- This is an appeal
brought with permission of Keene LJ from the decision of the Employment Appeal
Tribunal (the EAT) dated 7th November 2002. The EAT reversed the
decision of an Employment Tribunal (the ET) dated 17th July 2001.
The ET had decided that the contracts of employment of the respondents (the
Colens) were tainted with illegality, and that accordingly the Colens had
no remedy either to enforce an alleged entitlement to commission due prior
to their dismissal and no remedy for unfair or wrongful dismissal.
Background
facts
- In September
1995 the Colens (to whom where appropriate I shall refer individually as MC
and AC) each brought a claim against the appellant company Cebrian (UK) Limited
(Cebrian (UK)) for unfair dismissal, for damages for breach of contract, and
for what are popularly known as "Wages Act" claims. This followed
a breakdown of the relationship between the shareholders in Cebrian (UK) who
were as to 52% the Cebrian brothers, 24% the Colens and 24% the Percivals
(Mr Percival being AC’s brother). That breakdown resulted in the Colens being
dismissed in June 1995. The Colens also issued a petition in the High Court
under Section 459 of the Companies Act 1985, and launched certain High Court
proceedings with which the Section 459 proceedings were consolidated. While
the High Court/Section 459 proceedings were being resolved the ET proceedings
were held in abeyance.
- In the High
Court/Section 459 proceedings the history of the working relationship as between
the Colens, the Percivals, the Cebrians, and Cebrian (UK), was explored in
some detail. The judgment of His Honour Judge Boggis QC delivered on 17th
November 1999, sets out his findings of fact in that regard. That judgment
reflects that from the outset the arrangement between Cebrian (UK) and the
Colens and the Percivals was that each family would have a responsibility
for different parts of the United Kingdom, and that a low basic salary would
be paid to each family but that each family would receive a commission of
10% on sales in that section of the country for which each was responsible.
AC and MC frankly state in statements before the ET, that when it came to
actually making payments to the individual members of the families, payments
were made in the manner most tax efficient to the individuals. No suggestion
was made before Judge Boggis that anything was being done illegally. Judge
Boggis traced certain changes in the commission arrangements. Evidently for
a period from 1984 to 1988 it was agreed that the Percivals and the Colens
should receive 5% from all sales, not simply from the sales for which
each family was responsible. In 1988 however there was a reversion to 10%
on the sales for which each was responsible. There was no issue before Judge
Boggis as to whether those changes and in particular the change in 1988 was
intended to vary the agreement in any radical way. Judge Boggis described
this change in 1988 in the following way:
"In
1988 the commission system was changed again with Mr Colen and Mr Percival
each taking 10% on their own sales. The purpose was to increase their own
motivation"
- The Colens were
totally successful in their Section 459 proceedings. Judge Boggis held that
the Colens had been wrongfully dismissed, and ordered the Cebrians to buy
the Colens’ shares for £150,000. He also dealt with certain points the subject
of a counterclaim by Cebrian (UK), one of which related to the calculation
of commission. In that regard the judge said this:
"There
has been very little evidence about the terms on which commission was chargeable
by the Colens and the Percivals. The best evidence I have been shown is a
letter in Spanish dated 25 February 1982 which appears to set out Mr Percival’s
terms in connection with Tellime. It speaks of Commission on sales.
In
my judgment, all of these elements of the Counterclaim fail. I have heard
evidence that post and packing did indeed include a profit element. The medal
cases were indeed sold to Cebrian SL which company made a good profit on them.
I accept Mr Craig’s submission that the commission was on sales not profit.
So far as I can tell, there was no provision for the commission to be payable
only once the customer had paid for the goods. It is true that Manolo and
Paco Cebrian complained that the Percivals and the Colens were making too
much money out of the company, but never was any complaint made about the
way in which commission was calculated until long after both the Percivals
and the Colens had left. If the complaint were legitimate it would have been
raised much earlier. This part of the Counterclaim fails."
- The judge’s
use of language at that stage would tend to indicate that he did not contemplate
that there had ever been any significant change in the arrangement that commission
should be paid to the Colens and the Percivals as a family as opposed to Mr
Colen and Mr Percival individually, but nor it is fair to say would he have
been considering that issue.
- Following the
conclusion of the Section 459 proceedings in November 1999, the proceedings
before the ET were revived and Cebrian (UK) admitted liability. The proceedings
were thus from 1999 concerned with remedies only. In June 2001 statements
of MC and AC were served on those representing Cebrian (UK). They spelt out
in detail the way over the years from 1982 to 1984 a basic salary was paid
and how the Colens, and the Percivals, as a family received 10% commission
on the sales in their particular area. MC’s statement dealt with the changes
thereafter in this way:
"The
Cebrians had very little involvement in the business in the UK, despite being
majority shareholders and left Ann and myself, together with Peter and Lynne,
to run the business. Our basic salaries increased, but we always retained
a low basic salary, with commission of 10% being paid on all sales. For a
short while, between 1984 and 1988, we changed the system of commission so
that each family earned 5% of commission throughout the country. Prior to
that, and again after October 1988, we each had 10% commission on the sales
in our particular areas. Sales in the southern area were usually about 60-65%
of the total sales. As always, our commission was paid to the family, i.e.
