Appeal No.  UKEAT/0572/05/ZT

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 23 January 2006
Judgment handed down on 3 March 2006

Before
THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)
MR P A L PARKER CBE        
MR P M SMITH

MR D E LANGLEY and MS C J CARTER	APPELLANT

MS A M BURSO	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	Ms SARAH WILKINSON of Counsel
Instructed by:
Messrs Ashurst Solicitors
Broadwalk House
5 Appold Street
LONDON
EC2A 2HA	
For the Respondent	Mr AYOADE ELESINNLA of Counsel
Instructed by:
Messrs J R Jones Solicitors
58 Uxbridge Road
Ealing
LONDON
W5 2ST	

SUMMARY

Unfair dismissal of employee whilst she was sick.  The Tribunal held that she was contractually entitled to full pay for the notice period.  That conclusion was overturned on appeal.  The Respondent cross appealed on the grounds that in any event she was entitled to unfair dismissal compensation which should have included full pay for the notice period, following the principle enunciated by Sir John Donaldson in Norton Tool v Tewson [1972] ICR 501.  EAT held, by a majority, that this principle was no longer applicable following the decision of the House of Lords in Dunnachie v Kingston Upon Hull City Council [2004] UKHL 36; [2005]1 AC 226; [2004] ICR 1052

1.	Ms Burso, the Respondent to this appeal was employed by the Appellants, who are husband and wife, as a nanny for their two children.  She was employed from November 1999 until her contract was terminated in March 2004.  This followed a heated discussion between Ms Burso and the Appellants over the payment of a salary increase.  Shortly before the dismissal, Ms Burso was involved in a car crash.  She suffered various injuries and was not able to work between 5th March 2004 and the 12th July 2004.  This included the whole of her notice period. There was no connection whatsoever between this accident and the dismissal.  

2.	Ms Burso brought claims for unfair dismissal (whether from an actual or a constructive dismissal), wrongful dismissal, unauthorised deductions of salary and sex discrimination.  The Tribunal upheld her complaints of unfair and wrongful dismissal.  Essentially they found that she was entitled to 8 weeks notice under her contract and that her contract was terminated by a letter from Mr Langley on 13th March 2005.  The dismissal was also held to be unfair because there was no properly convened disciplinary hearing or right of appeal. 

3.	The Tribunal calculated the compensation referable to each claim.  They found in terms that had Ms Burso been given notice it would have been at her contractual rate of pay. They calculated the loss as £3440 (that being 8 weeks net pay). Their calculation of that sum indicates that they must have assumed that that rate was the normal weekly wage.  There was no explanation as to how they had reached that conclusion. (In fairness to the Tribunal it may well simply have been an understandable oversight when fixing the damages to award full pay, but we have to assume that it reflects their view of the contract.) The only other reference they make to the contractual position as regards sickness is when they quote paragraph 7 of the Contract of Employment which provided that:

	“David and Caroline will pay sickness benefit in accordance with government statutory sick pay legislation.”

4.	In relation to the unfair dismissal claim, the Tribunal calculated that the compensatory award amounted to some £5736 to which was added the basic award.  In the calculation of that compensatory award, no sums were awarded referable to the notice period itself.  That was because the Tribunal had already identified the loss for that period in the damages for the wrongful dismissal.

5.	The finding on liability is not disputed.  The only ground on which the Appellants seek to challenge this decision is that they submit that the Tribunal erred in concluding (as they must be assumed to have done) that Ms Burso would have been entitled to full pay for the notice period.  They accept that the period of notice was 8 weeks but submit that the clear term of the contract was that she should receive statutory sick pay if absent ill.  It is common ground that that would lead to a sum of around £440 which is very substantially less that the sum awarded in relation to wrongful dismissal.  Counsel for Ms Burso, Mr Elesinnla, submits that the Tribunal was right to conclude that she was contractually entitled to full pay for the notice period.  Alternatively he submits in a cross appeal that in any event, even if the Appellants were right that the contractual entitlement was merely to statutory sick pay for that period, nonetheless under the unfair dismissal provisions, case law clearly established that Ms Burso should have been awarded full pay for the notice period.  He relies upon the principle first enunciated in Norton Tool v Tewson [1972] ICR 501 in which Sir John Donaldson, sitting in the National Industrial Relations Court, held that it was good industrial relations practice for an employer who dismisses without notice to make a payment in lieu of notice.  Where such sums are paid, no credit has to be given by the employee for monies earned by the employee from other employers in the notice period.  It was held that damages for unfair dismissal should therefore include full pay for the notice period without reduction for mitigation.

The appeal

6.	The first issue is whether the tribunal were justified in fixing the loss for the period of notice as being the full wages which the employee would have earned in the eight week notice period.  The Tribunal did not state how it concluded that the employee would be entitled to full pay.  Ms. Wilkinson, for the Appellants, submits that this was a finding which contradicted the only evidence on the point. As we have said, the express term of the contract provided that for periods of sickness the Respondent would be paid statutory sick pay.   Ms Wilkinson says that there was no evidence at all to suggest that this term no longer formed part of the contract.  On the contrary, as the agreed notes of evidence confirm, Ms Burso had accepted that it accurately reflected her contractual rights during the notice period.  However, Mr Elesinnla contends that in fact it does not in terms state that it would apply even during the notice period, and the tribunal was justified in concluding that it did not. 

