Act: S. Reid, Solicitor Advocate; Maclay Murray & Spens

Alt: Fairley; Brodies LLP

3 July 2007

Introduction
[1] This is an action of damages for breach of a contract of employment between the pursuer and respondent ("the employee") and the defenders and appellants ("the employers"). The employee is the former financial director and company secretary of the employers. His conditions of employment were regulated by an agreement dated 6 July 1984 ("the agreement") entered into between him and Clyde Cablevision Limited. By operation of the Transfer of Undertakings (Protection of Employment) Regulations 1981 the rights and obligations of Clyde Cablevision Limited were transferred to the employers.

[2] Clause 1 of the agreement was in the following terms:

"1. The Company shall employ the Appointee and the Appointee shall serve the Company as Financial Director and Company Secretary of the Company and subject to the provisions for determination of this Agreement hereinafter contained such employment shall be for a period of three years commencing on First June, Nineteen hundred and eighty four (notwithstanding the date hereof) and thereafter shall continue unless and until terminated by either party giving to the other not less than twelve months written notice thereof expiring on or at any time after Thirty first May, Nineteen hundred and eighty seven."

[3] By letter dated 6 January 2005 the employers informed the employee that his employment was terminated with effect from 29 December 2004 "as a result of your position being made redundant". The employee avers that by thus terminating his employment without giving twelve months written notice thereof as provided by Clause 1 of the agreement, the employers were in breach of contract. If this is so, then the employee is entitled to an award of damages in accordance with well-established principles. The leading authority is Hadley v Baxendale (1854) 9 Ex. 341, in which Alderson B said, at p.355:

"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."

Among many subsequent cases, reference may be made to Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 K.B. 528. The employee has raised a commercial action in Glasgow Sheriff Court in which he claims, in accordance with these principles, damages under various heads. It is sufficient for present purposes to refer to these heads simply as they appear in the pleadings: "Diminution in Value of Pension Rights", "Value of Pension Rights", "Loss of Opportunity to receive 2004 Executive Bonus Payment", "2004 Executive Bonus Scheme", "Loss of Opportunity to receive LTIP [Long Term Incentive Plan] Payment", "Loss of Opportunity to exercise Share Options" and "Breach of Promise to pay one-off Bonus of £50,000".

[4] The response of the employers is that they were not in breach of contract because the contract of employment between the parties was subject to an implied term giving right to the employers lawfully to terminate the contract by making payment to the employee of a proportion of his salary and emoluments corresponding to the period of notice stipulated in the contract. Consistently with this approach, it appears from the letter dated 6 January 2005 that the employers have throughout been willing to make a payment in lieu of notice ("PILON") to the employee, together with additional payments "as compensation for loss of contractual benefits". The question for determination is whether they are contractually entitled to adopt this position.

[5] By agreement between the parties, the sheriff heard a debate upon the issue whether the agreement was subject to the implied term contended for by the employers. Secondary issues in relation to quantification of the damages claimed were left over for subsequent resolution. By interlocutor dated 27 February 2006 the sheriff found that the agreement was not subject to the implied term contended for by the employers. As appears from the relative note, the sheriff held that as a matter of general law there is implied into employment contracts an entitlement in favour of the employers to dismiss without notice on paying wages and other contractual entitlements in lieu, but the express provisions of Clause 1 of the agreement were effective to oust this entitlement in the present case. The employers appealed to the sheriff principal, who by interlocutor dated 14 June 2006 refused the appeal. He held:

"In my opinion the words used by the parties in their contract are clear. They are more than sufficient to oust the term implied ex lege. The express term has supremacy over the implied term."

He also said:

"In the instant case the implied term was not necessary to give the contract efficacy but rather it is said to be implied as a matter of law. I accept that because the term is implied as a matter of law very clear words are required in the contract to exclude the implied term. In the present case I consider that a similar clash occurs between the express term and the implied term contended for."

The employers have now appealed to this court.