Percivals and Colens.
- In paragraph
19 he said this:-
"At
the time of my dismissal I was earning a basic salary of £12,600 per annum
and Ann was earning a basic salary of £4,680. As already explained we shared
the commission in the most tax efficient way as advised to us and some parts
of the commission were used to pay for private health insurance. We also participated
in a fine wine scheme whereby wine was purchased by the company on our behalf,
and later sold. I understand this avoided the payment of national insurance
contributions. I do not know all the details, but my understanding is that
this was a perfectly legitimate scheme recommended by SDB Group and implemented
by Dean Statham."
- AC provided
a statement consistent with that of her husband saying in paragraph 4:-
"Throughout
the whole of my employment with Cebrian (UK) Limited, Manolo and I always
shared income. We both had low salaries from the start and at the very beginning
we took a joint salary of about £5,000.00 together with commission. We always
arranged it so that commission was paid to both of us with it being divided
in a tax efficient way. We were both working, and we both had low salaries
and it was reasonable for each of us to receive some commission. My brother
Peter Percival and his wife Lynne similarly shared commission in a way appropriate
to them and this was the way payments were always made. The Cebrians had no
involvement in the way payments were made and, at least initially, were just
happy that the company grew in its turnover and profitability."
- We were informed
by Mr Laddie who appeared before us for Cebrian (UK), that it was following
receipt of those statements that one week before the ET hearing those representing
Cebrian (UK) took the point in correspondence that an issue arose as to whether
"this contract was (or presumably these contracts were) tainted with
illegality".
- When the matter
came on before the ET, the ET identified seven points in issue, and the reduction
of the seven points to two in the following terms:
"For
the sake of completeness, those seven points which we had to decide were as
follows:
(1) the
length of Mrs Colen’s service;
(2) the
method of calculating the commission;
(3) what
has been colloquially referred to as the "split" in respect of the
commission, i.e. whether the commission was due to Mr Colen or Mrs Colen or
both;
(4) the
length of notice to which each of the applicants were entitled;
(5) one
of illegality, and whether this contract was tainted with illegality as being
a fraud on the Revenue;
(6) holiday
pay;
(7) the
compensatory award in the unfair dismissal case.
The
parties agreed that we should initially decide items (3) and (5) which are
inextricably intertwined; the decision on (5) depended on our factual findings
in respect of (3). We have to make findings of fact as to who was entitled
to the commission before we can decide whether there is an illegality such
as to deprive Mr and Mrs Colen of their rights."
- Before the ET
the evidence called by Cebrian (UK) was from an accountant who produced certain
schedules (pages 83 and 84 in our bundle). He also produced an auditor’s document
page 86 and 87 in our bundle. Otherwise no single document of the company
was produced. Mr Hector Cebrian was also called but, as Mr Laddie accepted,
since he was a son of one of the Cebrians involved in the original setting
up of Cebrian (UK), and only 9 years old in 1982, such direct evidence as
he could give was limited and no finding of the ET appears to have been based
on his evidence.
- The ET made
the following findings of fact:
"Our
findings of fact are substantially based upon the applicant’s own evidence
and their own pleaded cases. It is all very well parties expressing views
in 2001, looking back to 1995, for example, but it is very easy for any party
to forget or to put a gloss on matters later. Accordingly, it is helpful for
a Tribunal to look at some of the original documents to assist us.
If
one looks at page 3 of the bundle of documents, this is part of Mrs Colen’s
originating application, drawn up on her behalf by solicitors. That states,
in paragraph 2:-
"The
following were express terms of the contract of employment relating to remuneration
and benefits:-
(b) ad
hoc share in the commission of 10% of total sales of the Respondent which
was payable to the applicant’s husband.
Equally,
on page 7 of the documents, Mr Colen says, in his originating application:-
"The
following were express terms of the contract of employment relating to remuneration
and benefits:-
(b) commission
of 10% of total sales of the Respondents (to be shared on an ad hoc basis
with the applicant’s wife.
In
paragraph 19 of Mr Colen’s written witness statement he says:-
"As
already explained, we shared the commission in the most tax efficient way
as advised to us."
In
paragraph 4 of Mrs Colen’s written witness statement she states:-
"We
always arranged it so that commission was paid to both of us with it being
divided in a tax efficient way.
The
position was confirmed by Mr Colen in his verbal testimony to the Tribunal.
He stated that his duties were principally sales and buying. He confirmed
that initially in the first two years his wife came round with him on his
sales calls because his English language abilities were not very good. However,
thereafter her main duties were administrative and clerical. She did, in fact,
deal with mail order and telephone sales arising therefrom. For a period of
approximately four years, after the birth of her daughter in 1984, Mrs Colen
worked mainly at home and went into the office from time to time. Mr Colen
further gave evidence that the split of commission would be different from
time to time dependent upon the advice that he was receiving. He gave examples
of perhaps a 7 to 3 split or a 6 to 4 split dependent upon how favourable
it was at the particular time.
