The claimant brought claims to the ET and the respondent brought a counter claim. The ET found that the contract of employment was illegal because it was found that the respondent, with the full agreement of the claimant, paid the claimant half his salary less deductions for PAYE and National Insurance, the other half without the appropriate deductions. The ET therefore rejected the claims on the basis of illegality. The claimant appealed.

The EAT upheld the appeal. Neither the allegation of illegality nor the authorities had been raised with the parties during the hearing. It was held that this was more than a mere irregularity, and amounted to a breach of natural justice which required that the appeal be allowed.

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Appeal No. UKEAT/0133/12/RN

EMPLOYMENT APPEAL TRIBUNAL

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

At the Tribunal

On 13 July 2012

Before

THE HONOURABLE MR JUSTICE LANGSTAFF (PRESIDENT)

MR C EDWARDS

MRS A GALLICO

MR M SHEIBANI (APPELLANT)

ELAN & CO LLP (RESPONDENT)

Transcript of Proceedings

JUDGMENT

For the Appellant
MR RUSSELL HOLLAND (of Counsel)
Instructed by:
Minster Law
Alexander House
Hospital Fields Road
York
YO10 4DZ

For the Respondent
MR RICHARD REES (Representative)
Peninsula Business Services Ltd
The Peninsula
2 Cheetham Hill Road
Manchester
M4 4FB

PRACTICE AND PROCEDURE – Bias, misconduct and procedural irregularity

Employment Tribunal rejected claims by an accountant employee, and a cross-claim by his accountant employer, on the basis that the contact of employment was illegal as performed, and relying on authorities, when neither the allegation of illegality nor the authorities had been raised with the parties during the hearing. Held: that this was more than a mere irregularity, and amounted to a breach of natural justice which required that the appeal be allowed.

1. Where an Employment Tribunal comes to the conclusion that a contract of employment as performed is illegal, is it required as a matter of fundamental fairness to tell the parties to that agreement who are before it as Claimant and Respondent that it might draw that conclusion so that each has the opportunity of facing the allegation fairly and squarely and persuading it to an opposite or less extreme view?

1. That is the central issue in this appeal from a decision of a Tribunal sitting at London South, reasons for whose decision were given on 13 October 2011. On the basis of its finding, that the contract in that case was illegal as performed, the Tribunal dismissed both the claims by the Claimant for unfair dismissal, for breach of contract and for arrears of holiday pay not given to him and the Respondent's counterclaim in respect of breach of contract.

1. The illegality, which the Tribunal found, was said to arise out of the following facts.

1. The Claimant is a chartered certified accountant. He took up employment with a firm in respect of which a Mr Elahi was the principal. He did so on 15 June 2009; he remained in employment until 30 April 2010. From August 2009, having been paid the first month with an appropriate deduction of tax and national insurance, the Tribunal found:

"The claimant received in total £4,385.36 net (£2,500 by cheque halfway through the month and the balance, £1,885.36 through BACS at the end of the month). This pay arrangement continued every month until April 2010. This was as a result of the parties agreeing a new pay package at full time pay at £60,000 per annum, with pay due of £5000 pcm. All of this should have been taxed. But to save money on both sides the parties agreed that £2,500 would go through payroll and £2,500 per month would be paid "offline" and "off the books" by cheque to mutual benefit. The Claimant banked these cheques monthly and made no report of any potential wrongdoing. He was happy to go along with the arrangement."

1. The Tribunal found that in April 2010 the company provided the Claimant with a copy of his P60. That showed income of £25,880 for the year and tax on it of £3,880. He considered the details were incorrect, and he informed Shakir Elahi of this and asked him to put it right.

1. A P45 was submitted after the conclusion of the relationship, which came to grief in disputes that followed during that April and which included the Claimant arguing that instead of being paid on the basis of £60,000 per year, he should, in fact, have been paid upon the basis of £72,800 gross. The first P45 mis-stated the earnings of the Claimant and so did a second P45 to which paragraph 18 of the Tribunal Judgment refers. But the Tribunal were not satisfied of the explanations given by the employer Respondent for the remarkable arrangement whereby the Claimant's salary of £5,000 was paid half without the appropriate monthly deduction of tax or national insurance (so it might appear) and half with an appropriate deduction in respect of that half alone.

1. There were a number of explanations put forward by Mr Elahi. The Tribunal accepted none. Nor did it accept the evidence which had been given to it by the Claimant. As to him the Tribunal said:

"40. He was also a poor and not credible witness. His evidence included a number of inconsistencies and implausibilities. By way of example, we firmly reject the explanation given that he had agreed the deal because it was, "about right" in respect of tax. He later claimed his salary was £72,800 but did not explain how that meant the payments were about right.

