Notcutt v Universal Equipment Company (London) Ltd [1986] EWCA Civ 3 (14 March 1986)

HTML VERSION OF JUDGMENT ____________________ Crown Copyright © LORD JUSTICR DILLON : This is an appeal by the plaintiff in the action, Mr Notcutt, from a decision of His Honour Judge Birks given in the Brentford County Court on 22nd March 1985 whereby he dismissed the plaintiff's action with costs. The appeal was brought on at very short notice, to fill an unexpected gap in the court's list. Each side had therefore to instruct counsel who had not appeared in the court below. In the result we have had the benefit of an extremely high standard of advocacy from both the counsel who have appeared before us and I am most grateful to them for the clarity and conciseness of their arguments. Their arguments brought out that the appeal raises issues of considerable general importance in that it seems that this is the first case in which the Court of Appeal has been required to consider the application of the doctrine of frustration to a periodic contract of employment, which is determinable by short or relatively short notice where the contract is said to have been frustrated by the illness or incapacity of the employee. Had this been appreciated before the hearing began, arrangements would have been made for the appeal to be heard by a three-judge court. As however the importance of the case only emerged as the argument developed, I did not think it right to put the parties to the extra expense which would have been involved if we had directed that the appeal be adjourned to come on before a three-judge court. The appellant, who was born in December 1920, entered the employment of the respondents, who are a relatively small company with two directors and about a hundred employees, in December 1957. He remained in their employment until 1984. He was a skilled workman whose job was to operate a universal milling machine, whereby metal was milled to make parts for aircraft or for other plant and equipment. His wages were at an hourly rate. Subject to statute, his employment was originally terminable by a week's notice, and it was a term of his contract that no remuneration would he paid for periods of absence from work because of sickness, injury or incapacity or for any other reason other than agreed holidays. However, certain further terms are incorporated - see Westwood v Secretary of State for Employment (1985) A. C. 209 at 218 - into the contract of employment by statute under the Employment Protection (Consolidation) Act 1978 as amended. Apart from the provisions of that Act which record the right of every employee, not here in question, not to be unfairly dismissed, section 49 of the Act gives employees a right to a minimum period of notice, if their contract of employment is to be terminated by notice by their employer. In the appellant's case by 1984 the notice required to terminate his contract had to be not less than 12 weeks' notice. Moreover under subsection (1) of section 50 of the Act if an employer gives notice to terminate the contract of employment of a person who has been continuously employed for one month or more, the provisions of Schedule 3 to the Act are to have effect as respects the liability of the employer for the period of notice required by section 49. These provisions include under paragraph 3 of Schedule 3 an obligation on the employer to pay the employee at his average hourly rate in so far as during the period of his notice he is incapable of work because of sickness or injury. What actually happened is that the appellant had a coronary in October or November 1983? when he was nearly 63 years old, and was thereafter off work. The respondents for a time sub-contracted the appellant's work on a temporary basis, but this was not wholly satisfactory, and, not unnaturally, by July 1984 they were minded to employ another miller in the appellants place if the appellant was not going to return to work. They therefore arranged with the appellant for him to authorise his doctor, Dr Menzies, to write a report to the respondents on the appellant's state of health. That was done. The report is dated 24th July 1984 and the relevant parts read as follows: "This man had a Coronary Infarct in November 1983. He also suffers from arthritis of shoulders, hips and spine. He is unlikely to be able to resume work in the near future. In fact, I doubt whether he will ever be able to work again." On receipt of this report, the respondent's shop foreman Mr Johnson, who was handling the matter for the respondents, had a telephone conversation with the appellant in which they discussed the report. The judge found as a fact that both sides accepted that the report made it clear that the appellant was not going to work again. There is evidence to support that finding, not least, so far as the appellant himself is concerned, in that he himself said in evidence that after the report he knew he could not go on working. I regard that finding as crucial to this appeal. Accordingly, after consulting ACAS as to the length of notice, Mr Johnson on the respondents' behalf by a letter of 26th July 1984 gave the appellant notice to terminate his employment on 19th October 1984. The appellant took advice, and a Law Centre on his behalf claimed that he was entitled to sick pay under paragraph 3 of schedule 3 to the Act while absent from work during the period of his notice. This took the respondents by surprise. Their first reaction was to suggest that the appellant might wish to be re-engaged, presumably without pay unless he unexpectedly became fit to work. This was not accepted. The respondents then suggested that the notice of termination was really a sham, designed to enable the appellant to obtain extra social security benefits when his contract of employment had in truth been determined without notice by mutual consent at 25th or 26th July 1984; this however the judge rejected on the facts. The respondents also contended, however, that the contract of employment had been frustrated by the appellant's illness before the purported notice of termination of 26th July. That argument, of frustration, the judge accepted; he accordingly dismissed the action, in which the appellant has claimed payment of his sick pay under schedule 3 to the Act during the period of that notice, and it is against that decision that the appellant now appeals. I have found it impossible to discern from the wording of the Act why Parliament should have required an employer to pay sick pay to an employee who is off work because of sickness or injury while under notice of termination of his contract, although the employer is under no such obligation while the employee is not under notice. Possibly it may have been thought that a good employer who, even if not obliged to, would pay sick pay to a man off sick would not be willing to do so if the man was under notice; even this speculation, however, is difficult to fit in with subsection (3) of section 50 of the Act (which does not apply in this particular case). Whatever the reason, however, it is clear that the Act has imposed such an obligation on employers. The obligation is incorporated into the contract of employment. Both counsel are therefore agreed that if the appellant's contract was terminated by the notice of 26th July, he is entitled to the monies which he has claimed. Conversely both counsel are equally agreed that if the appellant's contract of employment had been frustrated before the notice of 26th July was given, that notice was of no effect and the appellant cannot make any claim under