Neither
of the applicants could give any evidence whatsoever as to the exact amount
to which Mrs Colen would be entitled. Whereas, it was very clear indeed, that
Mr Colen was entitled to 10% commission on his sales.
Of
considerable importance also was the judgment of the High Court, at page 47
in the bundle of documents, where the judge stated:-
"In
1988 the commission system was changed again with Mr Colen and Mr Percival
each taking 10% on their own sales.
Further,
Mr Richard Bladen, chartered accountant, gave evidence and referred to contemporaneous
documents, which referred to the commission due to Mr Colen, and made no mention
of Mrs Colen.
The
Tribunal accepts that factually the company did actually pay commission to
Mrs Colen over many years."
- It then rehearsed
the arguments of Mrs Hancock for the Colens and Mr Ashton for Cebrian (UK).
The submission accepted was that of Mr Ashton, which was to the effect that
"Mrs Colen was not entitled at law or in contract to any commission at
all. Mr Colen had decided to divest some of his rightful income and give it
to his wife in order to evade paying tax." In paragraphs 20, 21 and 22
the ET said:
"The
burden of proof is upon the applicants to satisfy this Tribunal on the balance
of probabilities that it is more likely than not that the applicant, Mrs Colen,
was legally and contractually entitled to commission. They have singularly
failed to do that. Indeed, we are satisfied, on the balance of probabilities,
that it was more likely than not, that Mrs Colen was not legally or contractually
entitled to commission as claimed.
The
contemporaneous documents indicate to us the commission was due to Mr Colen.
The High Court judge so found in his decision.
We
appreciate that citizens have the right to organise their tax affairs in the
most tax efficient way possible. However, we cannot envisage that a wage earner
has the right to say to employers: "Please pay a proportion of my salary
to someone else, who does not pay tax or who pays tax at a lower rate than
I, in order that I should pay less tax to the Inland Revenue". That seems
to us a classic case of tax evasion. The Revenue would no doubt lose billions
of pounds a year from such a device. Where does such matters end? Would it
be right for a wage earner to direct the top slice of his income to his wife,
his daughter, his cousin, his friends? Clearly, not."
- Their conclusion
in paragraph 27 was:
"The
unanimous decision of this Tribunal is that these contracts of employment
between the parties are tainted with illegality, as being a fraud on the Revenue,
and accordingly, we must dismiss both cases."
- The matter came
before the EAT. By the skeleton argument put in on behalf of Cebrian (UK)
by paragraph 4.5 it made what was an important concession:
"On
any proper reading of the High Court judgment it is clear that the Appellants
were jointly entitled to receive 10% commission, payable on all sales,
until mid 1984. From mid-1984 to 1988 the Colens and the Percivals were each
entitled to receive 5% commission, payable on all sales. However, post-1988
it was agreed that the Second Appellant (or for that matter Mrs Percival)
would no longer be entitled to any form of commission; commission was payable
solely to the First Respondent (and Mr Percival) on all sales made
by him, the purpose of which arrangement was to increase his
motivation."
- In its decision
the EAT noted the evidential support for the proposition that in 1982 "the
contractual arrangements properly so defined gave Mrs Colen an entitlement
to commission" [para 10]; it suggested that reliance by the ET on the
sentence from Judge Boggis’ judgment relating to 1988 was misconceived [paragraphs
12 and 47]. It then examined the findings of fact of the ET, and it concluded
in paragraphs 49 and 50 as follows:
"In
those circumstances it seems to us that an examination of those facts would
inevitably have driven a reasonable Tribunal to exactly the opposite conclusion
to which this Tribunal was driven; which was that there was a clear contractual
term for the entitlement that was argued for by the parties. A distinction
is to be drawn, it seems to us, between the method of calculating commission
which was to be 10% on Mr Colen’s sales and the ultimate destination of such
commission.
There
is no difficulty, it seems to us, in an employee A being entitled to gross
commission subject to a deduction in favour of employee B so as to leave him
with only a net figure of commission. That seems to us to be the only interpretation
there can be placed upon the evidence that was before the Employment Tribunal."
Issue
for the Court of Appeal
- The question
for this court is not primarily whether the EAT was correct in its decision
but whether the decision of the ET was wrong (see Mensah v East Hertfordshire
NHS Trust [1998] IRLR 531 CA). It is primarily the ET’s decision which
this court must examine, and it is thus that decision to which I turn.
