had been made.  Mr Freud, for his part, did not push the issue and so we can deal with any issue which arises upon the cross-appeal, should we uphold the Tribunal’s decision, simply by saying that the Tribunal’s decision should have been in the sum which was, according to this Tribunal, conceded on the 14th July that is £2,236.22.  

13.	Against this background, the challenges which are made to the Employment Tribunal’s decision have necessarily to be challenges of law.  We have to remind ourselves that an appeal lies to this Tribunal only upon a matter of law.  Tempting as it may be, we are not entitled to reopen facts.  We are not entitled to substitute our own preference for the result if it appears, upon review, that the Tribunal was entitled, upon the evidence before it, to reach the conclusion which it did.  For that purpose, unless it can be shown that a decision is simply perverse in the extreme sense in which it is used in this Tribunal or was a decision which simply did not accord with any of the evidence, we have to accept and adopt the findings of fact which the Tribunal made.  Our own view, had we been members of Employment Tribunal that had such issues before it, is beside the point.

14.	With that reminder, we approach the submissions made by Mr Freud.  What he submitted to us was based upon two factual points.  The first, he said, was that the employer did not make a deduction from the amount which was properly payable to Mrs Bellingham or, if it did so, did so in error.  He told us that the claim for breach of contract was in reality a claim to which Part 2 of the Employment Rights Act 1996 applied, that is the part which deals with the ability of an employee to complain that there has been an unauthorised deduction from the wage otherwise properly payable to him or her.  He drew our attention to Section 13(4) which is to the effect that there is no deficiency if it is attributable to an error of any description – a very wide phrase – on the part of an employer affecting the computation by him of the gross amount of the wages properly payable.  I shall come back to that submission in a moment or two. 

15.	He reminded us of what is said in the classic case of Western Excavating (ECC) Ltd v Sharp [1978] ICR 221.  There, Lord Denning MR, said under the heading of “The Contract Test” 

“….that if an employer is guilty of conduct which is a significant breach going to the root of the contract of employment or which shows that the employer no longer intends to be bound by one or more of the essential terms of the contract, then the employee is entitled to treat himself as discharged from any further performance.  If he does so and he terminates the contract by reason of the employer’s conduct, he is constructively dismissed.  The employee is entitled, in those circumstances, to leave at the instant without giving any notice at all or alternatively, he may give notice and say he is leaving at the end of the notice but the conduct must, in either case, be sufficiently serious to entitle him to leave at once.  Moreover, he must make up his mind soon after the conduct of which he complains for, if he continues for any length of time without leaving, he will lose his right to treat himself as discharged; he will be regarded as having elected to affirm the contract”.
He says that there was here no sufficiently serious breach in the circumstances to make the conduct of the employer repudiatory.  Secondly, he says, that as a matter of fact, Mrs Bellingham did not resign in response to the breach, and drew our attention to the terms in which she wrote the letter of resignation which I have already recited.  Thirdly, he said that she had affirmed the contract and was thus disentitled to regard herself as entitled to resign.  

16.	There is, we think, a preliminary issue however before one ever gets into the territory covered by the Western Excavating (ECC) Ltd v Sharp line of authorities.  That is whether or not it may properly be said by a Tribunal that one can imply a term as to the payment, not just of pay, but of full pay during a period of sickness.  As to this, Mr Freud at one stage sought to contend that statute provided statutory sick pay as a default provision such that in the absence of any other provision, the pay which an employee would be entitled to when off sick and not doing the job which he or she was employed to do would be statutory sick pay and no more.  But after consideration, he recognised that statutory sick pay represented properly a floor rather than a default position and that it was therefore open to a Tribunal, if the evidence was appropriate, to conclude on the basis of that evidence that another term as to payment of sick pay in excess of statutory sick pay had been made out.  

17.	The law as to whether or not a term may be implied by previous conduct of the parties is best seen in the context set by the speech of Lord Hoffman in the case of Carmichael v National Power [1999] ICR 1233 where he dealt with submissions that an exchange of letters between power station guides and their employers constituted a contract which needed to be construed as though it were a legal document containing the complete contract between the parties.  He thought that to do so, as the Court of Appeal had done
“….pushed the rule about the construction of documents too far.  It applies in cases in which the parties intend all the terms of their contract (apart from any implied by law) to be contained in a document or documents.  On the other hand, it does not apply when the intention of the parties, objectively ascertained, has to be gathered partly from documents but also from oral exchanges and conduct.  In the latter case, the terms of the contract are a question of fact and of course the question of whether the parties intended the document or documents to be the exclusive record of the terms of their agreement is also a question of fact”.
He illustrated that proposition by reference to the case of Moore v Garwood [1849] 4 Exchequer 681 and returned toward the end of his speech to emphasise that the parties could, by their conduct, demonstrate what were the terms of the contract where the contract was otherwise silent.  Carmichael was a case in which there had been at least some documentation, albeit a cursory exchange of letters.  In the present case, we are bound by the Tribunal’s finding that Mrs Bellingham did not have any written contract of employment.  Accordingly, the terms had entirely to be derived, as it seems to us, in the way in which Lord Hoffman set out in Carmichael.  Carmichael, although of the highest authority, does not stand alone.  For her part, Mrs Bellingham has pointed out that in the case of Seligman & Latz Ltd v McHugh which came before this Tribunal on 25 January 1979, a finding by a Tribunal that a contract contained a term implied by custom and practice that the employee was a hairdresser and would be provided with a junior to assist her if she was busy was sufficiently evidenced to be upheld as a term of the contract despite, as is obvious, the fact that there was nothing in writing to that effect.  

