The claimant, a teacher, went off sick with stress after allegations were made against him at work. He was informed a few months later that his pay was to be reduced from 100% to 50%. The respondent regarded the terms of the sick pay provisions to mean that full pay would only be paid if the injury was a physical injury. An Employment Tribunal found that the provisions as incorporated into the claimant’s contract of employment were not clear but he ruled that they included not just absence due to physical injuries but also to psychological and psychiatric injuries and awarded the claimant the difference in pay. There was no appeal against this judgment. Two days after being informed that his sick pay was to be reduced, the claimant resigned. A second Employment Tribunal, referring to the previous judgment, concluded that the established breach was not a fundamental breach because the respondent had the honest though mistaken view of the meaning of the relevant contractual term. They had not breached the contract because they did not intend to be bound by the contract. Therefore the claimant could not claim constructive dismissal. The claimant appealed.

The EAT upheld the appeal. The ET had erroneously relied upon the previous judgment which decided the pay difference issue. The previous judgment had made no finding as to whether the respondent had the honest but mistaken view of the meaning of the contractual term. The ET found that the respondent had a settled intent to pay 50% and no other conclusion could be reached other than that the respondent was in fundamental anticipating breach of contract.

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Appeal No. UKEAT/0070/12/ZT

EMPLOYMENT APPEAL TRIBUNAL

FLEETBANK HOUSE, 2-6 SALISBURY SQUARE, LONDON EC4Y 8JX

At the Tribunal

On 19 June 2012

Before

THE HONOURABLE MRS JUSTICE SLADE DBE

MR A HARRIS

MR I EZEKIEL

MR P G ROBERTS (APPELLANT)

THE GOVERNING BODY OF WHITECROSS SCHOOL (RESPONDENT)

Transcript of Proceedings

JUDGMENT

For the Appellant
MR RAD KOHANZAD (of Counsel)
Instructed by:
Quay Legal
1 Friary
Temple Quay
Bristol
BS1 6EA

For the Respondent
MR SIMON EMSLIE (of Counsel)
Instructed by:
Gloucestershire County Council
Legal Services
Quayside House
Quay Street
Gloucester
GL1 2TZ

UNFAIR DISMISSAL – Constructive dismissal

A settled communicated intention to pay half rather than full pay was a fundamental breach of contract. The conclusion of the Employment Tribunal that the established breach was not fundamental because of an honest though mistaken view of the meaning of the relevant contractual term erroneously relied upon the judgment of an Employment Judge when that Judgment contained no such finding. On the findings of fact by the ET including that the Respondent had a settled intent to pay 50% of full pay no other conclusion could be reached other than the Respondent was in fundamental anticipating breach of contract. Case remitted to a differently constituted Employment Tribunal for rehearing on the basis that the anticipatory breach of contract by the Respondent was fundamental going to the root of the contract.

1. Mr Roberts appeals from the Judgment of an Employment Tribunal sent to the parties on 22 October 2011, which held that his resignation from his employment did not amount to a constructive dismissal; accordingly, his claim for unfair dismissal was dismissed. The parties will be referred to, as they were before the Employment Tribunal, as the Claimant and the Respondent. The issue on appeal is whether the Employment Tribunal erred in holding that the Respondent in notifying the Claimant that it would put him on half pay when on sick leave was not a repudiatory breach of contract enabling him to resign and claim constructive dismissal. A second ground of appeal, which raised other issues in addition to pay, was not permitted to proceed to a full hearing.

1. The Claimant was employed by the Respondent as a teacher from 1 September 1997 until his resignation on 26 May 2010. His employment terminated on 31 August 2010. Following allegations against him, the Claimant went on sick leave in November 2009. In a Judgment sent to the parties on 20 April 2011 on the claim brought by the Claimant in respect of deduction in pay, the claim being the difference between the 100 per cent of pay that he claimed and the 50 per cent of pay that was paid by the Respondent Employment Judge Tickle recorded that sick notes and fit notes cited variously that the Claimant was suffering from "stress at work, stress reaction and depression".