The appeal to this court
[6] Before us, parties were agreed that, in general, the Scottish courts will not grant the remedies of interdict or specific implement with a view to enforcement of a contract of employment. No such remedy is sought in the present case. Accordingly any remedy available to an employee whose contract of employment has been terminated by his employers is a pecuniary one. The issue between the parties is whether, if the employers have terminated the contract without giving the period of notice provided for by the contract, that constitutes a breach of contract, entitling the employee to payment of damages in accordance with the normal principles referred to above, or whether it constitutes the exercise by the employers of their contractual right under the implied term contended for by the employers. We intend, so far as possible, to address this issue only so far as is necessary to determine the respective rights of the parties under this particular contract of employment.

[7] Counsel for the employers submitted that there was an implied term which applied specifically to every contract of employment, under which satisfaction might be given by payment in lieu of wages. The principle under the law of Scotland was that every contract of employment included an implied right on the part of the employers lawfully to terminate the contract without giving notice but by making instead a payment to the employee of a proportion of the salary and emoluments corresponding to the period of notice expressed or implied under the contract. Counsel sought to derive support for this from Gloag, Contract, 2^nd ed., p.731:

"[I]n contracts of employment, where the whole time of the party engaged is devoted to his duties, it is a general rule that, even although no definite period of employment is specified, neither party is entitled to terminate the relationship without reasonable notice... Dismissal without notice is not properly a breach of contract on the part of the employer, but brings into operation an implied condition of the contract that payment in lieu of notice is due."

The cases cited by Gloag in support of this latter proposition were Cooper v Henderson (1825) 3 S. 619 (in which no opinions are reported) and Morrison v Abernethy School Board (1876) 3 R. 945. (Reference was also made before us to Graham v Thomson (1822) 1 S. 309, another case in which no opinions are reported.) Since Morrison v Abernethy School Board is the cornerstone of the grounds of appeal for the employers and their counsel's submissions, we require to examine it in a little detail.

[8] The old common law rule was that parish schoolmasters appointed by the heritors had tenure ad vitam aut culpam. This was overridden by section 55 of the Education (Scotland) Act 1872, which provided:

"After the passing of this Act the right and duty to appoint teachers of public schools shall be in the respective school boards having the management of the schools, who shall assign to them such salaries or emoluments as they think fit, and every appointment shall be during the pleasure of the school board."

A schoolmaster appointed by a school board at a salary of £150, and with a free house and garden, was dismissed by the school board without notice, but received fifteen days' pay, being his salary to the end of the quarter current at the date of his dismissal. The case came originally before the Second Division of the Court of Session, whose opinions were equally divided, and, the matter being of some general public importance, it was heard again before the Second Division with three judges of the First Division. It was held by a majority (Lord Neaves and Lord Ormidale dissenting) (1) that although in terms of the 1872 Act the pursuer held office only during the pleasure of the board, he was entitled at common law to reasonable notice before dismissal, or to a money payment in lieu thereof, and (2) that, in the circumstances, three months' notice would have been reasonable, and that the pursuer was entitled to £50 in lieu thereof.

[9] Lord Deas said at p.948:

"[T]he pursuer's claim, if he has one, is, in my opinion, not for damages but for an allowance, or, as he alternatively calls it, compensation in lieu of notice; ...".

At p.949 Lord Deas said that the contract fell under the category of an ordinary contract of service for no specific period, and consequently terminable at pleasure. He went on:

"The next question is, Does such a contract imply, in a case like the present, an obligation on the master or employer to give notice or to make a pecuniary allowance in lieu of notice when he means to terminate the contract, without alleging fault on the part of the servant? And my answer to that question is, that, by the law and practice of Scotland, such a contract does imply that obligation."

At p.952 he said:

"The contract was that they should retain the pursuer in their service during pleasure, but it was an implied condition of that contract that, when they dispensed with his services without cause assigned, he should be allowed the means of livelihood for a period within which he might reasonably be expected to find another situation. That I think the fair and reasonable construction to be put upon such a contract."