7.	We accept the Appellant’s submission.  There was no basis for the Tribunal’s conclusion that under the contract Ms Burso would have been entitled to full pay for the period when she was absent for sickness.  The contractual term was clear and there is no justification for saying that it is inapplicable to the notice period.  Furthermore, there was no proper evidential basis for saying that it had been overtaken by some other term.  It is true that in the dismissal letter Mr Langley noted that “we have paid you in full for the considerable number of days sick which you have taken in your time with us, notwithstanding that we have never been under any obligation to do so.”  But that is entirely consistent with the employers making an ex gratia payment whilst preserving their legal rights.  That observation alone is not a sufficient basis for a finding that the practice had the effect of altering the contract, and Mr Elessinla fairly accepted that he had not sought to argue that the express term had been varied by subsequent practice.   In any event, the nature and extent of that practice would have had to be explored in some detail before the tribunal could begin to conclude that any subsequent variation had occurred, and they were not.

8.	Mr Elesinnla submits in the alternative that there is a proper statutory basis for the Tribunal’s conclusion even if at common law the employee’s right was only to statutory sick pay.  He relies upon Section 88 of the Employment Rights Act 1996. This was not a point argued below, but we accept that if the statute establishes the entitlement on undisputed facts then we should determine it.  Section 88 provides as follows: 

“If an employee has normal working hours under the contract of employment in force during the period of the notice and during the period of notice…

 (b) the employee is incapable of work because of sickness or injury….

the employer is liable to pay the employee for part of normal work hours covered by any paragraph (a), (b), (c) and (d) a sum not less that the amount of remuneration for that part of the normal working hours calculated at the average hourly rate of remuneration produced by dividing a week’s pay by the number of working hours.” 

It is common ground that the employee has normal working hours.

9	The reference to the notice period is, however, not a reference to the whole period of notice but only to the statutory minimum period set out in Section 86: see Section 87(3).  So this provision, if applicable, would only relate to four weeks of the contractual notice entitlement, since that is the statutory minimum for someone like Ms Burso with between four and five years service.  It would not require full payment for the eight weeks of the notice period.  

10.	Ms Wilkinson denies that Section 88 has any application at all.  This is because those rights do not apply to employees whose contracts fall within the scope of Section 87(4).  That subsection provides as follows: 

This section does not apply in relation to a notice given by the employer or the employee if the notice to be given by the employer to terminate the contract must be at least one week more than the notice required by Section 86(1).

Counsel submits that this is a complete answer to this contention.  In this case the notice to be given under the contract at the time of dismissal was eight weeks, which was in fact four weeks more than the four week statutory minimum which Section 86 requires for this contract. 

11.	Mr Elesinnla responded that this provision applies only if the employer actually gives the contractual notice.  We reject that argument.  We accept that Section 88 is indeed envisaging the rights which arise where notice is given.  If the employer fails to give that notice then that failure gives rise to a claim in damages. Section 91(5) provides in terms that when calculating those damages, the rights conferred by Sections 87 to 90 must be taken into account.   However, where the notice which the employer is obliged to give (“the notice to be given by the employer”) exceeds by at least one week the statutory notice period then the rights conferred by Section 88 are inapplicable and Section 88 has no relevance.  The damages must be measured by the rights which would have arisen under the contract, unaffected by the statutory provisions.  The damages are simply what would have been earned had the contract been performed in accordance with its terms.  Had that occurred, the employee in this case would not have had the right to full pay for the statutory notice period even although off sick for that period.  She would have been entitled only to statutory sick pay.

12.	Our analysis of these statutory provisions follows the more elegant account of their effect given by this tribunal (Judge Burke Q.C presiding) in Scott’s Company (U.K.) Ltd. v Budd [2003] IRLR 145. Like the court in that case, we find it difficult to see what the rationale is for Section 87(4).  Perhaps it was assumed that employees whose notice period was more extensive than the statutory minimum would be well protected in any event.  But this case shows that any such assumption is not always correct, and we do not understand why this employee should be any less entitled than someone with statutory notice to full pay for the statutory notice period.  But we must of course loyally apply the law as enacted by Parliament, however inequitable the effects may appear in a particular case.

13.	Accordingly the appeal succeeds and, subject to the cross appeal, the damages must be reduced to require payment of statutory sick pay only for the eight week notice period.

The cross appeal.

14.	We turn to consider the cross appeal.  The submission here is that even if the Tribunal were wrong to award full pay for the period of notice in the wrongful dismissal action, nonetheless it should have awarded precisely the same sum when calculating the compensation for unfair dismissal.  As we have said, it rests on the principle first enunciated in the Norton Tool case. A premise of the argument in the context of this case is that it is in fact good industrial relations practice to give full pay in lieu of notice to an employee summarily dismissed (save where there is a lawful summary dismissal) even where the employee is unable to work through the notice period because of sickness.  We will consider whether the premise is correct later.

15.	The employers contend that the Norton Tool principles are no longer a legitimate basis for awarding full compensation for the notice period, particularly in the light of the decision of the House of Lords in Dunnachie v Kingston Upon Hull City Council [2004] UKHL 36; [2005]1 AC 226; [2004] ICR 1052.   They pray in aid two recent decisions of Burton J in this tribunal which have held that Norton Tool is no longer good law, and that there is no room for the proposition that good industrial relations’ practice can be relied upon to increase the amount of compensation so as to award more than the true loss actually incurred as a consequence of the dismissal itself

16.	The law.

The relevant statutory provision is Section 123 of the Employment Rights Act 1996 in so far as is material it is as follows: 

Subsection (1)

Subject to the provisions of this section and sections 124 and 126, the amount of the compensatory award shall be such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer.  