41. He also offered no plausible explanation for not recording his alleged doubts about the veracity of the arrangement from the outset.

42. He could not explain why he continued to bank the cheques for £2,500 and why he did not query his monthly payslips."

1. The conclusion the Tribunal reached was to say:

**

"44. The first issue was whether any contract was void due to illegality.

45. The first stage to this was whether the parties had sufficient knowledge of facts relating to illegality. It was clear to us that both parties knew very well about the arrangement that the Claimant would be paid a cheque each month for £2500 without any deductions and £2500 per month, with deductions. They expressly agreed to this deal, in terms, and continued the arrangement for 8 months without complaint.

46. Neither party's account as to what was actually agreed on pay was credible or accepted by us. Both parties gave self serving accounts that we rejected."

1. The Tribunal having dealt with actual knowledge of matters which amounted to misrepresentations to the Inland Revenue dealt with the question of whether the parties had actively participated in making those misrepresentations. This was because the Tribunal had in mind the Court of Appeal authority of Enfield Technical Services Ltd v Payne [2008] IRLR 500 CA. The Judgment of Pill LJ expressly agreed with the analysis of Elias LJ when President of this Tribunal in which he had said:

"43. In our judgment the essential feature of all the cases where there has been found to be illegality is that parties have knowingly entered into arrangements which have to their knowledge represented the facts of the employment relationship to be other than they really were."

1. He emphasised that actual knowledge of that representation was needed, as was participation which was more than mere acquiescence. We would add that "representation to a third party" covers an actual representation which has historically happened, but we see no reason in principle why it should not also cover a representation which it was the joint intention of the parties to the agreement to make in due course, even if as events transpired it never was made.

1. The Tribunal then dealt with active participation from paragraph 58 to paragraph 70 and came in that latter paragraph to the conclusion that because of the illegality, those claims dependent upon contract should all be dismissed.

1. In respect of this Judgment, three grounds of appeal are taken. The first is that the Tribunal erred in law in that of its own motion it concluded that the contract between the Claimant and Respondent was illegal and that the Claimant both knew and actively participated in the illegal performance of that contract, since it only raised that issue of its own motion when giving Judgment. The question of the legality of the contract had not been raised by either party nor was it raised as an issue at the beginning of the hearing. Further, the Tribunal relied on authorities that were cited only in its Judgment. Neither party had the opportunity to make submissions on those authorities. The Claimant was found to have known and actively participated in the performance of an illegal contract without being given any opportunity to comment on or make submissions on that point.

1. Factually, it is agreed that those contentions are accurate. Mr Rees who appears to respond, tell us that he accepts that here there was a procedural irregularity. The parties do not dispute that the question of illegality as such was not raised before the Employment Tribunal; they agree that cases referring to illegality such as Enfield v Payne were not put to the parties.

1. Mr Rees submits, however, that given the overwhelmingly powerful case based upon the findings of fact that the Tribunal did make, and the inference which it was entitled to draw from those facts that there had been an agreement between the Claimant and the Respondent in August 2009, that part of the money for his work should be paid to the Claimant with the deduction of tax and national insurance and part not, thereby depriving the Revenue each month of sums it ought to have had, to the mutual advantage of the Claimant and Respondent, it was something which could only in the circumstances be held to be illegal. It was not open to any other characterisation. Although there had been a material irregularity: see in particular, the case of Stanley Cole (Wainfleet) Ltd v Sheridan [2003] EWCA Civ 1046 the result would have been the same. In that case it was said in paragraph 28 in the Judgment of Ward LJ, with which Buxton LJ and Mance LJ agreed:

"Not to be afforded a fair hearing would be an obviously seriously procedural irregularity sufficient to allow the appeal. The real question is, however, whether what happened was seriously irregular and unfair."

1. In that particular case the issue was whether there had been such a serious irregularity where a Tribunal had not alerted advocates to what was said to be material, significant and relevant authority. Ward LJ expressed his conclusion in this way at paragraph 32:

"[…] the authority must alter or affect the way the issues have been addressed to a significant extent so that it truly can be said by a fair minded observer that the case was decided in a way which could not have been anticipated by a party fixed with such knowledge of the law and procedure as it would be reasonable to attribute to him in all the circumstances.

33. There is however an important caveat; this is not intended to be an all encompassing test. It is, in my judgment, impossible to lay down a rigid rule as to where the boundaries of procedural irregularity lie or when the principles of natural justice are to apply or what makes a hearing unfair. Everything depends on the subject matter and the facts and circumstances for each case."

1. Mr Rees would argue that no substantial injustice was done here because the Tribunal would inevitably have come to the same conclusion upon these particular facts.

