Lavarack v Woods of Colchester Ltd, a case that is now more than 50 years old, established that in a wrongful dismissal claim, a court should calculate damages on the basis that the employer would have performed the contract in the way that was least burdensome to it. Although the correctness of the decision has been debated, in Mackenzie v AA Ltd the Court of Appeal confirmed that it remains good law. As a result, an employee’s claims for bonus payments he said he would have received during his notice period were struck out.
Mr Mackenzie was the CEO of the AA. After a management away day, he committed an unprovoked assault on a colleague, for which he was immediately suspended while an investigation took place. A week later he resigned as an employee and director with immediate effect on grounds of ill-health. The AA refused to accept his resignation without notice and summarily dismissed him for gross misconduct. He subsequently brought a wrongful dismissal claim for salary and a discretionary bonus he said he would have received during his notice period, arguing that in the circumstances his behaviour did not amount to gross misconduct.
The preliminary issue for the court was whether the bonus claim should be struck out. At this stage it was not considering whether the wrongful dismissal claim would succeed.
Mr Mackenzie’s contract of employment contained a salary only PILON. The AA argued that even if he succeeded in his wrongful dismissal claim, damages would be calculated on the basis of the Lavarack principle. As the least burdensome way of terminating the contract would have been by relying on the PILON clause, which did not include any payment for benefits other than salary, the claim for bonus could not succeed and should be struck out.
The Court of Appeal upheld the High Court’s decision to strike out Mr Mackenzie’s bonus claim. There were three ways in which his employment contract could be terminated. It could be terminated on notice, or with immediate effect by making a payment in lieu of notice, or summarily in appropriate circumstances. Given that there was a clear choice between alternative methods of terminating the contract, the Lavarack principle that the employer would choose the least burdensome way in which to perform its obligations under the contract clearly applied. This was not unsound or contrary to principle, and the court could not depart from a consistent line of authority stretching back many years.
On the facts of this case, it was clear that the least burdensome way of terminating the contract for the AA would be by relying on the PILON. It was wholly implausible to suggest that it would have been less burdensome to give Mr Mackenzie 12 months’ notice and place him on sick leave for at least six months (reflecting the medical advice he had received), pending the uncertain prospect of his return to work. The High Court was correct to strike out the bonus claim.
Wrongful dismissal claims of this type are much less common than they used to be, at least in part because notice periods for senior executives have decreased significantly and there is less room for dispute over the value of a former employee’s claim. However, the decision is nonetheless welcome confirmation for employers that the Laverack principle holds good where there is a clear contractual right to terminate on specific terms.
Authored by Jo Broadbent and Stefan Martin.