The claimant was made redundant and received a severance package made up of an ex-gratia payment, statutory redundancy pay and accrued holiday pay. The ex-gratia payment was equivalent to 3 months salary, 3 months being her notice period. The Tribunal found that her dismissal was unfair and allowed her claim that the company was in breach of contract by failing to pay her notice pay. The Tribunal found that the ex-gratia payment was a gift or payment made by favour and was not a payment made on account of any legal obligation. The ex-gratia payment could therefore not amount to a payment of notice pay and this payment was still outstanding. The respondent appealed.

The task for the EAT was to consider and find the correct construction of the severance pay letter as a matter of law. They said that nothing in the language used in the letter suggested or implied that the payment was in fact another form of payment that the company was legally obliged to make, ie a payment for a period of notice. It was tolerably plain what the latter said and what the words used would, in the context in which they came to be written, be taken to mean by any reasonable and objective reader.

________________________

Appeal No. UKEAT/0430/10/DM

EMPLOYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 27 May 2011

Before

MR RECORDER LUBA QC, MR M CLANCY, MR J MALLENDER

PUBLICIS CONSULTANTS UK LTD (APPELLANT)

MS F O'FARRELL (RESPONDENT)

Transcript of Proceedings

JUDGMENT

For the Appellant
MR IAN SCOTT (of Counsel)

Instructed by:
Re:Sources UK Ltd
Pembroke Building
Kensington Village
Avonmore Roa
London
W14 8DG

For Respondent
MR BEN COOPER (of Counsel)

Instructed by:
Thompsons Solicitors
Congress House
Great Russell Street
London
WC1B 3LW

REDUNDANCY – Fairness

CONTRACT OF EMPLOYMENT – Notice and pay in lieu

Employee entitled to three months notice of dismissal. Dismissed for redundancy with four days notice. Letter of dismissal states that payment will be made of statutory redundancy pay, holiday pay, and an 'ex gratia' payment of a sum equivalent to three months' gross salary. Claim by employee for damages for dismissal without notice. Employer seeking to meet the claim by reference to the 'ex gratia payment'. Employment Tribunal allows the employee's claim. On a correct construction, the payment was truly 'ex gratia'. Appeal dismissed and Tribunal's construction upheld."

1. This appeal concerns the true legal nature of a payment made by an employer to a former employee at the termination of her employment. Was it, as the employee contended and the Employment Tribunal found, a payment made ex gratia to the employee? Or was it, as the employers contended and seek to persuade us on appeal, a payment that reflected or included compensation for monies that she would otherwise have been entitled to receive by way of pay for a period of notice?

1. Ms O'Farrell worked for Publicis Consultants UK Ltd, to whom we shall refer as 'the company', in the post of Director, Head of Corporate. Her contract of employment provided at paragraphs 10.3 10.5 arrangements for "Notice after first six months". Paragraph 10.3, so far as material, read:

"[...] your employment may be terminated by either party by giving three calendar months' written notice of termination."

1. Paragraph 10.4 is not presently relevant. Paragraph 10.5 reads:

"The company may at its absolute discretion require you not to attend work during the whole or part of your notice period, and may at its discretion relieve you of some or all of your contractual duties during that period."

1. In 2008 2009 a redundancy situation arose and Ms O'Farrell was selected by the company for dismissal for redundancy. Her employment was terminated by a letter dated 14 May 2009. Under the heading "Notice of Termination of Employment – Redundancy" the following words appear in the first paragraph:

"[...] we have decided to make your job role redundant, with effect from Friday 15 May 2009."

1. That of course was the date following the date of the letter. After setting out the circumstances of the redundancy situation, the letter continues materially as follows:

"In terminating your employment on the grounds of redundancy you will be paid up to and including Monday 18 May 2009 and in addition you will receive the following severance package, which as you are aware is in excess of your statutory entitlement:

* Ex gratia Payment – You will receive an ex gratia payment equivalent to three months' salary. This payment amounts to £20,625. The payment is free of Tax and NI deductions.

* Statutory Redundancy Payment – You will receive a statutory redundancy payment of £700. This payment is free of Tax and NI deduction.

* Holiday pay – You will have 11 days' accrued holiday pay; this includes the 6 days you state were carried forward from 2008. This amounts to £3,490; this payment is subject to Tax and NI deductions."