Subsection (2)

The loss referred to in subsection (1) shall be taken to include-

(a)	any expenses reasonably incurred by the complainant in consequence of the dismissal, and
(b)	subject to subsection (3), loss of any benefit which he might reasonably be expected to have had but for the dismissal.

Subsection (4)

In ascertaining the loss referred to in subsection (1) the tribunal shall apply the same rule concerning the duty of a person to mitigate his loss as applies to damages recoverable under the common law of England and Wales or (as the case may be) Scotland.

Subsection (2) shows that the assessment of loss is not identical to common law concepts.  The loss includes payments which the employee might reasonably have expected to be made even although there was no contractual right to them. 

17.	It is necessary to analyse the case law in more detail, starting with Norton Tool. That was the first case where what was then the new principle of unfair dismissal was assessed.  The legislation was in substantially similar terms to the current provisions.  Sir John Donaldson first made some general observations about the principles which should inform the assessment of compensation. He noted that unfair dismissal was an entirely new cause of action and that common law rules were irrelevant, but that the measure of compensation was not arbitrary and had to be found in the legislation.  (This was section 116 of the Industrial Relations Act 1971.  That was not a section which was tailored specifically to the calculation of loss in unfair dismissal cases; rather it laid out the general principles of loss applicable to all the new causes of action created by that Act.)  He added this: 

“The court or tribunal is enjoined to assess compensation in an amount which is just and equitable in all the circumstances, and there is neither justice nor equity in a failure to act in accordance with principle. The principles to be adopted emerge from Section 116 of the Act of 1971. First, the object is to compensate, and compensate fully, but not to award a bonus, save possibly in the special case of a refusal by an employer to make an offer of employment in accordance with the recommendation of the court or a tribunal. Secondly, the amount to be awarded is that which is just and equitable in all the circumstances, having regard to the loss sustained by the complainant. 'Loss' in the context of Section 116 does not include injury to pride or feelings. In its natural meaning the word is not to be so construed, and that this meaning is intended seems to us to be clear from the elaboration contained in Section 116(2). The discretionary element is introduced by the words 'having regard to the loss.' This does not mean that the court or tribunal can have regard to other matters, but rather that the amount of the compensation is not precisely and arithmetically related to the proved loss. Such a provision will be seen to be natural and possibly essential, when it is remembered that the claims with which the court and tribunals are concerned are more often than not presented by claimants in person and in conditions of informality. It is not, therefore, to be expected that precise and detailed proof of every item of loss will be presented, although, after making due allowance for the skills of the persons presenting the claims, the statutory requirement for informality of procedure and the undesirability of burdening the parties with the expense of adducing evidence of an elaboration which is disproportionate to the sums in issue, the burden of proof lies squarely upon the complainant.” 

18.	Later in his judgment, when assessing the loss in the particular case, he formulated the principle now being relied upon, relating to the calculation of loss during the notice period, in the following terms: 

“The Contracts of Employment Act 1963, as amended by the Act of 1971, entitles a worker with more than ten years' continuous employment to not less than six weeks' notice to terminate his employment. Good industrial practice requires the employer either to give this notice or pay six weeks' wages in lieu. The employee was given neither. In an action for damages for wrongful, as opposed to unfair, dismissal he could have claimed that six weeks' wages, but would have had to give credit for anything which he earned or could have earned during the notice period. In the event he would have had to give credit for what he earned in the last two weeks, thus reducing his claim to about four weeks' wages. But if he had been paid the wages in lieu of notice at the time of his dismissal, he would not have had to make any repayment upon obtaining further employment during the notice period. In the context of compensation for unfair dismissal we think that it is appropriate and in accordance with the intentions of Parliament that we should treat an employee as having suffered a loss in so far as he receives less than he would have received in accordance with good industrial practice. Accordingly, no deduction has been made for his earnings during the notice period.”

19.	There are a number of points to note about the principle thus formulated.  First, it is not altogether clear from this formulation whether the principle required payment in lieu merely with respect to the statutory notice period, or whether it applied also to any longer notice period stipulated by the contract. It has since been treated as applying in principle to contractual notice periods, even if longer than the statutory minimum, subject to some limitation depending on what good industrial relations’ practice requires.  Second, it is not said that the employee in fact suffers the loss from his dismissal if the employer fails to make a payment in lieu.  He is treated as having suffered that loss; it is in effect a “deemed loss.” It would be an actual loss if the question is what flows from the failure to comply with good industrial relations’ practice; but it is not an actual loss where what is being assessed is the loss flowing from the dismissal. Someone who is dismissed and immediately obtains another job at higher pay suffers no loss of income at all.  (There may of course be other losses, such as pension rights). Third, although it is asserted that this principle would be in accordance with the intentions of Parliament, there is no analysis of precisely how this principle is justified by the statutory provision itself.  Fourth, the effect is that the duty to mitigate does not apply with respect to wages earned elsewhere during the notice period.  Although Sir John Donaldson said that the common law rules were irrelevant, section 116, like the current legislation, in fact provided in terms that the calculation of loss was “subject… to the application of the same rule concerning the duty of a person to mitigate his loss as applies in relation to damages recoverable under common law…” 

20.	That decision was then followed in a large number of subsequent decisions of the Employment Appeal Tribunal including Everwear Candlewick Ltd. v Isaac [1974] ICR 525, Hilti (Great Britain) v Windridge [1974] ICR 352 and Vaughan v Weighpack [1974] ICR 261 when Sir Hugh Griffiths commented (p.263) that the loss of wages during the notice period was “the irreducible minimum” to which an employee was entitled.  

