Cavenagh v William Evans Ltd CA 2012 EWCA Civ 697

William Evans made its MD Mr Cavenagh redundant. He was entitled to 6 months’ pay in lieu of notice worth £65,000 but before they paid him William Evans discovered that he had wrongly procured a payment of £10,000 from the company to his pension provider. William Evans regarded itself as discharged from any liability and the County Court dismissed Mr Cavenagh’s claim for the payment in lieu on the basis that his prior gross misconduct gave the Company a complete defence to the debt claim.

On appeal to the Court of Appeal Mr Cavenagh was successful. It was held that having chosen to terminate the Agreement with a PILON it was not open to William Evans to avoid the contractual consequences and follow the different common law route of accepting repudiation by relying after the termination on an earlier act of gross misconduct. There was no provision in his Service Agreement denying Mr Cavenagh the right to a payment if it was subsequently discovered that he had committed a prior act of gross misconduct. Neither the general principles of contract law nor those laid down in Boston Deep Sea Fishing and Ice Company v Ansell state that prior unknown misconduct provides a defence to a claim for payment of a debt arising from an employer’s election to summarily terminate an employee’s contract.

Mr Cavenagh had agreed to repay the £10,000 and the Court of Appeal hinted that the outcome may have been different if William Evans had defended the case on the basis that Mr Cavenagh had acted in breach of his fiduciary duties. The Company had also not pleaded in its defence that its agreement to make the payment in lieu was void or voidable because it agreed to make the payment on the basis of a mistake, namely the fact that it could have terminated the contract summarily without payment in lieu had it known about Mr Cavenagh’s conduct.

Key point: Employers should consider when drafting PILON clauses that provision is made for payments in lieu to be avoided or recovered in the event that a repudiatory breach of contract is uncovered post‑termination.