1. Having been dismissed, Ms O'Farrell complained to an Employment Tribunal that her dismissal had been unfair. The Employment Tribunal at London Central, chaired by Employment Judge Mrs N Walker, decided that the dismissal had indeed been unfair. The correctness or otherwise of that decision is not now in issue. Ms O'Farrell had also made money related claims to the Employment Tribunal. The Tribunal dismissed her claim for breach of contract arising out of a failure to pay her a bonus, but it allowed her claim that the company was in breach of contract by failing to pay her notice pay. The decision on the bonus payment is not in issue before us, but the company pursues before us an appeal against the Judgment in respect of failure to pay for a notice period.

1. The relevant part of the Employment Tribunal's reserved Judgment gives its reasons for upholding the claim in respect of breach of contract, relating to notice, at paragraphs 64 66, which are in the following terms:

"64. The Tribunal then turned to the notice claim. It was submitted by the Respondent that it was clear that the payment which had been made as an ex gratia payment was meant to be a payment for the notice period and the Respondent submitted that in that case, a payment had been made and no further payment should be due. The Tribunal rejected the Respondent's submission on that point. We accept that the Respondent calculated that payment by reference to the notice period but they chose to call it an ex gratia payment.

65. There are employers who make an ex gratia payment in addition to any other payments due. There is nothing in the letter which explained to Ms O'Farrell that that was actually her notice payment. It would have been perfectly possible for it to have been intended as an additional severance payment over and above her entitlements. She certainly never accepted it as anything other than an ex gratia payment and she is not bound in any way. She is entirely free to make a claim for her notice payment. However the Respondent calculated the ex gratia payment, it is clear to the Tribunal that the Respondent has not paid a payment which was a payment of notice pay by way of damages for their breach of contract in failing to let Ms O'Farrell work her notice period, there being no payment in lieu provision in the contract itself.

66. [...] the Tribunal are satisfied that an ex gratia payment is a gift or payment made by favour and it is not a payment made on account of any legal obligation. In those circumstances, as we have said, the payment that was made could not amount to a payment of the notice pay and that payment is still outstanding."

1. The ground of appeal before us is essentially that the Employment Tribunal misconstrued the terms of the dismissal letter of 14 May 2009 in relation to the nature of the payments therein referred-to. The company contends that the only available and indeed true construction is that the payments made to Ms O'Farrell and referred to in that letter embraced or exhausted her entitlement to pay in respect of the notice period. It is common ground before us that Ms O'Farrell was dismissed by the letter of 14 May 2009 with effect from 18 May 2009 (four day's notice) in circumstances that were in breach of a contract that otherwise entitled her to three months notice. The issue is whether, as the Employment Tribunal found, she remains entitled to compensation for that breach, or whether, on a true construction of the letter of 14 May 2009, she has already been paid at the appropriate amount.

1. Both counsel are agreed that the task for this Employment Appeal Tribunal is to determine, on a true construction, the meaning of the words used by the company in its letter. Do they mean on the one hand, in effect, 'we are hereby paying you for your period of notice'? or do they mean, on the other hand, 'we are hereby paying you a sum other than the monies to which you would be entitled by way of pay in lieu of notice'? Mr Cooper, for the Respondent was initially inclined to persuade us that the true construction of the letter of 14 May 2009 was a question of fact for the Tribunal which could only be re-opened by this Employment Appeal Tribunal in exceptional circumstances. On reflection, that submission was not pursued. Mr Cooper accepted that the letter in question was open to be construed as a matter of law as readily by ourselves as it had been by the Employment Tribunal. He confirmed before us that beyond the documents that we have been invited to consider there was no additional further evidential material available to the Tribunal on this question which is not available to us. The task for us therefore is to consider and find the correct construction of the letter of 14 May 2009 as a matter of law.

1. We were reminded by both counsel of the proper approach to the construction of documents set out by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. In a now famous passage, Lord Hoffmann in that case set the course of English law relating to the construction of documents on a new path. At page 912H he set out a series of now familiar principles to be utilised in the interpretation of documents. He said:

"The principles may be summarised as follows:

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact,' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (See Mannai Investments Co. Ltd. v Eagle Star Life Assurance Co. Ltd [1997] 2 WLR 945.)