21.	It is pertinent to note that when Norton was decided, there was no basic award payable to those found to have been unfairly dismissed. Such an award is now made, usually equivalent to a statutory redundancy payment.   It was not introduced until the Employment Protection Act 1975.  

22.	An attempt to limit the scope of the principle- indeed, virtually to subvert it- was made by this Tribunal in Tradewinds Airways v Fletcher [1981]IRLR 272 ( Bristow J presiding). In that case an employee, an airline pilot, was entitled to three months contractual notice.  The Tribunal awarded compensation for the full three months even although he had earned a salary from other employment during part of that period.   The EAT held that Norton Tool did not lay down a rule of law but rather a rule of practice which would rarely justify awarding more than the actual loss given that a basic award was now given in virtually all cases. Bristow J said this:  

“Now the reason that the Industrial Tribunal awarded the equivalent of the wages that Mr Fletcher would have earned during the whole period was that they followed the observations of the National Industrial Relations Court in Norton Tool Co Ltd v Tewson [1972] IRLR 86, as interpreted in Vaughan v Weighpack [1974] IRLR 105 (another decision of the same Court). As we see it, they took those cases as laying it down as a rule of law that (to quote the judgment in Vaughan v Weighpack) 'that was to be considered as the irreducible minimum to which the employee is entitled under this head of compensation'. In our judgment, if the Industrial Relations Court intended to lay that down as a rule of law, they were wrong to do so. The law and the whole law on this matter is contained in the provisions of the Statute, and the provisions of the Industrial Relations Act 1971, under which those decisions were made, were in effect the same as the provisions of s.74 of the Employment Protection (Consolidation) Act 1978, It was not until the Employment Protection Act 1975 that, in addition to compensatory award, a provision was made, enshrined in ss.72 and 73 of the 1978 Act, that there should be a basic award which would always be awarded, irrespective of the actual amount of the loss sustained by the employee; and that is, of course, the equivalent of the 'irreducible minimum to which the employee is entitled', referred to in Norton v Tewson and Vaughan v Weighpack.
We think that the Industrial Relations Court was doing no more than to say that, in general, an Industrial Tribunal, considering what it was just and equitable to award, might well come to the conclusion that they should start with what the employee would have earned through the notice period if he had not been dismissed. Maybe there are cases in which it might be just and equitable for an Industrial Tribunal to take that view before the basic award was introduced by the 1975 Act. But, in our judgment, it is difficult to imagine any situation, during the period in which the basic award obtained, in which it could be just and equitable to make any compensatory award which was not directly related to financial compensation for actual financial loss……In our judgment, the concept of a basic irreducible minimum, apart from actual monetary loss sustained, is quite foreign to the way in which the whole matter of compensatory award is approached.”

23.	However, in TBA Industrial Products Ltd v Locke [1984] ICR 228 Browne Wilkinson J, then the President of this Tribunal, chose not to follow Tradewinds, trenchantly criticising  its reasoning, and  reaffirming the principle established in Norton Tool. After referring to the passage in Tradewinds to which we have made reference.  He said this: 

“It seems to us that the decision in the Tradewinds [1981] IRLR 272 case is quite inconsistent with the earlier cases.  We have to decide which authority to follow.  In the realm of industrial relations (where settlement by negotiation must be the prime objective) it is even more undesirable than usual that there should be conflicting decisions.  If we were satisfied that the decision in Norton [1972] IRLR 86 line of cases was wrong in principle or, due to changes in industrial relations practice , had ceased to be appropriate, we would say so but suggest that the parties should correct the matter in the Court of Appeal rather than produce conflicting authority in this Tribunal.  But in our judgment the line of authorities stemming from the Norton [1972] IRLR 86 case is not unsound in principle and there has been no change in law or practice which merits departure from it.
There is no doubt that in assessing compensation under s. 74 of the 1978 Act the Industrial Tribunal in deciding what compensation is just and equitable has to have regard to the loss sustained by the employee in consequence of the dismissal.  In order to ascertain the loss, one has to discover what the employee would have received if had not been unfairly dismissed.  The Appeal Tribunal in the Tradewinds [1981] IRLR 272 case had regard to what, as a matter of contract and the common law remedy for breach of contract, the employee would have got.  At common law there is no doubt that the employee is bound to mitigate his loss seeking alternative employment during the notice period and, if successful, his damages for breach of contract are reduced by the amount of his earnings during the notice period from his new employment. The Tradewinds [1981] IRLR 272 case therefore identifies this as his loss.
In making exactly the same assessment (ie the loss suffered by the employee) the Norton [1972] IRLR 86 line of cases starts from a different premise, i.e. that the employer would act not only in accordance with his contractual duties but also in accordance with good industrial practice which would require (in the absence of gross misconduct) that an employee who is summarily dismissed should at the time of his dismissal be paid a payment in lieu of notice covering the notice period.  If such good industrial practice is adopted, there is no right for the employer to recover any part of it from the ex-employee if, during the notice period given, he obtains alternative employment.  Therefore on this basis the loss suffered by the employee is the full amount of his wages during the notice period without any deductions for wages from the alternative employment.
We can see no flaw in the reasoning of the authorities stemming from the Norton [1972] IRLR 86 case, unless it can be said that the loss referred to in s.74(1) must be limited to the loss which can be recoverable in an action for wrongful dismissal.  We can see no reason why such limit should be placed on the wide words of s.74.
We note that the important decisions in the Everwear case and the Blackwell [1976] IRLR 144 case were not cited to this Appeal Tribunal in the Tradewinds [1981] IRLR 272 case.  Moreover, in our judgment the suggestion that the introduction of the basic award by the 1975 Act has altered the position is not well founded.  The basic award was introduced to compensate an employee for the loss of his accrued rights to a redundancy payment; it has no connection with loss of wages during the notice period.”