1. In his reply, with a few strokes of the forensic pen as it were, Mr Holland gave what seems to us in context a completely convincing response. He submitted that this case was more than one of procedural irregularity and there was a denial of a fair hearing. The cross examination would have been differently conducted had he known, and the parties known, that illegality was a live issue; re-examination would have been different. The witness evidence might well have been different; the submissions made would have been different.

1. He drew attention to the severity of the potential outcome. Here both the principal parties giving evidence were accountants. If condemned of making an agreement to defraud the Revenue, as effectively the Tribunal had concluded they had done, their continuing professional career would be at risk and they would be exposed potentially to criminal prosecution, let alone to civil action by the Inland Revenue or, as it may be, penalties. We agree.

1. As Ward LJ recognised in Stanley Cole (Wainfleet) v Sheridan not every case within the boundaries of procedural irregularity is one in which the principles of natural justice have been broken. An essential feature of natural justice as it seems to us is that a party must know what case they have to meet. That includes knowing sufficient to give an answer to any serious charge or allegation which is to be made.

1. Here what we understand occurred was that the Tribunal determined in effect that the Claimant was fraudulent as being a party to a scheme to deceive the Revenue to his and his employer's private advantage without first giving him the opportunity to know that that was potentially what was in the Tribunal's mind and permitting him to make such explanation as he might in respect of that serious matter.

1. Further, where potential criminal offences may be under consideration, it is an essential matter of justice and procedure that a party should be warned by the Tribunal that he need not answer a question, if to do so might incriminate him. It is plain from what we are told such a warning was never given here despite what may have been in the mind of the Tribunal. The argument that the outcome is so obvious that a party does not need to be told of what is a serious accusation against him or her is one which deprives the legal process of any effect. It denies the importance of oral hearing; it permits conviction without anyone being given the opportunity to respond to show why conviction might be inappropriate. It would stick in the gullet of any court to condone that as being other than unfair and a material procedural irregularity, amounting to a denial of justice.

1. This is to look at the matter on the basis purely of theory but there is a practical aspect to it too; it is the forensic experience of all of us who have been involved in hearing or arguing cases that what may appear on paper or on limited facts to be an unanswerable case leading to one conclusion can suddenly, in a moment of revelation, because of a particular answer given orally, be shown to be nothing of the sort. Such cases may be rare but the fact that they exist mean that the procedural entitlement which natural justice provides to an individual to know what is to be said to his serious disadvantage and to have a real opportunity of meeting it is essential in our system.

1. This is not to ignore the fact that in this particular case it might have been apparent to the parties, had they thought about it, that a real question of illegality would arise. It appears that they never did realise this, though at moments they may have come close to it. In his closing written submissions Mr Holland, for instance, argued that Mr Elahi's evidence should not be accepted. At one stage he suggested that it was inherently unlikely that he had made an innocent error in respect his dealings with the Revenue. He has, however, persuaded us that he did not by those observations mean that he was actually accusing Mr Elahi of himself being party to or the author of a fraud.

1. In the light of our conclusions on the first ground, it is not necessary to explore the other two grounds of appeal further, although we would have rejected each without hesitation, upon the basis that the facts as found by the Employment Tribunal were facts it was entitled to find. There being no evidence from either party as to whether there had been an agreement and, if so, what its terms were about the payment monthly from August 2009 the Tribunal was entitled in the circumstances to draw the inference it did, and taking into account all the circumstances including the professional training and occupation of the parties, infer that they might have hoped to benefit thereby, and the extent of that benefit.

1. But those findings are necessarily based upon findings of fact made on the whole of the evidence. A Tribunal which made the accusations which were on its mind, so that the parties could deal with the question of whether they had acted so as to defraud the Revenue, might have had further evidence to consider which could lead it to different factual conclusions. It would not be right for us here to express any view of our own even if we could about whether it would or should have done so. It is enough for us to recognise that not only was there a procedural irregularity which of itself means that this decision cannot stand, but also to recognise that the decision could possibly have been different from that which it turned out to be.

1. It follows that this appeal must be allowed. Mr Holland is right when he submits the matter must be remitted to the Employment Tribunal. In the circumstances we have no hesitation in concluding that it will have to be a different Tribunal, because this Tribunal has expressed views about the honesty and integrity of the two witnesses from which it would on a practical level be impossible for it to recant, however professional its approach.

1. The fresh Tribunal will no doubt wish to have a hearing for directions before proceeding. In part that may be, depending upon the circumstances, to consider whether any regulatory or prosecutorial action has been taken elsewhere in the light of those facts which we understand from the Tribunal's decision were reported to the President of Employment Tribunals for any appropriate further action. If it decides to continue to do so on the basis of the allegations made in the ET1 and ET3, then no doubt it will wish to consider whether there was here a contract which properly could be said to be illegal as performed, such as to disentitle the Claimant from success in his claims.