ET’s
Decision
- That decision
as it seems to me is deeply flawed. First and foremost, it does not in any
way reflect what was conceded before the EAT and conceded before us that there
was on any view a period during which AC did have a joint entitlement to commission
with her husband. The case before the EAT as reflected in the skeleton of
Cebrian (UK) was as quoted above. The case being made in the skeleton before
us by Mr Laddie is on the same lines and he formally conceded that there was
no challenge to the contention that AC with her husband had a joint arrangement
up until 1988. The question, which the ET should have addressed, was whether
there was a change in that arrangement in 1988. If they had addressed that
point they would have had to address also whether the quote from Judge Boggis’
judgment who was not concerned with that issue, provided any basis for suggesting
a change from a joint entitlement to an entitlement of MC alone, particularly
in the light of the language used by him later in his judgment (see para 4
above). The tribunal further suggested they were relying on contemporaneous
documents, but on analysis the only contemporaneous documents were pages 83
and 87 of the bundle put before us. Page 83 (a summary of the payroll records
in respect of MC and AC for the 6 months ended 30th June 1995)
is in fact consistent with joint entitlement albeit it can be said to reflect
a rather higher split in favour of AC than MC had suggested in evidence. Page
87 is an auditor’s note prepared in April 1995 and showing commission for
the previous year under the headings "M. Colen" and "P. Percival"
and is not inconsistent with AC’s evidence that on occasions the commission
was described as Mr Percival’s or Mr Colen’s although it was a joint commission.
- It furthermore
seems to me that to place the burden of proof where they did was fundamentally
wrong where illegality is being alleged. The burden was on Cebrian (UK) to
show that they and the Colens and indeed the Percivals had either made a contract
with the object of defrauding the revenue, or had performed it with that objective
or in a way which did defraud the revenue. That would have involved proving
that the Colens varied the arrangement in 1988 so as to exclude AC from any
share in the commission, and that MC had then with Cebrian (UK) decided to
continue to pay her in order to defraud the Revenue. Why, one asks, should
they have done such a thing if the prior arrangement worked perfectly well?
- In my view,
despite attempting to direct themselves as to the different questions that
arise i.e. what the contractual arrangements for commission were and then
whether the contract was tainted with illegality the ET blurred the distinctions
that have to be kept in mind in this difficult area.
- It is important
to keep certain strands separate. It is of course fundamental that an analysis
is done as to what the contract is which is sought to be enforced. It is also
important to keep in mind what the enforcing party needs to establish in order
to succeed. The different aspects of illegality are helpfully referred to
in the judgment of Peter Gibson LJ in Hall v Woolston Hall Leisure Ltd
[2001] ICR 99 at 108 where he said in paragraphs 28 to 31 as follows:-
"There
can be no doubt but that under English law a claim, whether in contract
or in tort, may be defeated on the ground of illegality or, in the Latin
phrase, ex turpi causa non oritur actio. The classic statement
of the principle was by Lord Mansfield CJ in Holman v Johnson (1775)
1 Cowp 341, 343:
"No
court will lend its aid to a man who founds his cause of action upon an
immoral or an illegal act. If, from the plaintiff's own stating or otherwise,
the cause of action appears to arise ex turpi causa, or the transgression
of a positive law of this country, there the court says he has no right
to be assisted."
Although
we are not directly concerned with a claim in contract, it is helpful
to consider the applicability of the defence of illegality to a contractual
claim before considering the more directly relevant position of a claim
in tort. In contract the decision of the House of Lords in Tinsley
v Milligan [1994] 1 AC 340 has reaffirmed that the claimant cannot
found his claim on an unlawful act. But when the claimant is not seeking
to enforce an unlawful contract but founds his case on collateral rights
acquired under the contract the court is neither bound nor entitled to
reject the claim unless the illegality of necessity forms part of the
claimant's case: p 377 per Lord Browne-Wilkinson.
In
two types of case it is well established that illegality renders a contract
unenforceable from the outset. One is where the contract is entered into
with the intention of committing an illegal act; the other is where the
contract is expressly or implicitly prohibited by statute: St John
Shipping Corporation v Joseph Rank Limited [1957] 1 QB 267, 283 per
Devlin J.
In
a third category of cases a party may be prevented from enforcing it.
That is where a contract, lawful when made, is illegally performed and
the party knowingly participated in that illegal performance. In Ashmore,
Benson, Pease & Co v A V Dawson Ltd [1973] 1 WLR 828, 833 Lord
Denning MR said:
"Not
only did [the plaintiff's transport manager] know of the illegality. He
participated in it by sanctioning the loading of the vehicle with a load
in excess of the regulations. That participation in the illegal performance
of the contract debars [the plaintiff] from suing [the defendant] on it
or suing [the defendant] for negligence."
So
too Scarman LJ, at p 836:
"But
knowledge by itself is not ... enough. There must be knowledge plus participation
... For these reasons I think the performance was illegal ..."."
- He also in paragraphs
33 and 34 of the same judgment refers to two cases dealing with contracts
of employment:-
"In
Coral Leisure Group Ltd v Barnet [1981] ICR 503, 508 the Employment
Appeal Tribunal asked itself the question whether any taint of illegality
affecting part of a contract necessarily rendered the whole contract unenforceable
by a party who knew of the illegality. In the case of a contract not for
an illegal purpose or prohibited by statute the appeal tribunal answered
that question in the negative, holding that the fact that the employee in
the course of his employment committed an unlawful act did not prevent him
from asserting thereafter his contract of employment against his employer.
