Précis In the case of  Cavenagh v William Evans Limited [2012], the Court of Appeal held that, having exercised an express contractual right to terminate an employment contract with payment in lieu of notice, William Evans Limited  (the “Company”) could not avoid making that payment because it subsequently discovered that the employee had committed a prior act of misconduct, which would have entitled the Company to terminate for misconduct without any termination payment being payable.

What? Having served termination notice for redundancy on an employee, William Evans Limited  (the “Company”) remained liable to pay the employee the agreed payment in lieu of notice despite the discovery (after the termination notice was served) that the employee had committed a prior act of gross misconduct, which would have given the company a right to terminate the employment without any termination payment being payable.

So what? This case has potential application in the context of commercial contracts. When contracting as a customer, consider whether any contractual obligation to pay a termination sum should be conditional on the supplier not being in breach of contract.

Facts of the case

Mr Cavenagh was the Managing Director of William Evans Limited/the Company. The Company underwent a restructuring, which made Mr Cavenagh redundant. The Company therefore exercised an express contractual right to terminate Mr Cavenagh’s employment with payment in lieu of notice. After giving notice of termination, the Company discovered that, two months previously, Mr Cavenagh had made an unauthorised withdrawal of £10,000 from the Company’s funds into his pension. If the Company had been aware of this, it would have dismissed him summarily for misconduct.

In the light of this, the Company refused to give Mr Cavenagh his payment in lieu of notice. Mr Cavenagh brought a claim for that payment, which was dismissed at first instance. Mr Cavenagh appealed.

The Court of Appeal found in favour of Mr Cavenagh. When the Company gave notice to terminate the employment contract by exercising its express contractual right, a debt (for payment in lieu of notice) was created. Having chosen to exercise its contractual right of termination, the Company was not entitled to resile from the contractual consequences of that choice by later following the different common law route of accepting repudiation by relying, after the termination event, on an earlier act of misconduct.

There was no provision in the employment contract that denied Mr Cavenagh the right to recover the debt owed if the Company subsequently discovered that he had committed a prior act of gross misconduct. There was also no general principle of contract law that could be relied on by the Company barring or extinguishing Mr Cavenagh’s right to recover the debt from the Company.

Implications

This case has potential application in the context of commercial contracts. Long-term contracts frequently contain a break clause in favour of the customer and there may be an obligation on the customer to make a termination payment to the supplier (to cover its costs and losses arising from early termination) if that break right is exercised. It is possible that a customer could exercise a break right and subsequently discover that circumstances existed that would have entitled it to terminate for breach and thereby avoid making the termination payment.

Given this, it would be advisable when contracting as a customer, to consider making payment of such a termination sum conditional on the supplier not being in breach of contract.