24.	The matter was further considered again by the Court of Appeal in Babcock FATA Ltd v Addison [1987] ICR 805. The issue arose whether the employee should give credit for sums earned during the notice period.  Ralph Gibson LJ, with whose judgment Sir John Donaldson MR and Bingham LJ (as he was) agreed, having analysed the history of the case law concluded that the Norton principle should be upheld as it had been applied without operating unfairly for many years.  He was, however, at pains to emphasise it was not always good industrial relations practice to make a full payment in lieu of notice.  He said this: 

“It seems to me, however, that circumstances may arise in which, having regard to the length of notice required, and the known likelihood of the employee getting new employment within a short period of time, or for other sufficient reason, an employer may show that a payment less than the wages due over the full period of notice did not offend good industrial practice.  The employer might tender two months’ in respect of a six-month period of notice and ask to be informed if the expected new job was for any reason not obtained.  I am unable to accept that any rule of law exists which requires that in all circumstances, irrespective of the terms upon which a payment in lieu of notice was made, and of any jurisdiction for not making payment in full of wages in advance for the full period of notice, the employee is entitled in claiming a compensatory award under Section 74 to disregard wages earned from another employer during the notice period.  The number of cases in which an employer will be able, in view of an industrial Tribunal, to justify departure from the general practice will probably be small.  But in my view no rule of law exists to prevent the industrial Tribunal from considering such a case or from giving effect to it if it is so established.”

25.	Sir John Donaldson MR also considered that Norton was still good law, although emphasising that it was not “holy writ”.  It is however instructive to see how the original architect of the principle perceived its juridical basis: 

“If the Norton case was rightly decided, and I think it was, or, if it was not, it should not be disturbed because it had been so widely accepted as correct for so long, it does indeed lay down a rule of law, but one that is more limited than is sometimes appreciated.  That rule, is that, in assessing compensation for unfair dismissal, it is just and equitable to regard a claimant as having suffered an additional loss if the employer in unfairly dismissing him did not otherwise act in accordance with good industrial practice.  That there is nothing inconsistent in expecting an employer who dismisses unfairly so to act is well illustrated by the instant case, where an employer does just that.  What the Norton case did not, and could not, decide as a rule of law, was that in all circumstances good industrial practice required that notice of dismissal should be accompanied by the payment of “money in lieu.”  Good industrial relations practice can change and, in any event, what is good industrial practice in relation to a weekly wage earner entitled to notice measured in weeks, may be quite different from that which is appropriate in the case of senior salaried staff entitled to notice measured in months or years.” (emphasis added.)

26.	An example of a case where it was considered not to be good industrial relations’ practice to give full pay in lieu was Isleworth Studios v Rickard [1988]ICR 432 where the EAT held that a Tribunal had erred in awarding compensation for the 23 weeks’ unexpired period of a year’s fixed term contract.  The employee in that case had immediately on dismissal gone into business on his own account and earned some £10,000 more than he would have done had he remained employed.  The court considered that it would have been wholly unjust if he had received this sum as a windfall.

27.	The continuing applicability of the principle has been considered by three recent decisions of this Tribunal.  In Hardy v Polk (Leeds) Ltd. [2005] ICR 557, this Tribunal held that the decisions in Norton Tool and Babcock should not be followed.  It was suggested that the those cases had not properly addressed the question of the duty to mitigate which is enshrined in Section 123 (4) of the 1996 Act and, as we have noted, was found in virtually identical terms in all the relevant earlier legislation. Burton J considered that had it been, it would not have been possible for those courts to have reached the conclusion which they did.  It was simply irrational, he suggested, for the consequences of the duty to mitigate being ignored for the notice period.  Also the Tribunal considered that the decision of the Court of Appeal in Cerberus Software Limited v Rowley [2001] ICR 376 which was a wrongful dismissal case, had shown that in similar circumstances where an employer chose not to dismiss with pay in lieu (although having the contractual right lawfully to terminate the contract by doing so), the duty to mitigate was applicable and required the employee to give credit for sums earned elsewhere during the notice period.

28.	Mr Justice Burton returned to the issue in Morgans v Alpha Plus Security Limited [2005] ICR 525. In that case a Tribunal had given credit for the full amount of incapacity benefit which the employee had received during the notice period.  He appealed on the grounds that it ought not to have done so.  There was a conflict of authority on the point in this Tribunal.  In the case of Puglia v C James & Sons [1996] ICR 301 Mummery J presiding, as he was, had held that it was all deductible.  In Rubenstein v McLoughlan [1997] ICR 318 the EAT (Judge Hicks QC presiding) had refused to follow that decision and had taken the view that the Tribunal’s duty was to assess what compensation was just and equitable.  Following that principle the Tribunal in that case considered one half of the benefit only should be deducted. 
 
29.	These two cases raise the question, in the context of these social security benefits, whether the Tribunal should focus on the loss actually resulting from the dismissal or whether a broader principle of equity justified a calculation more favourable to the employee.  In the course of giving judgment, Burton J again considered whether the approach adumbrated in Norton Tool remained good law, and he held that it did not.