In
Newland v Simons & Willer (Hairdressers) Ltd [1981] ICR 521 the
question was whether an employee could complain of unfair dismissal in circumstances
where the tribunal had held that the employee knew or ought to have known
that her employer had failed to pay tax and national insurance contributions
in respect of her wages. The majority of the Employment Appeal Tribunal
were of the view that, where both employer and employee knowingly commit
an illegality by way of a fraud on the revenue in the payment and receipt
of the employee’s remuneration under a contract of employment, the contract
was turned into one prohibited by statute or common law and the employee
was precluded from enforcing any employment rights which she might otherwise
have against the employer. The majority thought the essential question to
be: "Has the employee knowingly been a party to a deception on the
revenue?": see p 531. Further, May J said, at p 533:
"We
have no doubt that Parliament never intended to give the statutory rights
provided for by the relevant employment legislation to those who were knowingly
breaking the law by committing or participating in a fraud on the revenue.""
- The above passages
demonstrate that an analysis needs to be done as to what the party’s intentions
were from time to time. If the contract was unlawful at its formation or if
there was an intention to perform the contract unlawfully as at the date of
the contract, then the contract will be unenforceable. If at the date of the
contract the contract was perfectly lawful and it was intended to perform
it lawfully, the effect of some act of illegal performance is not automatically
to render the contract unenforceable. If the contract is ultimately performed
illegally and the party seeking to enforce takes part in the illegality, that
may render the contract unenforceable at his instigation. But not every
act of illegality in performance even participated in by the enforcer, will
have that effect. If the person seeking to enforce the contract has to rely
on his illegal action in order to succeed then the court will not assist him.
But if he does not have to do so, then in my view the question is whether
the method of performance chosen and the degree of participation in that illegal
performance is such as to "turn the contract into an illegal contract"
(see the dictum of Jenkins LJ in B and B Viennese Fashions v Losane [1952]
1 All E R 909 at 913 cited by Scarman LJ in Ashmore Benson Ltd VA v Dawson
Ltd [1973]1 WLR 828 at 836, and the language of para 34 in Hall quoted
above). The decisions cited in the paragraphs 30 and 31 in Hall reflect,
I suggest, the principle that not every illegality in performance will turn
a contract into an illegal contract; on one side of the line appears to be
Ashmore Benson Ltd v AV Dawson Ltd and on the other St John Shipping
Corporation v Joseph Rank Ltd [1957] 1 QB 267. In the latter case the
court was concerned with a breach of statute, and performance in breach of
that statute. The question in relation to performance, it asked itself, was
whether the statute intended to prohibit the type of contract sued on, and
held on the construction of the relevant statute that it did not. In the former
case the citation by Scarman LJ of the dictum of Jenkins LJ suggests that
where illegality by virtue of the common law is concerned the question is
whether the common law would say that a contract has by its illegal performance
been turned into an illegal contract. Of course much may depend on the question
whether the party seeking to enforce the contract needs to rely on the illegal
performance in order to succeed.
- The appellants
have put their case on the basis that any contract for the payment of commission
was with MC alone. They then argue that the performance of the contract was
illegal because the company actually paid part of the commission to AC with
the intention of defrauding the Inland Revenue. They further assert that MC
was a party to that fraud on the revenue. If the contract was with MC alone
then there is clearly great force in the argument that the illegality of the
performance with MC’s participation should lead to the result that the contract
had become an illegal contract which MC should not now be entitled to enforce.
I am not sure I have to say how AC’s contractual rights other than her claim
to commission would be affected. But I need not dwell on that because in my
view, in concluding that the contract so far as it related to commission was
with MC alone, the ET misdirected itself.
- I deduce that
the ET was moved in part by the notion that because MC and AC were frankly
saying that when it came to performance of the commission arrangement, payment
was made in the way most advantageous so far as tax was concerned, that there
would be something wrong or unlawful about taking such considerations into
account. They failed to distinguish between [1] a contract made between the
company and AC and MC under which commission was to be paid jointly with the
sole motivation of defrauding the revenue because in reality the commission
belonged to MC alone (undoubtedly an illegal contract); [2] a contract with
MC alone but performed by payment to AC with the intention of defrauding the
revenue (a contract rendered illegal by the performance and participation
in the performance); [3] a contract under which both AC and MC were jointly
entitled to commission for work done and participation in the business, but
which may, when the question of actual payment came to be considered, have
been paid with tax considerations in mind.
- In this last
case, I would accept that if it could be demonstrated that on some occasion
the split of the commission could not in any way be justified by reference
to AC and MC’s participation in the business of the company, so that the revenue
was being cheated of tax, then some illegality in the performance might have
been demonstrated. But even then for Cebrian (UK) to be able to resist payment
or resist a claim for damages, the onus would be on it to demonstrate that
the transgressions were such as to turn by its illegal performance a valid
contract into an illegal contract; or Cebrian(UK) would have to show (and
again the onus would be on it) that AC and MC needed to rely on their illegality
to succeed in their claim..
