In Cavenagh v William Evans Ltd, the Court of Appeal held that an employer who had terminated the employment of its managing director under a contractual pay in lieu of notice clause was obliged to make this payment despite discovering subsequently that he had been guilty of gross misconduct before his employment ended.

Mr Cavenagh’s position as managing director of William Evans Ltd became redundant. The company terminated his service agreement summarily by agreeing to make a contractual payment in lieu of notice amounting to six months’ pay. However, it was subsequently discovered that Mr Cavenagh had made an unauthorised payment from company funds to his pension fund prior to the termination of his employment. Since this would have amounted to gross misconduct, the company refused to make the payment in lieu of notice.

William Evans Ltd relied on the case of Boston Deep Sea Fishing v Ansell which established the principle that an employer may justify an otherwise wrongful dismissal with facts which were not known at the time of dismissal, but only discovered subsequently. It argued that Mr Cavenagh’s prior gross misconduct gave the company a complete defence to his debt claim for the payment in lieu of notice.

Mr Cavenagh argued that his situation could be distinguished because in Boston Deep Sea Fishing v Ansell the employee’s claim was for damages for wrongful dismissal, whereas his case was for a debt due under a contractual term which had been exercised by the company. The Court of Appeal agreed with this argument, finding that when an employer chooses to exercise a pay in lieu of notice clause, it elects for a clean break. This involves taking a risk that it may subsequently discover matters that could have justified summary dismissal, just as it takes a risk that the employee may die or find a job elsewhere.

Although the legal analysis may be correct, it is clearly unfortunate that Mr Cavenagh was able to profit from his own wrong. Unusually, however, the company did not plead a counterclaim. For example, it could have sought damages for breach of fiduciary duty.

Employers should consider whether their pay in lieu of notice clauses and compromise agreements need amending to include provision for the recovery or withholding of a payment if any earlier repudiatory breaches by the employee are discovered.