Lord Ardmillan concurred in the result of Lord Deas's opinion. He said, at p.956:

"In requiring reasonable notice, or reasonable compensation in lieu of notice, I concur with Lord Deas."

Lord Mure said, at p.961:

"By the rules of the law of Scotland I have always understood that in all cases between master and servant there must either be reasonable notice given of the intention to make a change or reasonable compensation."

Lord Gifford agreed with Lord Deas and the majority of the court. Lord Justice Clerk Moncreiff gave the last opinion. He said, at p.964:

"The statute necessarily imports the common law by providing that the teacher shall hold office during the pleasure of the school board. We are compelled to resort to the common law to ascertain what are the incidents of a tenure at pleasure. I think that a tenure at pleasure, while it implies the right of the employer to dismiss the employed at any time without reason assigned lays upon him an obligation either to give reasonable notice or compensation in lieu of notice. It is not necessary to go into the principle of this rule, because it has been applied in so very many cases; but the rule is based on obvious equity. Our judgment will not allow a schoolmaster to retain his office one day longer than the board thinks fit; but it will secure to men offering their services as teachers to school boards that they will not be obliged to leave suddenly without compensation."

[10] Counsel for the employers said that he had found no case relating to a contract of employment which contained an express provision relating to notice and in which it had also been held that there was the implied term contended for by him.

[11] Morran v Glasgow Council of Tenants Associations and Others 1997 S.C. 279 was a case in which a claim by the employee for damages failed because there was an express contractual provision that the employers might make a payment in lieu of notice. The court reserved its opinion on the question of the relevancy of such a claim in a case where the employers did not have a specific right under the contract to make a payment in lieu of notice. Counsel sought to derive support, however, from passages in various textbooks. In addition to the passage in Gloag quoted above, reference was made to Fraser, Master and Servant, 3^rd ed. (1881) pp.50-51, Miller, Industrial Law in Scotland (1970), p.396, Craig and Miller, Employment Law in Scotland, 3^rd ed. (2004), paras.3.87 and 4.3 and the Stair Memorial Encyclopaedia Reissue, Employment (2000), para.125. It is sufficient to quote from the last mentioned of these:

"Except in the case of an appointment ad vitam aut culpam or a contract for a determinate period, in the absence of an express or implied term relating to notice a contract of employment may be terminated by either party giving to the other reasonable notice of termination or, in the case of termination by the employer, payment in lieu of such notice."

After quoting from Morrison v Abernethy School Board the passage continued:

"Thus it is not a breach of contract for the employer to dismiss without notice provided payment in lieu of notice is made."

The footnote to this last sentence refers to Graham v Thomson and Cooper v Henderson.

[12] In Scottish Power plc v Kvaerner Construction (Regions) Ltd 1999 S.L.T. 721 Lord Macfadyen held that while there were cases where terms not necessary to give a contract business efficacy might be implied by the court, in particular where terms required to be implied as a matter of necessity from the nature of the contract, as one of the legal incidents of a contract of a particular sort, such cases had to be regarded as exceptional; and that while no term could be implied which was contradictory of an express term, the existence of an express term did not necessarily exclude the possibility of an implied term touching on the same subject matter. On this basis, counsel submitted that the implied term he contended for, derived from Morrison v Abernethy School Board, was implied not by reason of business efficacy, but ex lege. He did not suggest that such a term could not be excluded, but it could only be excluded by an express, clear and unequivocal provision. It was more difficult to displace a term which was implied ex lege than one implied for business efficacy: McBryde, The Law of Contract in Scotland, 2^nd ed. (2001), para.9-07. The implied term here was the option to the employers lawfully to terminate the contract without the giving of notice by making a payment to the employee of a sum representing the salary and other emoluments to which he would have been entitled during the period of notice. This would include all payments to which he was contractually entitled, such as salary, bonus and pension contributions, but not any consequential losses he might suffer which were referable to his status as an employee, but were not part of his contractual emoluments. Where the option was to dismiss the employee in one of two ways, the employers were entitled to exercise the less burdensome of the two options.