30.	He reaffirmed what he had said in Hardy v Polk and noted that even in the Babcock case itself, Sir John Donaldson MR had noted that in the assessment of compensation, the object was to compensate fully “but not to award a bonus” (p.822e).   However, in addition to the justification for departing from Norton Tool that he had given in the earlier case, he also relied upon the decision of the House of Lords in Dunnachie v Kingston Upon Hull City Council [2004] ICR 1052.   The issue in Dunnachie, as is well known, was whether compensation could be recovered in unfair dismissal proceedings for injury to feelings.  However, Lord Steyn, with whose speech the other Lords (Lords Nicholls, Hoffmann, Rodger and Brown) concurred, held that it could not, and that it did not naturally fall within the meaning of “loss” as defined by Section 123.  It is material to point out that their Lordships do not appear to have had their attention drawn to the issue which we now have to determine, and the relevant case law was not cited to them.  In the course of giving his judgment, however, Lord Steyn had cause to consider the structure of Section 123.  In so doing, he referred to the judgment of the Court of Appeal in that case: see [2004] ICR 2481.  Lord Justice Sedley had concluded that the overriding principle in Section 123 was to provide such compensation as was just and equitable and that whilst Tribunals had to have regard to the loss, which he accepted would naturally mean economic loss and would not include injury to feelings, he held that tribunals were also entitled under the controlling principle of awarding what was just and equitable to have regard to other non economic losses. Lord Steyn rejected this reasoning in the following terms:

	24.	 Sedley LJ concluded that the construction in Norton Tool "leaves the governing concept - compensation which is just and equitable - without a role": para 30. I would not accept this proposition. It will be recalled that in Norton Tool Sir John Donaldson explained that the claims with which tribunals are concerned are more often than not presented in person and informally, and that it is therefore not to be expected that precise and detailed proof of every item of loss will be presented. The phrase "just and equitable" gives the tribunal a degree of flexibility having regard to the informality of the procedures, and the fact that the maximum award is capped.

25. Sedley LJ relied on the decision of the House in W Devis & Sons v Atkins [1977] IRLR 314. He held that Devis established that resultant loss is not the only element to which regard is to be had. The leading opinion in Devis was given by Viscount Dilhorne. He stated that (at 955G): 
"The paragraph does not, nor did Section 116 of the Act of 1971, provide that regard should be had only to the loss resulting from the dismissal being unfair. Regard must be had to that but the award must be just and equitable in all the circumstances, and it cannot be just and equitable that a sum should be awarded in compensation when in fact the employee has suffered no injustice by being dismissed." 
This reveals a decision to the effect that it is open to a tribunal to consider whether it is just and equitable in all the circumstances for the complainant to be awarded all or any of the loss attributable to the dismissal. It was not a ruling that a tribunal is free to award additional sums not amounting to loss.
26. In my view Section 123(1) must be construed as a composite formula. The interpretation preferred by Sedley LJ splits up the formula in a way which, with great respect, is more than a little contrived. It unjustifiably relegates the criterion of loss to a subordinate role. Given the hypothesis that the legislature expressly provided for the recovery of economic loss, it fails to explain why the legislature did not also expressly provide for compensation for injury to feelings. It also fails to take full account of the context. For example, on this expansive interpretation there would as already mentioned be nothing on the face of the statute to exclude the award (subject to the cap which is now standing at £55,000) of aggravated or exemplary damages. This could not have been intended. The better view is that the provision was not intended, in the words of Brooke LJ, to provide for "palm tree" justice.”

31.	Burton J considered that it was now inconsistent with this reasoning to follow the Norton Tool principle.  There is no room for deemed losses, no justification for an employee being awarded a bonus, which is what occurs if he receives more than his actual loss, and no basis for failing to apply the duty to mitigate to the whole period following dismissal, including the notice period.

32.	In a decision handed down some two weeks after the Morgans case, Voith Turbo v Stowe [2005] ICR 453 another division of EAT, this time with Judge McMullen QC presiding, chose not to follow these two decisions of Hardy and Morgans and held that a tribunal had been right to give effect to the Norton Tool principles.  The EAT analysed the reasoning in the two cases and concluded that the decisions, at least in so far as they sought to lay down a general principle that Norton Tool was no longer to be followed, were wrong.  The Tribunal accepted that on the facts in the Hardy case, where an employee left her employer to work for a competitor, it may be the case that it would not necessarily be good industrial relations practice for an employer to make payment in lieu in full.  But that would be to justify the decision in accordance with the Norton principles, not in defiance of them. 

33.	The EAT pointed out that the subsection requiring the employee to mitigate (or to be more accurate, limiting damages if he failed to do so) was in fact referred to both in Norton Tool and Babcock.  As to Cerberus, the Tribunal concluded that it was of no relevance in the calculation of unfair dismissal compensation.

34.	Moreover, far from considering that the reasoning in Dunnachie cast doubt on the Norton principles, the EAT considered that the case provided some indirect support for it since the analysis of Sir John Donaldson in that case was accepted.  Their Lordships did not cast any doubt on the principle that good industrial relations practice required a dismissed employee to be paid the notice pay for the whole of the notice period as part of the compensation in unfair dismissal awards. (That is true because they simply made no observations on the point at all.)   Norton Tool does not provide for recovery for non economic loss; rather it focuses on economic loss, namely the loss caused by a failure to comply with good industrial relations practice. Providing compensation for such loss does not create the same risk of “palm tree justice” which Lord Steyn thought would result from allowing recovery for injury to feelings.   Judge McMullen also emphasised - which is not in dispute - that it is part of the function of this Tribunal to promote good industrial relations practice; and he also pointed out that the assessment of compensation for unfair dismissal already allows for compensation in the absence of loss, namely in the making of the basic award. 