- But this is
not the way in which Mr Laddie sought to argue the case before us and is not
the way the matter was ever argued before the ET or the EAT. Furthermore if
it had been so argued, by reference to such evidence as we have which reflects
the evidence before the ET, [a] there is nothing to demonstrate that, although
tax considerations were taken into account as MC and AC frankly admitted,
the result was receipt by either of commission which did not reflect the husband
and wife’s joint efforts in the business; [b] if the document at page 83 relied
on by Mr Laddie, could be argued to reflect an occasion where AC did receive
more than could be justified by reference to their joint efforts and her participation,
that glimpse of a very short period of performance, is in no measure sufficient
to turn a lawful contract into an illegal contract; and [c] there does not
appear to be any question of either AC or MC having to rely on any illegal
conduct in order to succeed on their claim.
- AC and MC are
asserting that commission is due. They do not need to rely on the way payments
were made in the past. They are not entitled (contrary possibly to what may
have been Miss Eady’s final submissions to us), to suggest that there was
some contractual entitlement to have the commission paid solely by reference
to tax considerations. Although the ET described as fatal to the Colen’s claims
their inability to identify a particular amount or proportion of the commission
to which each was entitled, commission, shared on an ad hoc arrangement, has
never been argued to be so uncertain as to lead to no commission being due.
It is a case where the ET must do its best to divide the commission relying
on what is reasonable as between AC and MC remembering that not only were
the two employees contributing to the profits made on sales in different ways,
but were also shareholders with equal shares.
- The ET in assessing
the appropriate remedy will simply have to assess (1) 10% commission for the
period up until the Colen’s dismissal, and award what would be a reasonable
part of that sum to AC and a reasonable part to MC; (2) the ET will then have
to assess what is the reasonable period of notice which AC or MC were entitled
to, and make an assessment of what that would have meant in commission terms.
Clearly while AC and MC would have continued in employment together that will
involve a reasonable split between them taking account of their different
contributions to the making of the profits for the period, if there be one,
when MC would have been employed alone, the commission will go to MC.
- I would therefore
dismiss the appeal and remit the matter to the ET to assess the entitlement
of AC and MC in accordance with this judgment, varying the EAT’s order as
suggested by Carnwath LJ.
Lord Justice
Carnwath:
- I agree. There
are three issues:
- What was
the contract?
- Did it involve
illegality?
- If so, how
does this affect the jurisdiction of the Employment Tribunal?
- On the first
issue the Employment Tribunal decided that the contract was one under which
Mr Colen alone was entitled to commission and that Mrs Colen had no legal
or contractual entitlement to commission (para 12, 20-24). This conclusion
was unsustainable on the evidence before them. The only oral evidence they
heard was from Mr and Mrs Colen, both of whom gave evidence that the commission
was shared between them, and was consideration for work done by them both,
although the balance of work varied over the years.
- The company
called no relevant oral evidence on this point. However the position as stated
in its skeleton argument was that the entitlement to commission was indeed
shared by the Colens until 1988 but that thereafter
"it
was agreed that (Mrs Colen)… would no longer be entitled to any form of commission.
Commission was payable solely to (Mr Colen)… and all sales made by him,
the purpose of which arrangement was to increase his motivation".
- No evidence
was called in support of this assertion other than reliance on what is said
to be the "proper reading" of the High Court judgment, in which
a sentence appears to the effect that the commission system was changed in
1988 as there asserted.
- The Tribunal
referred to that reference as being "of considerable importance"
and as a "decision" to that effect (para 13, 21). The only other
material relied on by them was an indication in "contemporaneous documents",
which had been cited in evidence by Mr Bladen a chartered accountant. However,
Mr Bladen himself had no direct knowledge of the events in question. The only
"contemporaneous document" relied on before us was an auditor’s
working paper dated 31st December 1994, in which the entitlement
to commission was noted as due to Mr Colen and Mr Percival, without any reference
to their wives. However, we have no knowledge of the basis on which the auditors
were working. In any event, that note is not inconsistent with Mr Colen’s
own evidence (prepared before any question of illegality was raised), that
"it
was all four of us worked in the business, and it was never the case that
it was my commission and Peter’s commission, although that was the way it
was often referred to, but rather was just the basis on which we were all
paid."
- In my view,
the Tribunal were wrong to place any weight on one sentence in the High Court
judgment. The entitlement of Mrs Colen to any part of the commission was not
at issue in the High Court proceedings. Accordingly the statement on that
point has no binding force. Nor is it direct evidence in any way of the actual
circumstances. It would have no doubt been open to either party to produce
evidence which had been before the High Court but that was not done. Furthermore
the Tribunal was wrong to refer to "contemporaneous documents" as
supporting that view, when there was only one document whose provenance was
not explained. In my view, that was quite insufficient to displace the evidence
of the Colens.
- To summarise,
it was the Tribunal’s duty to decide the case on the evidence before them.
The only direct evidence before them was that of the Colens. That made clear
that the entitlement to commission was a joint one. That was entirely consistent
with the company’s case so far as the period before 1988 was concerned. The
suggestion that there was a significant change in 1988 was unsupported by
any relevant evidence, and therefore should have been disregarded. It follows
that the EAT was right to allow the appeal on this ground.