1. On 29 March 2010 the former Deputy Headteacher, Ms Brearley, wrote to the Claimant notifying him that he would be placed on half pay from 28 May 2010. On the same day the Claimant wrote to Ms Brearley asking for confirmation that he would be paid in accordance with section 4, paragraph 9.1 of the "Burgundy Book", the collective agreement which was incorporated into his contract of employment. Paragraph 9.1, which is headed "Absences arising from accidents, injury or assault at work", reads as follows:

"In the case of absence due to accident, injury or assault attested by an approved medical practitioner to have arisen out of and in the course of the teacher's employment, including attendance for instruction at physical training or other classes organised or approved by the employer or participation in any extra curricular or voluntary activity connected with the school, full pay shall in all cases be allowed, such pay being treated as sick pay for the purposes of paragraphs 3 and 7.5 above, subject to the production of self certificates and/or doctor's statements from the day of the accident, injury or assault up to the day of recovery but not exceeding six calendar months."

1. On 29 April 2010 the Claimant's representative wrote to Ms Brearley alleging breach of contract in respect of the Claimant's sick pay. The Claimant and his representative submitted that he was entitled to full pay under the provisions of clause 9.1, it being contended that his stress and depression were the result of an injury at work. The Respondent maintained that they were only obliged to pay half pay and not full pay. They paid half pay as they had indicated and the Claimant claimed for unpaid wages which he alleged were due being the difference between full pay and half pay.

1. The claim for unpaid wages was heard before Employment Judge Tickle. In a Judgment sent to the parties on 20 April 2011 the Employment Judge upheld the Claimant's claim and made an award for the difference in pay. In paragraph 6 of his Judgment the Employment Judge made it clear that he proceeded purely on the facts that he had outlined. Those facts did not include any finding regarding the reason why the Respondent maintained that they were obliged to pay only half pay, and materially, as will appear, Employment Judge Tickle did not make any finding as to whether or not the Respondent had an honest belief that they only had to pay half pay. At paragraph 15 of the Judgment Employment Judge Tickle held, "Injury used to mean physical injuries but psychological and psychiatric injuries are now included in my view" and at paragraph 18:

"I find that the claimant's injury arose out of and in the course of employment. The claimant is therefore entitled to be paid in accordance with the provisions of Clause 9.1."

1. There was no appeal from the Order and the Judgment of Employment Judge Tickle.

1. In our papers there is an email from a senior HR advisor of Gloucestershire County Council sent on 13 May 2010, which was directed to the Headteacher and another, stating:

"Dear both, I have now heard from the Local Government Employers (LGE) who have said that there is no caste [sic] iron definition of what the 'industrial injury' provision of the Burgundy Book covers – this is why NUT is pursuing the issue. The Employers' advice continues to be that this clause only relates to physical injury and not to stress. They are aware that the NUT are challenging this elsewhere."

The email continued:

"I suggest included in your response to the NUT letter of 29 April that you could say that both Occupational Health and the Local Government Employers have confirmed that their understanding of the term industrial injury only covers physical injury."

1. The Respondent followed that advice in its letter of 18 May 2010 to the National Union of Teachers, in which they wrote:

"Thank you for your letter of 29th April which has been passed to me by Mrs Brearley. I am somewhat surprised and dismayed at the tone, particularly the threat of legal action.

Occupational health and the Local Government Employer (LGE) have confirmed that their understanding of the term industrial injury only covers physical injury."

1. It is to be noted that there is no reference to the email of 13 May 2010 in the Judgment of the Employment Tribunal which heard the unfair dismissal claim. .

1. On 26 May 2010 the Claimant resigned from his employment.

1. In paragraph 6.10 the Employment Tribunal held:

"6.10 The final matter relates to the claimant's pay. The Tribunal does not accept Mr Emslie's submission to the effect that there is no possibility of relying on a repudiatory [it is thought that must be anticipatory] breach. It was clear as a matter of fact to the Tribunal, that when Ms Brearley wrote to the claimant on 29 March notifying him that he would be placed on half pay as from 28 May, in her mind the decision was finalised. Nothing before the claimant resigned suggested anything different.

