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Managing director keeps pay in lieu despite gross misconduct

Gun firm must live with irrevocable election to pay six months' notice

29 May 2012

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The managing director of a firm of gun dealers can keep his six months’ pay in lieu of notice despite previous gross misconduct, appeal judges have ruled.

Duncan Cavenagh, managing director of William Evans in central London, was made redundant and told he would get six months’ pay in lieu, amounting to over £60,000.

However, the court heard that after sending Cavenagh a dismissal letter, the firm discovered that, several months before, the managing director had “wrongly procured a payment of £10,000 to be made by the company to his pension provider”.

Delivering the leading judgment in Cavenagh v William Evans [2012] EWCA Civ 697, Lord Justice Mummery said that, having discovered the misconduct, the firm made “no payments at all” to the managing director for his notice period.

“The company’s defence referred to Mr Cavenagh’s implied duty to act in good faith towards the company and not to act so as to damage the relationship of trust and confidence between himself and the company.

“It alleged that, in breach of his duties, he had instructed an accounts clerk to make the payment of £10,000 out of the company’s account to the pension provider. That was alleged to be an act of gross misconduct, which the company had not discovered until after its dismissal of Mr Cavenagh on 12 March.”

Mummery LJ said Cavenagh argued that the pay in lieu had accrued on the day of termination and the company was “no more entitled to avoid liability to pay that debt by reason of the employee’s prior breach than it was to avoid liability for other accrued rights such as holiday pay, which the company had accepted was payable in any event”.

He went on: “The position was that there had been a lawful termination of Mr Cavenagh’s service agreement in accordance with its terms, even though the company had not made the promised payment in lieu.

“Both sides treated the service agreement as at an end as from that date. Mr Cavenagh did not go into work again after that date.”

Mummery LJ said he could understand why the firm regarded Cavenagh’s misconduct as undermining his legal entitlement to claim pay in lieu.

“On 12 March 2010 it did not know something relevant to termination of his appointment that he knew, but chose to keep quiet about. If it had known what he knew, it would have treated the service agreement as having been repudiated by him and it could have done so without incurring a liability to pay him in lieu.

“The service agreement appointing him to be managing director of the company created a relationship of mutual trust and confidence between them.

“Yet he chose not to inform the company of facts that would have affected its decision on how to proceed with termination of his appointment. It suited him to stay silent and watch the company take a course of action that was more beneficial to him than it was to the interests of the company served by him in a fiduciary capacity.”

However, Mummery LJ said there was “no escaping” the fact that the company had exercised its contractual power and terminated the service agreement without notice but with pay in lieu, and, as a result, a debt had accrued.

He concluded that the appeal turned on whether the company made an “irrevocable election” as it how it terminated the service agreement.

“For the reasons given above, it made an election giving rise to a liability in debt for six months’ pay in lieu.

“The company must live with the contractual consequences of its election in the absence of any other pleaded theory as to why Mr Cavenagh was disentitled from recovering it from the company, or from retaining it beneficially as against the company.”

Lord Justice Tomlinson agreed, for his own reasons, and Lady Justice Hallett also agreed.

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Contracts & Rights