- The next question
is whether there was any illegality involved. As a matter of contract law,
it is not suggested that there is anything unlawful in a contract being made
with a husband and wife to work as a team for an employer in return for a
joint commission. Such a contract is discharged by the employer paying the
commission to the husband and wife jointly, and he is not concerned with how
they divide it between them. On the evidence that essentially was the nature
of this contract. The respective contributions of Mr and Mrs Colen varied
over the period of their involvement, but that made no difference to their
relationship with the company as a team, or to the commission payable to them
as a team.
- The alleged
illegality arises out of the requirements of tax law. On the view the Employment
Tribunal took of the facts there was a clear breach of that law. On the assumption
that the commission was due to Mr Colen exclusively, the Tribunal was right
to say that he could not lawfully direct that a proportion of that income
should be treated as due to someone else for tax purposes. As they said that
would be "a classic case of tax evasion".(para 22).
- However, if
the commission is seen as a joint entitlement then the position is somewhat
different. The Tribunal thought that it was fatal to the claim that the applicants
were not able to identify a particular amount to which either of the Colens
was entitled. If it is a joint entitlement that is irrelevant to the contractual
obligation, although it may become relevant to the remedy which the Tribunal
is able to give (a point to which I shall return). So far as the tax position
is concerned, there is a difficulty because under tax law the obligations
of employer and employee in respect of tax on the emoluments of an employment
are obligations related to individual employees. They cannot be treated as
joint obligations of husband and wife. It was therefore necessary for tax
purposes for the company to take a view of the respective proportions to be
allocated to each employee when calculating the tax deductions.
- The evidence
of Mr Colen was frank and unequivocal that the commission was shared "in
the most tax-efficient way as advised to us". That I take to be a statement
that the division was guided solely by tax considerations and not by reference
to the relative contributions of the husband and wife. The Tribunal recorded
his oral evidence to similar effect, with the result that it might be
"perhaps
a 7 to 3 split or a 6 to 4 split dependent upon how favourable it was at a
particular time". (para 11).
- For my part,
I would be reluctant to proceed on the basis that this is a lawful way of
discharging the company’s obligations to the Revenue. (It is fair to note,
however, that there is no indication that the Revenue have ever been concerned
about any alleged infringements). A division has to be made for tax purposes.
Although we have not heard argument on the point, it seems to me that the
division should, in my view,principle, be made on some objective criterion,.
other than that of saving tax. The criterion may not be tied to the particular
hours put in by either party over a particular period. In a case such as the
present, the contribution of husband and wife as a team to a long-term projectin
which they were both substantial shareholders, may not fairly be measured
in terms of hours. If no other criterion is available then an equal division
is likely to be the most appropriate. However, I would find it difficult to
accept that the division can be made guided purely by tax considerations.
- However, even
if this is correct, it this conclusion does not mean that the contract is
wholly unenforceable. This is not a case like Salvesen v Simons [1994]
ICR 409, where part of the arrangement was a payment of a management fee to
a partnership for which there was no proper legal basis. Here the essential
nature of the contract was perfectly lawful, and under it the husband and
wife team was entitled to payment of commission.
- I agree with
Waller LJ’s analysis of the authorities. I have also been assisted by the
consideration given to this subject by Law Commission in its consultation
paper on Illegal Transactions: the Effect of Illegality on Contracts and Trusts
(LCCP 154, para 229 to 231). The proposition there stated was:
"Generally
it seems that the commission of a legal wrong or acting otherwise contrary
to public policy in the course of performing a contract does not at common
law affect enforcement."
- This was supported
by reference to a review of the authorities, beginning with Wetherell v
Jones (1832) 3B&AD 221, ending with Coral Leisure Group Ltd v Barnett
[1981] ICR 503, 509 where Browne-Wilkinson J summarised the position:
"The
fact that a party has in the course of performing a contract committed an
unlawful or immoral act will not by itself prevent him from further enforcing
that contract unless the contract as entered into with the purpose of doing
that unlawful or immoral act or the contract itself (as opposed to the mode
of his performance) is prohibited by law."
- In my view,
therefore, the Employment Tribunal had jurisdiction to deal with the issues
before it and should have done so.
- There is, as
the Tribunal recognised, a separate problem in fixing a remedy in damages.
The cases of Mr and Mrs Colen before the Tribunal were presented as two separate
cases. There was no suggestion that they could present a joint case. Accordingly,
in fixing any damages for breach of contract it was necessary to deal with
them separately. Furthermore their claims in respect of lost share of commission
were different. Mr Colen was arguing that a reasonable period of notice for
an employee in his senior position would be 12 months, and that he was entitled
to lost commission for that period (to be shared, in an unspecified way, with
his wife). Mrs Colen, on the other hand, limited her claim to a period of
notice of 4 months and claimed loss of commission for that period. Accordingly,
if the Tribunal had found there to be an entitlement to damages for lost commission,
it would have been necessary for them to assess the relative shares.
- As I have already
noted they regarded the lack of the Colens’ ability to point to a specific
division as fatal to their claim. They said:
"It
cannot be right that the Tribunal should have a stab at it on the basis of
what the applicant earned over the last 12 weeks of her employment."