18.	This court has dealt with the issue as a question of principle when Sir Nicholas Brown-Wilkinson, as president, said in 1982 in the case of Duke v Reliance Systems [1982] ICR 459 when the issue was whether or not there was any contractual retirement age for women - that 
“A policy adopted by management unilaterally cannot become a term of the employees' contracts on the grounds that it is an established custom and practice unless it is at least shown that the policy has been drawn to the attention of the employees or has been followed without exception for a substantial period”.  
19.	That was picked up in Quinn v Calder [1996] IRLR 126 determined by the Employment Appeal Tribunal sitting in Scotland.  It was alleged on behalf of employees that enhanced redundancy terms had become a term of the contract, rather than remaining a matter of discretion as they would otherwise be.  The fact that, on some four occasions since 1987 until the incident which led to the appeal, those terms had always been honoured, did not, in the view of the Appeal Tribunal, create such a custom and practice as to entitle to the Tribunal in that case on those facts to assume that a term to the effect that enhancement was a matter of entitlement could be implied.  Helpfully, the Appeal Tribunal set out at paragraph 6, the different contexts in which a term could or should be implied into a contract.  It found that, on the facts, the situation there did not justify such an implication.  As had been in the case in Duke v Reliance, there had been a collective agreement reached between members of the workforce and the employers.  There thus was a detailed contract in writing.  The alleged implied term, one which varied or supplemented the written agreement, was one which one might have expected to see in writing had it not been agreed, but which had, as it happened, been present, when it had been said to be present, only in practice.  

20.	It seems to us that the decision in Quinn v Calder is particularly specific to those facts.  This case is different.  It is a case in which, without deriving the terms of the contract from the surrounding circumstances as best it can, the Tribunal would have no basis from which to start.  The approach, therefore, which Lord Hoffman took in Carmichael v National Power is not, in our view, qualified in its application to the present case by a consideration of either Quinn v Calder or Duke v Reliance.

21.	Finally, we should make reference to the case of Dunlop Tyres v Blows [2001] IRLR 632 in which evidence was used to resolve an ambiguity in a contract, that is an ambiguity in a written contract, and evidence of the practice of the parties (which had been prevalent not only after the contract terms were entered but before they were entered) was used to resolve that ambiguity to favour the practice, as opposed to the argument that those terms meant other than that which the practice portrayed.  Again, it seems to us that that does not materially assist us in the present case.  Accordingly, we begin from the proposition that if there is evidence upon which a Tribunal may rely, it is entitled, in a situation in which there is no written contract, to derive the terms of that contract.  

22.	A simple example may explain the position in which the Employment Tribunal here found itself.  If an employee had no written contract and if there was no agreement as to what precisely he should be paid week by week, but he was paid for that work at £300 per week for the first twelve weeks of his employment and was then paid £200, would an employer be entitled to say of the £200 that that was all the employee was entitled to for the seventh week upon the basis that that was the minimum wage?  We think it would be open to the Tribunal, after considering all the circumstances conclude that by then the practice had been such that the contract was for £300 per week, that the practice of the parties demonstrated what the intention was and that was therefore the term which was binding upon them for the future unless varied by consent.  

23.	The feature which leads one to that conclusion are a consistency sufficient to establish a pattern of treatment and no contrary evidence.  When we turn to the Tribunal’s decision in the present case, reminding ourselves, as we have done, that we were not present before the Tribunal to hear the witnesses and to hear the questioning, nor do we have before us precisely the same documentation as did the Tribunal, we see in paragraph 18 the Tribunal adopting the approach derived from Carmichael of deriving the terms of the contract from the practice of the parties.  If the Tribunal were entitled to accept the Claimant’s evidence that in earlier periods of absence she had been paid in full and if they were entitled to accept her understanding that she would be paid in that way for all periods of sickness at her full contractual rate, then there was a term derived from the contract that that was what would happen if she fell sick again.  