6.11 However, the Tribunal also had to consider whether or not the respondent had shown an intention no longer to be bound by the terms of the contract. The Tribunal agreed that the provision relied upon by the respondent was not clear and this was identified by Regional Employment Judge Tickle (as he then was) at paragraph 9 of his judgment on this matter of 17 March sent to the parties on 20 April to the effect that 'this is not a happily drafted clause – it would be helpful if it were re visited'. The Tribunal has also noted the extract of the judgment in Bridgen v Lancashire County Council [1987] IRLR 58 per Sir John Donaldson MR at paragraph 16 'the mere fact that a party to contract takes a view of its construction which is ultimately shown to be wrong does not of itself constitute repudiatory conduct. It has to be shown that he did not intend to be bound by the contract as properly construed […]'.

6.12 The Tribunal was satisfied, on the basis of Judge Tickle's judgment, that the respondent came to a view which ultimately was shown to be wrong but that it was because of an honest view of what was meant by the relevant clause and not because it did not intend to be bound by the contract. Accordingly, although the failure to pay was a breach of contract, it did not amount to a breach going to the root of the contract."

1. Mr Kohanzad, for the Claimant, who also appeared for him at the Employment Tribunal, submitted that the Employment Tribunal erred in applying Bridgen to the facts of this case as this was not one of mistaken contractual interpretation; the Respondent was well aware that there was doubt about whether clause 9.1 applied to the mental illness of the Claimant. Further, in this case, the Respondent did more than just assert their view of the contract; they were going to act on it. Mr Kohanzad contended that the Employment Tribunal failed to apply Western Excavating (ECC) Ltd v Sharp [1977] ICR 221, in which Denning MR had held that a repudiatory breach could be established by "a significant breach going to the root of the contract" or "conduct which shows that the employer no longer intends to be bound by one or more of the essential terms of the contract". Mr Kohanzad contended that these were alternative, not cumulative, provisions. Those two provisions were on the one hand dealing with anticipatory breaches and on the other actual breaches. They were true alternative, not cumulative, approaches. He contended that the Employment Tribunal therefore erred in regarding intention to be in fundamental breach of contract as a necessary ingredient to establish a fundamental breach on the part of the Respondent when there had been a significant breach going to the root of the contract. A breach of a pay term such as in this case is a significant breach. Mr Kohanzad referred to the Judgment of Judge LJ in Cantor Fitzgerald International v Callaghan [1999] ICR 639, in which he held:

"In reality it is difficult to exaggerate the crucial importance of pay in any contract of employment. In simple terms the employee offers his skills and efforts in exchange for his pay: that is the understanding at the heart of the contractual arrangement between him and his employer."

1. Mr Kohanzad recognised that not all breaches of pay terms will amount to a fundamental breach of contract. He submitted that such a breach is established by an employer deliberately reducing pay, albeit on a misapprehension of the contractual position. Mr Kohanzad also referred to Financial Techniques (Planning Services) Ltd v Hughes [1981] IRLR 32, in particular the Judgment of Templeman LJ at paragraphs 27 and 28. Mr Kohanzad distinguished Bridgen in that he pointed out that in that case, before the Employment Tribunal and the Employment Appeal Tribunal it had not been accepted that the employee had left or resigned because of the employer's conduct. Accordingly, observations on the effect of the breach of contract on the part of the employer were obiter. Further, he pointed out that Hughes appears not to have been referred to in Bridgen. Having regard to all these matters, it was submitted on behalf of the Claimant that the Employment Tribunal erred in holding that the Respondent was not in fundamental breach of contract in this case.

1. For the Respondent, Mr Emslie contended that the Western Excavating test was cumulative. What must be established by a Claimant is both a fundamental breach of contract and that the Respondent intended to bring the contract to an end. Further, he contended that Western Excavating intended to apply on the one hand to anticipatory breaches and on the other to actual breaches of contract. The Employment Tribunal, it was contended, did not err by referring to the comments of Sir John Donaldson MR in Bridgen, although he accepted that they were strictly obiter; however, he contended those observations were in line with the ratio of Hughes, in which the Court of Appeal held against the employee. The effect of the authorities, Mr Emslie contends, is that a party taking a mistaken but genuine view of a contractual term is not in fundamental breach of contract. In Hughes, in any event, Templeman LJ held on the facts that there was no actual breach until the contract ended and the employer had not been in anticipatory breach by insisting on their point of view. There was no threat to current contractual entitlements; so too, contended Mr Emslie, were the facts of this case. Mr Emslie contended that the Employment Tribunal did not err in law in concluding that there was no fundamental breach of contract by the Respondent; there had been no intention not to abide by the Claimant's contract.

