20 June 2012

Use of PILON scuppers attempt to rely on Boston Deep Sea Fishing case

Cavenagh v Williams Evans Ltd sheds light on the impact on a clause giving the option to make a payment in lieu of notice ("PILON") when an employer discovers gross misconduct after making a payment in lieu. Mr Cavanagh was managing director of the firm of gunsmiths, Williams Evans Ltd. A restructure meant that no managing director was needed. The company invoked the power to pay him in lieu of the six months' notice due to him under his contract and dismissed him. After he left, it was discovered that he had diverted £10,000 of the company's money into his pension. Perhaps understandably, the company decided not to pay him after all. Mr Cavenagh sued for the money. William Evans defended by maintaining that Mr Cavenagh had committed a fundamental breach of contract and therefore they were not obliged to pay him anything, relying on Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339 (CA). Initially the defence was successful, but the Court of Appeal found for Mr Cavenagh.

While it is well established that an employer can defend a dismissal in breach of contract on the basis of misconduct discovered after the dismissal, the situation was different here. The company had opted to use a contractual provision entitling them to end the contract by making a payment to the employee instead of giving notice. When they did that, under general principles of contract law the company were bound by their choice and they incurred a debt to Mr Cavenagh. His prior misconduct gave the company no defence to a claim for the recovery of that debt.

Should employers reconsider including PILON clauses in contracts in the light of this decision? Probably not. They are currently very common features; it often suits employers better to have employees leave immediately rather than work their notice, and it is important to have a contractual power to pay in lieu in place to protect the enforceability of restrictive covenants. However, it would make sense to look again at how they are drafted - what sank William Evans in this case was the total absence of any contractual provisions providing a "get-out" from their contractual obligations in the circumstances that arose.