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera SA v Salen Rederierna AB 1985 1 AC 191, 201:

'[...] if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'"

1. Mr Scott, appearing for the company, placed particular emphasis on principle 4; that is to say, that the person upon whom falls the task of interpreting the document should not feel trapped by the dictionary or grammatical interpretation of the words the parties have used. He was critical of the Employment Tribunal's emphasis on the literal or dictionary meaning of 'ex gratia'. For his part, Mr Cooper urged our attention to principles 1 and 2, and in particular the fact that the principals start in Lord Hoffmann's list with instruction to discern the meaning which the document would convey to a reasonable person.

1. Beyond the reference to Investors Compensation Scheme as an agreed starting point, we received divergent but helpful submissions from the respective counsel in the appeal. For the company, Mr Scott particularly relied on the context in which the letter of 14 May 2009 had come to be written. He suggested that there were other documents that would assist us in understanding the context and properly interpreting the letter of 14 May 2009. He took us first to a letter of 6 April 2009, which was sent to Ms O'Farrell and received by her over a month before the ultimate dismissal letter. That letter had borne the heading: "Provisional Selection for Redundancy." After outlining the circumstances of the redundancy, that letter had continued with the following text:

"We will contact you again on 14 April to let you know if there is a change to our proposals and we will confirm our final decision to you in writing on 16 April 2009 and if we confirm redundancy then your notice period would commence from Monday 20 April 2009.

If your job role is confirmed for redundancy you have a three month notice period and we will be placing you on garden leave from the start of your notice period, 20 April until 15 May 2009. During this time we would require you to be available to complete and assist with work activities as designated by the Company. You can work from home during this period.

We would not require you to work the remainder of your notice period and we would provide you with the following severance package:

a) An ex gratia payment equivalent to 8 weeks' salary which amounts to: £12,692. This payment will be free of tax and NI deductions.

b) Statutory Redundancy Pay: £700. Also free of tax and NI deductions. Total: £13,392.

c) You will also receive payment for holiday accrued but not taken; this will be subject to tax and NI deductions."

1. Mr Scott submitted that this text was part of the essential factual matrix, and enabled us to construe the letter of 14 May 2009 in favour of the company and contrary to the construction that had been given by the Employment Tribunal. We were next shown by way of what was said to be the "factual matrix" a draft letter of 24 April 2009 which was not in fact sent by the company to the employee, but was nevertheless sought to be relied upon by Mr Scott. In the event we accept Mr Cooper's submission that this could not form part of the true contextual matrix as it was only a document in the hands of one party and knowledge of it did not pass to the other.

1. Mr Scott further submitted that there were other pointers to the correct construction of the letter of 14 May 2009. First, he emphasised - in opening his oral submissions before us - that the payment had been calculated by reference to the contractual notice period, as indeed the Employment Tribunal had itself found (see Judgment paragraph [64]). Second, that it exceeded rather than fell short of the total sum that the Company was otherwise liable to pay. Thirdly, Mr Scott submitted that although the words "ex gratia" had been used, the Employment Tribunal had been wrong to focus, particularly in paragraph [66], on their literal or dictionary meaning rather than on the substance of what had occurred in the relevant dealings between the parties. Fourth, he submitted, it was common industrial practice to call payments made to employees, dismissed without being required to work out their notice, "ex gratia" payments, even though what they were being paid was that to which they were otherwise entitled. In sum, he contended in his oral submissions, supplementing his helpful skeleton argument, that the Employment Tribunal had not correctly approached the question of construction, but had been misled by focussing far too heavily on the label "ex gratia" rather than on the true context.

1. Mr Cooper, having acknowledged that he could not pursue properly the submission at paragraph 8 of his skeleton argument (see paragraph 9 above), then developed his paragraphs 9 25 through succinct oral submissions before us, taking issue with the submissions of Mr Scott in turn.

1. We have not found it possible to accede to the company's submissions. We consider that the Employment Tribunal were correct in the decision that they reached, essentially for the reasons that they gave. We have reached that conclusion largely by adoption of the compelling argument advanced in the oral and written submissions of Mr Cooper for Ms O'Farrell. Expressed shortly in our own words, our reasons are as follows.