1. By the unappealed decision of Employment Judge Tickle the Respondent was in breach of contract by not paying 100 per cent of pay while the Claimant was off sick. The issue arose in respect of the notice period, which ran from 26 May 2010. The basis of the Tribunal's decision on whether such breach of contract was a fundamental breach of contract was set out in their paragraph 6.12. The Tribunal stated that they reached their conclusion on the basis of Judge Tickle's Judgment that the Respondent came to a view that was ultimately shown to be wrong but that it was because of an honest view of what was meant by the relevant clause and not because it did not intend to be bound by the contract. Correctly and fairly, Mr Emslie agrees that there is no such finding in Judge Tickle's Judgment, nor is there such a finding in the Judgment under appeal. We have difficulty in understanding how the Employment Tribunal in the appeal before us could have expressed themselves as basing themselves on Judge Tickle's Judgment to reach the conclusion that they did in paragraph 6.12.

1. On the material before the Employment Tribunal it is apparent that the Respondent formed the view that it was only obliged to pay 50 per cent of the Claimant's pay and the Claimant and his trade union were of the view that he was entitled to 100 per cent of his pay while absent sick. From the email of 13 May, which was not referred to at all in the Employment Tribunal's Judgment, it appears that the Respondent was being informed that the interpretation of the material clause was not clear as to whether the obligation was to pay 100 per cent of pay or 50 per cent of pay. The Employment Tribunal made a material finding of fact that the Respondent had a settled intent to pay 50 per cent of pay. They made a finding of fact that when Ms Brearley wrote to the Claimant on 29 March notifying him that he would be placed on half pay as from 28 May, "in her mind the decision was finalised"; nothing before the Claimant resigned suggested anything different. Accordingly, the Tribunal found as a fact that the Respondent had a settled intention to pay 50 per cent not 100 per cent of pay from 28 May.

1. Whilst adopting a view of a contractual obligation without more is unlikely to be an actual and/or anticipatory fundamental breach of contract, to act on that belief is likely to constitute such a breach. It will not avail a defendant in civil litigation facing a claim of fundamental breach of contract to show that he believed his view of the contract was right. It makes no difference to the character of the breach, as to whether it is fundamental or not, whether it is actual or anticipatory; indeed, Mr Emslie so agreed. It is to be noted that Templeman LJ in Hughes at paragraphs 26 28 said as follows:

"26. It is important to observe that the employers made no threat to deprive Mr Hughes either of his salary or any bonus which he might earn during the period between July and September, so that the only conflict was whether Mr Hughes was entitled as of right to the payment of 30 September of the whole the sum which he claimed of £3,200. By genuinely arguing that he was not so entitled and reserving the right to reduce that sum, the employers, to my mind, did not commit an anticipatory breach which went to the root of the contract.

27. I desire to guard myself against the implication which might otherwise be read and which I think has been argued that if any party to a contract has a plausible but mistaken view of his rights under that contract, he may insist on that view, and his insistence cannot amount to repudiation. For example, supposing that there had been a dispute between the employer and employee as to whether the employee was entitled to a £50 per week or to £50 plus a bonus of £25 per week payable either weekly or at the end of the year. It seems to me that if the employer mistakenly insisted that he was only liable to pay £50 per week, the employee would be entitled to regard that as a fundamental breach enabling him to treat the contract as at an end. He cannot be expected to work and accept less than his entitlement until litigation justified his view of the contract.