35.	Issues

There are two questions in this cross appeal which we have to resolve.  The first is whether it is in fact good industrial practice for an employer to make a full payment in lieu of notice to an employee who, during that period of notice, will be absent sick. Does the good practice require that the employer should pay up front what it is anticipated the employee would earn during the notice period, or does it require the payment of full pay even if in fact there may be some reason why the employee would not have received that sum?  The view of the lay-members (with which the President agrees) is that good industrial relations would require payment in full, at least in circumstances where (as here) the notice period is not unduly long, and there is no clear indication at the time of dismissal whether the illness will last for the whole of the notice period.

36.	The second question is whether, assuming that it is good industrial relations practice to make the payment in lieu, the principle established in Norton Tool remains good law.  Unfortunately there is a division of opinion on this issue:  the majority, the President and Mr Parker, consider that it is not; but Mr Smith believes that it is.  We first set out the analysis preferred by the majority and then give the reasons for Mr Smith’s dissent on the point. 

 	The majority view.
37.	Had the justification for departing from Norton Tool rested on the analysis in Hardy v Polk alone, we would not have considered that it was justifiable to depart from Babcock.  It does not seem to us that this Tribunal should assume that in Norton and Babcock where express reference was made to the mitigation provisions in the relevant legislation, nonetheless those Courts paid no proper attention to it.  In any event, with respect to the Tribunal in the Hardy case, that is not a basis for refusing to follow a decision of the Court of Appeal.  In our view the Courts in those cases were plainly taking the view that whilst only economic loss was recoverable, that included economic loss resulting from the failure to comply with good industrial relations practice, and the duty to mitigate did not apply with respect to the notice period because that would benefit an employer who acted in breach of good practice.  It may be difficult to square what was said with the statutory provision relating to mitigation, but the issue of mitigation was at the heart of those cases.  Equally, we agree with the Tribunal in Voith that Cerberus, which deals only with wrongful dismissal, is not to the point.  It is not possible from that case to establish, or even to support the proposition, that it is wrong in unfair dismissal cases to award full compensation for the notice period without begging the very question in issue.  Is the loss in unfair dismissal to be calculated by reference only to the loss flowing from the dismissal or can the Tribunal also have regard to the loss flowing from the failure to respect good industrial relations practice?  That is the issue, and Cerberus has nothing to say about it.  It is only if the premise is that the guiding principle is the same in wrongful and unfair dismissal claims that the case can have any relevance.  

38.	A more convincing argument, we think, is that the principle laid down in Norton Tool cannot continue to be treated as good law in the light of Lord Steyn’s speech in Dunnachie. In analysing that question we think it helpful to consider how Section 123  could be construed so as to permit the award of compensation for failure to follow good industrial relations’ practice even where that gives a greater sum than would flow from the loss resulting from the dismissal itself.  

39.	It seems to us that there are potentially two distinct routes by which the principle might arguably be justified.  The first is to say that in awarding compensation a Tribunal may have regard not only to the loss flowing from the dismissal, as the statute already expressly provides, but also the loss flowing from a failure to comply with good industrial relations practice.  However, that would require reading that additional factor into Section 123 itself.  We do not think that is a legitimate way to construe the statute.  Of course this Tribunal can, in the application of general legislative concepts, seek to give effect to good industrial relations’ practice, but not in a manner which is inconsistent with the statutory language.  Nor, it seems to us, can we simply treat good industrial relations’ practice as a source of a separate duty breach of which can sound in damages.  Accordingly, we do not think that this route is open to us. 

40.	This conclusion is in fact supported by Sir John Donaldson himself in the Norton case, for he stated in terms (see the passage from his judgment reproduced at para 17 above) that it was not legitimate for a Tribunal to have regard to factors other than loss.  To like effect are certain dicta of Brooke LJ in the Court of Appeal in the Dunnachie case.  (It was his dissenting judgment which was upheld in the House of Lords.) He observed that it was “logic chopping” to suggest that because Parliament had not used the word “solely” in Section 123(1) when identifying that regard should be had to the loss flowing from the dismissal,  it was open to a tribunal to have regard to other considerations: [2004]IRLR 278, para 94).

41.	The other route potentially justifying the application of the Norton principles is to award compensation for failing to comply with good industrial relations’ practice on the grounds that it is just and equitable that employees should be compensated for foreseeable losses flowing from such breaches. As we have seen, that is how it was justified by Sir John Donaldson himself in the Babcock case (notwithstanding that it does not sit happily with the more specific role which he gave to that concept in Norton Tool itself.)  But that requires that the guiding or controlling principle in Section 123 for identifying the kind of loss that can be recovered is the just and equitable one.  The House of Lords has held that this is not so; that concept plays a different role of giving flexibility in fixing the amount itself, it is not an independent principle from which the source of other heads of loss can be derived. The principle is that the Tribunal must award sums which reflect the loss resulting from the dismissal; it is not legitimate to award sums which are additional to such loss.  