- They referred
to the variations, referred to in Mr Colen’s own evidence, in the proportions
from time to time. The EAT did not grapple with this point. It ordered that
the matter be remitted to the Tribunal on the basis that the contracts of
employment were not tainted by illegality and that they
"provided
for a share of the commission in accordance with the terms of the contracts
as set out in the originating applications."
- That reference
to the originating applications provides little guidance, because they simply
referred to the commission as being "shared on an ad hoc basis"
between husband and wife.
- Miss Eady sought
to support that form of order, possibly qualified by reference to the applicant’s
evidence which referred to a division being made in the most tax-efficient
way. She did not shrink from suggesting that the Tribunal’s task would be
to hear accountancy evidence as to what the most tax-efficient distribution
would be. Given the doubts I have expressed about apportionment based purely
on tax considerations, I would not regard that as an acceptable form of order.
Mr Laddie also pointed to the difficulties that could arise in relation to
the statutory limit on damages which could be awarded.
- As a matter
of common sense, the simplest way to deal with this would be to treat the
husband and wife as a team and therefore entitled to the commission jointly.
Unfortunately this is made more difficult by the different periods of notice
which have been asserted. In the absence of agreement, there is no alternative
but to require the Tribunal to determine what share each party could reasonably
have expected to receive. If no other lawful basis of division is put forward,
then it may be that the issue will have to be resolved by dividing the commission
equally applying the principle that "equality is equity". However
that seems to me a matter to be resolved by the Tribunal on the basis of such
evidence as is called on this issue.
- In conclusion,
I would vary the EAT order, by deleting the reference to the terms set out
in the originating applications, and substituting the following finding:
"That
the contracts of employment were not tainted by illegality and provided for
commission of 10% to be paid to Mr and Mrs Colen jointly."
- Subject to this
variation, I would dismiss the appeal.
Peter Gibson
L.J.:
- For the reasons
given by Waller L.J. I too have reached the conclusion that the decision of
the ET is so flawed that it cannot stand.
- The ET, probably
because it ignored the fact that prior to 1988 the Colens, like the Percivals,
had a joint entitlement to commission from the company, does not appear to
have appreciated what a strange finding it made in holding that from and after
1988 Mr. Colen (and not Mrs. Colen) had the contractual entitlement to commission.
Why should Mrs. Colen, who continued to work for the company and to support
Mr. Colen’s sales efforts by her administrative work and to share commission
with her husband, have given up any contractual entitlement to her commission
when her salary continued to be small? Why should Mr. Colen have wanted to
be contractually entitled to all the commission when he continued to share
it with Mrs. Colen? Why should the company have wanted Mr. Colen alone to
be contractually entitled? Until early 1995, Judge Boggis Q.C. found, the
Colens and the Percivals ran the business of the company, and all four of
them were directors.
- Further, the
ET’s acceptance of the assertion by the solicitor advocate for the company
that "Mr. Colen had decided to divest some of his rightful income and
give it to his wife in order to evade paying tax" is strange. Why should
Mr. Colen do that when his wife, as a working employee of the company, could
lawfully be paid commission by the company, without it ever becoming "his
rightful income", as indeed had happened prior to 1988? The ET presumably
considered that the company joined with the Colens in pretending to the Revenue
that Mrs. Colen was entitled to commission, when the commission belonged to
Mr. Colen. But again I am at a loss to understand why rationally they should
engage in such pretence when Mrs. Colen could be given the lawful entitlement
to share the commission with her husband, as was done before 1988.
- Even stranger,
as it seems to me, is the consequence found by the ET that because it found
that Mr. Colen evaded tax by giving some of his commission to his wife, her
contract of employment, which, on the ET’s view contained no term entitling
her to commission, was tainted with illegality so that she cannot even obtain
a remedy for her contract having been wrongly terminated or for unfair dismissal.
That is bizarre.
- I cannot help
but think that the ET has lost its way in what I accept is not an easy area
of the law. As Waller L.J. has pointed out, the ET has made no attempt to
analyse the applicable principles laid down in the authorities in order to
apply them to the facts of this case. The ET has found unpalatable an agreement
which allows joint commission to be shared, in effect as the recipients, acting
on the advice of the company’s accountants, agree that it should be shared,
when the chief factor in how it was shared was tax efficiency. For my part
I find it difficult to say that an employee entitled contractually to commission
jointly with another employee in shares which they are free to agree contravenes
some tax principle by so agreeing or by receiving a share so agreed. Nor do
I see it as amounting to tax evasion as a failure to account to the Revenue.
That would assume that one or other has a contractual entitlement to a greater
share, the tax on which has not been accounted for to the Revenue. However,
we have heard no argument on this point, and I express no concluded view.
- I acknowledge
the practical problem posed by such an arrangement in the case of an employee
who has been unfairly and wrongly dismissed and who has not received the remuneration
due to him or her. A joint award cannot be made. The award of compensation
to each must be left to the good sense of the ET. I agree with what Waller
L.J. says in paras. 28 and 29 of his judgment.
- For these reasons,
as well as the reasons given by Waller L.J., I agree that this appeal should
be dismissed, subject to the variation, which Carnwath L.J. has proposed,
in the EAT’s order.