28. We were cited two cases to the contrary, which were on very different facts. In Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 3 All ER 30 there was an agreement for a lease in 1962. Both landlord and tenant were willing to execute the lease, but the landlord thought that on the true construction of the contract the lease ought to include a covenant by the tenant against underletting or parting with possession; and the tenant (rightly, as it turned out) thought the contrary. It was held by the Court of Appeal that the attitude of the landlord in saying the lease ought to include this covenant did not amount to a repudiation of the contract. As Harman LJ said at page 40, 'Let them go to court and get the matter determined as they can'. If that had been done, the tenant would have suffered no harm, and therefore there was no repudiation. Similarly, in Woodar Investments v Wimpey Construction [1980] 1 All ER 571 the facts in that case should not be overlooked. There was a contract in 1973 but Wimpey could not be forced to complete in the events which happened before 21 February 1980. There was an express power of recision, and on 20 March 1974 Wimpey purported to rescind. It was quite clear that they were content to go on with the contract if the right of recision had not in fact arisen, and they had until 1980 to litigate the point before it became material. If on the other hand in Woodar Investments v Wimpey Construction there had been an earlier date for completion – say, 21 March 1974 – and Wimpey had wrongly insisted that they had rescinded on 20 March 1974, there would have been an actual breach of contract by failure to complete on the due date once time was made of the essence, and I cannot think Wimpey could be excused from their actual breach of contract by the fact that they had misread their contractual rights. In my judgement, repudiation or no repudiation depends on the facts and consequences of each action by the party who holds mistaken views. What he says may amount to an actual or anticipatory breach of the term of the contract which would make it unreasonable to force the other party to go on and either to accept the mistake view of the contract or to litigate without knowing what he was going to get at the end of it. Accordingly, I think the present case turns very much on its own facts and in particular on the fact that there was no threat to current contractual rights; there was merely a dispute as to whether £3,200 was payable on the last day of the contract."

1. We do not consider that this case is at all like the two cases referred to in the passage in Hughes which has been set out above. We regard with some misgivings the case of Frank Wright & Co Holdings Ltd v Punch [1980] IRLR 217 in so far as that case seems to lend support to the view that a genuine but mistaken belief in the terms of a contract may prevent repudiation. We are not, as at present advised, convinced that that is necessarily so. A pay term is, as was explained in Callaghan, a term which goes to the root of the contract. As Judge LJ explained in that case, it may not be a fundamental breach of contract for an employer not to honour a pay term if that arose from an error or a simple mistake. However, where an employer intends to reduce pay to a material extent and that intention does not arise from an error or a simple mistake, it is likely to be otherwise.

1. In our judgment, on the facts found by the Employment Tribunal and the material before it and the Judgment of Employment Judge Tickle, the Respondent was indicating an intention to pay half pay. This was found by the Employment Tribunal to be a settled intention. Since the date of the proposed reduction was two days away from the date of resignation, it was an anticipatory breach of contract. The Respondent did more than insist that its view of its contractual obligations was the correct one. It is plain from the findings of fact by the Employment Tribunal, which are not appealed, that the employer had a settled intent to implement the reduction in pay, which would take effect two days after the resignation. In our judgment, the reduction in pay by half was a significant reduction. However, we do not accept that whether such a reduction is fundamental depends on its effect on employees. If that were so, whether or not the reduction in pay was a fundamental breach of contract would be different for different employees arising out of the same reduction in pay carried out by the employer. However, as is shown by the authorities, there may be circumstances in which the effect on an employee is material in coming to this conclusion. Hughes is one such case.

1. In our judgment not only is the factual basis for the Employment Tribunal's conclusion in this case absent but, applying the established principles of law to the unchallenged facts, no other conclusion could be reached than that this Respondent was in fundamental breach of contract when they indicated their settled intent to reduce pay by 50 per cent. Accordingly, this appeal is allowed.

1. This matter is to be remitted to a differently constituted Employment Tribunal for decision on whether the Claimant was constructively dismissed. That decision will proceed on the basis that the anticipatory breach of contract was a fundamental breach of contract. The Employment Tribunal will have to reach decisions on whether the Claimant resigned because of that breach to the necessary materiality and whether he waived the breach. Depending on the answer to those questions, and whether it is established that the Claimant was constructively dismissed, the Employment Tribunal will continue to consider whether the Claimant was unfairly dismissed and all other consequential matters.