Discussion
[13] We are not persuaded by the submissions of counsel for the employers. The 19^th century cases related to contracts of employment which contained no express provision for the giving of notice. The courts recognised that an employee whose contract of employment was terminated without notice and without payment in lieu of notice might suffer hardship, particularly where the employee was provided with accommodation by his employers. For these reasons, out of considerations of "obvious equity" (Morrison v Abernethy School Board, per Lord Justice Clerk Moncreiff at p.964), the courts held that, in a contract at pleasure, there was an implied term entitling the employee to reasonable notice before dismissal, or to a money payment in lieu thereof. None of the decided cases to which reference was made goes so far as to state, as counsel for the employers invited us to hold, that such a term is implied ex lege into every contract of employment, irrespective of an express provision entitling the employee to notice. We can see no reason whatever for holding that such a condition is implied into a contract, such as the present, which expressly provides for a period of notice. The passages in the textbooks to which we were referred, in particular the passage in the Stair Memorial Encyclopaedia quoted above, all appear to us to relate to contracts of employment without such express provision. Provisions are not to be held to be implied into contracts except for good reason. It was not suggested to us that business efficacy required such a provision to be implied, or that it was required for the protection of the employee. Such protection is only required where the employee is not otherwise entitled to a period of notice.

[14] It appears to us that the purpose of Clause 1 of the contract of employment in the present case was to allow the parties to the contract to know where they stood for the period of not less than twelve months after the giving by either of them of written notice of termination of the contract. The employee, in particular, would have the security of knowing that during that period he would continue to receive his salary and emoluments and the other benefits flowing from his continuing to be employed during that period. The implied term contended for does not provide the employers with alternative options, as their counsel submitted: it would be manifestly contradictory of the express terms of Clause 1. We can see no reason for holding that a term should be implied which would have the effect of depriving the employee of the normal remedy of damages for breach of contract, the purpose of which would be to put him in no worse a financial position than that in which he would have been had the employers fulfilled their contractual obligations to him. Even express provisions which have the effect of limiting or excluding damages are subject to strict rules of construction, and a fortiori the same approach should be applicable to alleged implied terms. We are satisfied therefore that the present action is relevantly pled as an action of damages for breach of contract.

[15] The solicitor advocate for the employee addressed us at some length on the question whether the sheriff and the sheriff principal had been right to hold that, as a matter of general law, there is implied into employment contracts an entitlement in favour of the employers to dismiss without notice on paying wages and other contractual entitlements in lieu, which implied term was ousted by the express provisions of the present contract. He recognised, however, that if we were to hold, as we do, that such an implied term would be incompatible with the express provisions of the present contract, the more general issue would properly be regarded as academic. As he pointed out, the 19^th century cases may now be of little more than historical interest. Section 86 of the Employment Rights Act 1996 gives a statutory entitlement to employees under contracts of employment to which the section applies to a minimum period of notice. As Lord Hoffmann said, under reference to this provision, in Johnson v Unisys Ltd [2003] 1 A.C. 518, at para.37:

"[A]ny terms which the courts imply into a contract must be consistent with the express terms. Implied terms may supplement the express terms of the contract but cannot contradict them. Only Parliament may actually override what the parties have agreed."

There would therefore appear to be little remaining scope for the implication, at common law, of a provision such as is contended for here. We have said enough to indicate that we have strong reservations as to whether, in the 21^st century, there is any scope for the implication of such a term. But we think it preferable to express no concluded view on this matter, since it is not necessary for the disposal of this appeal, and we therefore reserve our opinion on it.

Disposal
[16] For the above reasons we shall refuse the appeal, adhere to the interlocutors of the sheriff and the sheriff principal, and remit the case back to the sheriff to proceed as accords.