1. As Lord Hoffmann indicates, the starting point in any exercise of the construction of documents must be with the words the parties have used. We have already set out the relevant wording of the letter of 14 May 2009. The language used conveys to the ordinary reader, on our assessment, that three payments are being made by the employer. Two are payments that the employer is making because it must make them; that is to say, the statutory entitlement to redundancy pay, and the contractual entitlement to holiday pay. The third payment referred to in the letter of 14 May 2009 is in contrast a payment described in terms as "ex gratia payment"; that is to say, on its ordinary construction, a payment made freely and not under obligation. Accordingly, as the Employment Tribunal correctly found, the words 'ex gratia' ordinarily import the sense of something being paid by way of gift or favour. Nothing in the language used in the letter of 14 May 2009 suggests or implies that that payment is in fact another form of payment that the company is legally obliged to make, ie a payment for a period of notice. To the contrary, the letter refers in terms to the payments as comprising monies in "excess of" the recipient's entitlements. That language is wholly inconsistent, in our judgment, with the proposition that the payments are each and all amounts to which the recipient is otherwise entitled. That in our judgment is the proper starting point for the construction of the document.

1. We then turn to deal with Mr Scott's submissions in relation to the contextual matrix. In our judgment, nothing in the material we have been shown drives us to a conclusion other than that the construction of the document based on its ordinary words is the correct construction. At the forefront of Mr Scott's argument was the earlier letter of 6 April 2009. As we have indicated, it was his submission that this gave the message as to the alternative construction of the letter of 14 May 2009 from that which we have already identified by way of ordinary meaning of the language. We are unable to accept Mr Scott's submissions about the letter of 6 April 2009. We are persuaded by Mr Cooper's analysis that, on a true construction of the language from that letter which we have already extracted, it was dealing with a wholly different circumstance; that is to say, a premise in which the employee would not be summarily dismissed but would be being dismissed with three months of notice. In a rather confusing paragraph, the letter of 6 April 2009 gives a mixed message to the recipient as to what is to be required of her during the three months' notice period. As to the first part thereof, between 20 April 2009 and 15 May 2009, she is both told that she is going to be on garden leave but also simultaneously told that she may be required to work; but unambiguously the letter continues by an indication that she will not be required to work "the remainder of [her] notice period." That would suggest, we consider, to any reader that she was going to be given three months' notice period as per her contractual entitlement. Only on the expiry of that would her employment determine. It is in that context that the letter of 6 April 2009 continues, "[...] and we would provide you with the following severance package."

1. When invited in exchanges to say whether the subsequent letter of 14 May 2009 was more or less generous than what was proposed in the letter of 6 April 2009, Mr Scott's submission was that it was more generous. In our judgment, it can only be construed as more generous if the construction given to the language is the ordinary meaning of the words that we have already identified and that the Tribunal themselves adopted. In those circumstances, the main platform for Mr Scott's contention that the letter of 14 May 2009 bears an alternative construction in line with his submission falls away. That is the result even without dealing with Mr Cooper's further distinction between the two letters, in that the letter of 6 April 2009 refers to eight weeks' payment when in fact on a proper calculation of the dates there would have been an entitlement to nine weeks' pay.

1. Finally, even if the company had on this appeal satisfied us that there was some ambiguity in the construction of the letter of 14 May 2009, we consider that Ms O'Farrell would have been entitled to rely on the contra preferentem rule for a construction which advantaged her. This was, it must be recalled, the company's own unilateral document. If it was capable of two meanings, it had to be read (applying that rule) with the construction least favourable to the author. We were referred by both parties to the decision of this Appeal Tribunal in Bevan Ashford v Malin [1995] ICR 453 and the Judgment given therein by the then President, Mummery J, as he then was. In that case the task for this Appeal Tribunal was to construe a unilateral written disciplinary warning. It was suggested by Mr Scott that the scope of the authority ought therefore to be confined to a penal type of communication, such as a warning, and was of no assistance in construing a document such as the letter of 14 May 2009. Mr Cooper submitted that, in one sense, a dismissal letter was a more penal communication than a warning letter, and therefore emphasised the justification for a contra preferentem construction. In the event, we are not assisted by the decision in Bevan Ashford. The contra preferentem rule arises from the fact that the communication was unilateral and generated by one party only; it is not necessary to add to it the epithet 'penal'. The application of the contra preferentem rule would therefore have resulted in our upholding Ms O'Farrell's claim, even if there had been an ambiguity, which we find there was not. In the circumstances, reliance on that rule is not required.

1. In our judgment, it is tolerably plain what the letter of 14 May 2009 said, and what the words used would, in the context in which they came to be written, be taken to mean by any reasonable and objective reader. That is to say that the first of the payments to which that letter referred was a payment made free of any legal obligation to pay it, rather than as a payment the company was otherwise ordinarily and contractually obliged to make. In the result, for those reasons, we would dismiss the appeal.