42.	We bear in mind that the loss need not be loss dictated by the contract alone and can include the loss of benefits which the employee might reasonably expect to receive: see section 123(2) reproduced in paragraph 16 above.  No doubt it may be said that an employee had a reasonable expectation of being treated in accordance with good industrial relations’ practice.  But we do not think that this subsection could be relied upon as a basis for the Norton Tool principle (and no-one has sought to suggest that it could) for two reasons in particular.  First, subsection (2) is plainly, in our view, directed at how one assesses what the employee would in fact have received, whatever his contractual rights, had the contract been performed.  It is not dealing with an expectation he might have had about how the employer would conduct himself in the very act of dismissal.  It is focussing upon benefits which the employee might reasonably expected to have had but for the dismissal, not benefits arising out of the dismissal itself.  The concern is with the quantification of loss not the nature of the loss itself.  Second, section 123(4) would in any event require that the duty to mitigate would have to apply to such losses.  

43.	We recognise that in reaching its decision in Dunnachie the House of Lords did not focus on this aspect of the Norton Tool case. There was no reference to the duty to mitigate.  But in the majority view it is simply not consistent with the analysis of Section 123 to allow compensation for failure to comply with good industrial relations practice. If the requirement is that the assessment should be of loss flowing from the dismissal, it involves having to adopt a concept of a “deemed loss” as well as giving no effect to the duty to mitigate during the notice period.  If on the other hand it rests on the just and equitable principle, their Lordships have clearly established that this cannot be used to extend the scope of loss beyond the loss flowing from the dismissal itself.  Dunnachie was concerned with non economic loss, but there is no principled basis, it seems to us, for treating economic loss, but not flowing from the dismissal, any differently.  So we see no warrant for either approach.

44.	Whatever the merits of that principle, it can no longer be justified as a legitimate exercise of the Section 123 power.  We recognise, as Judge McMullen pointed out in Voith that the basic award does provide for compensation other than for actual loss.  But Parliament has specifically provided for that.  We see no legitimate basis for assessing the compensatory award so as to provide a bonus over and above the loss in fact flowing from the dismissal itself.

The minority view
45.	Mr Smith accepts that the relevant question here is whether the tribunal can properly have regard to the loss flowing from the failure to respect good industrial relations practice.  He also agrees that this depends upon whether the principle enunciated in Norton Tool remains good law. He does not, however, accept that Lord Steyn’s speech in Dunnachie precludes the continued application of that principle. On the contrary, he believes that it supports it.  In particular, he focuses on the emphasis given by Lord Steyn to the fact that the just and equitable concept gives the tribunals a degree of flexibility having regard to the informality of the proceedings; and he notes that the Tribunal in this case was concerned with the assessment of compensation, and the just and equitable formula is directed at such quantification.  He takes the view that this Tribunal should seek to give effect to enforcing good industrial relations practice and to uphold a practice which has long been applied in Employment Tribunals.  He considers that the just and equitable formula is broad enough to permit a tribunal to award full compensation for the notice period without having regard to mitigation, at least where, as here, that payment would have been in accordance with good practice.  The Dunnachie case did not directly deal with the point in issue but is not inconsistent with it. He would prefer the analysis of the EAT in the Voith case to that of the majority. Accordingly he would uphold both the appeal and the cross appeal.

Conclusions
46.	We are put in the invidious position of being bound by a Court of Appeal decision which seems to the majority to conflict with a later analysis of the relevant statutory provision by the House of Lords.  We think that in these circumstances we are justified in not following the decision of the Court of Appeal.  We are influenced in particular by the fact that in Babcock itself the Master of the Rolls put the justification for the principle in Norton Tool on the just and equitable concept in the statute.  The majority see no room for that approach in the light of Dunnachie.  It seems to us that we are entitled not to follow Babcock, even although the case has been undermined rather than overruled: see the discussion by the authors Cross and Harris, Precedent in English Law (4th edition, Clarendon Press) pp.129-131.   We also consider that it would be undesirable for us to leave in place a principle which the majority believe is now legally unsustainable, given that Tribunals will no doubt follow this decision pending a resolution of this issue by the Court of Appeal. We are the more emboldened to adopt this approach since this Tribunal has already done just that in the two decisions presided over by Burton J to which we have made reference.

47.	We reach this conclusion with some reluctance, although less so than we would have done had there been no basic award available to those who have been unfairly dismissed, whether or not they have suffered loss.  This Tribunal must, where it can properly do so, ensure that good industrial relations’ practices are promoted.  But it can only do that within the parameters allowed to it by the law.  For example, that concept has played a vitally important part in fleshing out the concept of reasonableness in unfair dismissal law.  Following Dunnachie, we see no proper juridical basis for giving effect to the particular good industrial relations’ practice identified in Norton Tool when calculating compensation for unfair dismissal.

48.	Accordingly, for these reasons we hold that the appeal succeeds and the cross appeal fails.  The Tribunal would have been neither obliged nor entitled to grant compensation for the full notice period as part of the unfair dismissal compensation.

49.	It follows that the sums awarded by the tribunal for wrongful dismissal cannot stand.  In place of the figure stipulated by the Tribunal we substitute eight weeks’ statutory sick pay.  We understand that the parties are confident that they will be able to agree what that sum is.

50.	In view of the conflicting authorities on this matter, we give the Respondent leave to appeal on the issue raised in the cross appeal (i.e. the Norton Tool point.).  If the respondent seeks leave from this Tribunal to appeal our finding on the appeal itself (i.e. the conclusion in relation to the construction of the contract) she will have to seek to persuade us that it is appropriate.