24.	Mr Freud, in his sustained argument, has complained that in reaching the conclusion which the Tribunal set out in paragraph 18, it did not pay sufficient regard to that which Mrs Freud had said in her witness statement, nor to the documentary material which she had derived from the records of the company after a trawl through them, nor from his own detail of that which had been done for other employees.  He relied upon the fact, as he put it, that the policy of the company, as demonstrated by other contracts of employment offered to others in employment, contained terms which showed that the payment was entirely discretionary.  However, although we are inclined to think that the Tribunal could on this issue, because it was central, have dealt more fully with the reasons why it rejected the evidence of Mrs Freud and preferred the evidence of Mrs Bellingham, we cannot at the end of the day say that it was disentitled from accepting her evidence.  Accordingly, from the law which we have set out and accepted, we have to conclude that the Tribunal made a finding of fact.  That finding of fact was one which the Tribunal was, we are persuaded, entitled to come to, and it was that during periods of sickness, she (Mrs Bellingham) was entitled to be paid her full contractual rate.  

25.	We should make one observation in passing.  Mr Freud has emphasised that to such a term would be without cap.  He has pointed out the practical consequences of an employee being on long term sick leave, and argued that by necessary implication, there would have to be some cap upon it.  There are, we think, two answers to this contention.  First, it is not actually this case.  Had the issue arisen, it might have had to have been dealt with.  Secondly, employers retain the ability to dismiss for reasons of capability in appropriate circumstances, and an employee will have no successful complaint under Section 98 of the Employment Relations Act 1996 unless the Tribunal are satisfied that such a dismissal is not fair and reasonable in all the circumstances of the case.  In such a case it might well be, though we would emphasise that every case must, of course, turn upon its own particular facts.  

26.	Having determined what were the terms of the contract, the Tribunal still has to determine whether or not Mrs Bellingham was entitled to regard herself as constructively dismissed for that reason.  As it is now settled law, not least in the recent case before the Court of Appeal of Meikle v Nottinghamshire County Council [2005] ICR 1, the breach of contract does not have to be the only reason for the employee resigning.  The Tribunal described themselves as satisfied that Mrs Bellingham’s resignation was in response to the breach.  Mr Freud has invited us to conclude that.  This was because Mrs Bellingham’s husband sent a fax on 18 February in which he queried calculations as to Mrs Bellingham’s pay cheque, not upon the basis that full pay was due, but upon the basis that holiday pay and statutory sick pay were due (she had not resigned in response to the breach consisting of a failure to pay her full pay).  However, we have looked carefully at the resignation letter of 12 February.  We are conscious that this was only part of the evidence before the Tribunal.  Mrs Bellingham herself said that she resigned in response to the breach.  But the letter is also capable of bearing that interpretation.  In it she complains twice about the employer’s payment to her of just statutory sick pay.  Accordingly, that was in her mind.  Accordingly it seems to us that whatever may be said about its weight as a matter of fact, the Employment Tribunal was entitled to come to the conclusion which it did in paragraph 19 even though it could possibly have come to the alternative conclusion.  

27.	As to whether or not the breach was sufficiently serious, we think that the Tribunal was entirely right to conclude that a failure to withhold money which was due to an employee and, indeed, to maintain that that sum was not due, and to do so in breach as, the Tribunal found, of contract, is a sufficiently serious breach within the meaning which Lord Denning gave to it in Western Excavating (ECC) Ltd v Sharp to justify that employee in resigning.  

28.	That leaves the question of whether or not Mrs Bellingham affirmed the contract.  Here, Mr Freud maintained that it was not so much an affirmation of the contract of employment as such that he could rely upon.  Rather, founding himself upon the same fax of 18 February 2004 to which we have just referred, he contended that she had confirmed the terms of the contract by asking for statutory sick pay; she was expressly confirming through her husband that her only entitlement was to statutory sick pay.  This, it seems to us, is an argument which, if it is to be employed, relates to whether or not there was such an implied term as the Tribunal derived.  We have dealt with that.  It does not constitute an affirmation in the sense that the behaviour of the Claimant was inconsistent with her acceptance of the conduct of the employer as entitling her to resign.  

29.	We were referred by Mr Freud in passing to the case of Taylor v Gordon [2004] IRLR 180 which dealt with the question of what was properly due by way of sick pay and the case of London Clubs v Hood.  We were unable to find in these authorities anything which directly informed our decision upon the main issues which we had to determine.  

30.	It follows from what we have said that, in summary, we have concluded that the Tribunal did not err in law in deciding that it could derive a term of a contract from the way in which these employers and this employee had, in the past, behaved towards one another.  There was no other proper basis on which they could do so.  We have concluded that they were entitled to reach the view which they expressed that that behaviour consisted of a payment to her, without any suggestion that there was an element of discretionary cap involved, of full pay during the time that she was absent, sick.  We are satisfied therefore that they were entitled to conclude that that was a term of the contract and that it was broken by the employer’s failure to pay full pay between January and February 2004.  We are satisfied that, upon the application properly of the Western Excavating principles and again, taking the findings of fact as they were made by the Employment Tribunal the employee, Mrs Bellingham, was entitled to resign.  Accordingly, we are satisfied that the cross-appeal therefore falls for consideration.  We have dealt with that already.  This appeal will therefore be dismissed and the cross-appeal allowed to the extent that the sum of £2,236.22 is substituted for the award first made by the Employment Tribunal.