section 50 or schedule 3 to the Act. The arguments of Mr Allen for the appellant are firstly, and generally, that the doctrine of frustration can have no application to a periodic contract of employment because there is no need for it - the contract can always be terminated by short or relatively short notice - and secondly that in the circumstances of the present case there was no frustration as absence for sickness, injury or incapacity was envisaged by the contract and also by paragraph 3 of schedule 3 to the Act. In Harman v Flexible lamps Ltd (1980) IRLR 418 Bristow J commented at page 419 as follows: "In the employment field the concept of discharge by operation of law, that is frustration, is normally only in play where the contract of employment is for a long term which cannot be determined by notice. Where the contract is terminable by notice, there is really no need to consider the question of frustration and if it were the law that in circumstances such as are before us in this case an employer was in a position to say 'this contract has been frustrated' then that would be a very convenient way in which to avoid the provisions of the Employment Protection (Consolidation) Act. In our judgment that is now the law in these sort of circumstances." In the present case, the argument of frustration is of course unashamedly put forward to avoid the provisions of the Act; in that it has succeeded in the court below. Notwithstanding the views expressed by Bristow J, however, there have been several cases in the National Industrial Relations Court and the Employment Appeal Tribunal in which those courts have considered that a contract of employment which is terminable by relatively short notice is in law capable of being terminated, without notice, by frustration as a result of the illness of the employee, and those courts have endeavoured to list by way of guideline the factors of which account should be taken in considering whether a particular such contract has been so frustrated. See Marshall v Harland & Wolf Ltd (1972) 1 WLR 899, Egg Stores ( Stamford Hill ) Ltd v Leibovici (1977) ICR 260 and Hart v A. E. Marshall & Sons ( Bulwell ) Ltd (1977) ICR 539. The judge in the present case was in his judgment endeavouring to apply the guidelines laid down in those cases to the facts of the present case. In this court, in Hare v Murphy Brothers Ltd (1974) 3 AER 940, Lord Denning M. R. held that a contract of employment of a workman was frustrated when the man was sentenced to imprisonment for 12 months. In reaching that conclusion Lord Denning M. E. considered by way of analogy that if the man had been grievously injured in a road accident and incapacitated for 8 months his contract of employment would be frustrated. However, though the man's contract was presumably determinable on short notice, no argument was founded on this; the discussion seems to have been over whether the contract was terminated by frustration or by repudiatory breach on the part of the man in committing the offence for which he was imprisoned. For my part, as a periodic contract of employment determinable by short or relatively short notice may none the less be intended in many cases by both parties to last for many years and as the power of the employer to terminate the contract by notice is subject to the provisions for the protection of employees against unfair dismissal now in the Act, I can see no reason in principle why such a periodic contract of employment should not in appropriate circumstances be held to have been terminated without notice by frustration according to the accepted and long established doctrine of frustration in our law of contract. The mere fact that the contract can be terminated by the employer by relatively short notice cannot of itself render the doctrine of frustration inevitably inapplicable. Accordingly the words of Bristow J cited earlier in this judgment must be taken as no more than a warning that the court must look carefully at any submission that a periodic contract of employment has been discharged by frustration if that submission is put forward to avoid the provisions of the Act; if Bristow J intended to go further than that I cannot agree with him. The principles that govern the doctrine of frustration are conveniently to be found in the speeches of Lord Reid and Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696 . Lord Reid said at page 721: "In my view, the proper approach to this case is to take ... all facts which throw light on the nature of the contract, or which can properly be held to be extrinsic evidence relevant to assist in its construction and then, as a matter of law, to construe the contract and to determine whether the ultimate situation ... is or is not within the scope of the contract so construed." Lord Radcliffe, in a much quoted passage, said at pages 728-9: "So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do. "There is, however, no uncertainty as to the materials upon which the court must proceed. 'The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred' ( Denny, Mott & Dickson Ltd. v James B. Fraser & Co. Ltd .," (1944) AC 265 , 274 S "per Lord Wright). In the nature of things there is often no room for any elaborate inquiry. The court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for. " Mr Allen for the appellant urges that there is a further factor which must be satisfied before it can be said that a contract has been terminated by frustration - it must be shown that it would be unjust to hold the parties to the literal terms of their contract. He therefore submits that there is no injustice in holding the parties in this case to their contract, despite the doctor's report and the subsequent conversation between the appellant and Mr Johnson, because the respondents were under no obligation under the contract to pay the appellant while he was away sick, and if they chose to terminate his contract by notice there could be no injustice in requiring them to pay him sick pay which the statute in that event required them to pay. To establish this further factor, Mr Allen relies on various statements in the authorities such as the passages in the speech of Lord Simon of Glaisdale in National Carriers Ltd y Panalpina ( Northern ) Ltd (1981) AC 675 , where he says, at page 700F: "Frustration of a contract takes place where there supervenes an event ... which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances", and again at page 701E that the doctrine of frustration is "on the face of it apt to vindicate justice wherever owing to relevant supervening circumstances the enforcement of any contractual arrangement in its literal terms would produce injustice." I do not for my part see that these references to justice or injustice introduce any further factor. If the unexpected event produces an ultimate situation which, as a matter of construction, is not within the scope of the contract or would render performance impossible or something radically different from that which was undertaken by the contract, then it is unjust that the contracting party should be held to be still bound by the contract in those altered circumstances. I approach the facts of this case on the footing that the test to be satisfied is that explained by Lord Reid and Lord Radcliffe in the passages above set out. The appellant's contract provided that the respondents were not bound to pay the appellant while he was absent from work because of sickness, injury or incapacity. The contract thus envisaged the possibility that he might be away from work because of sickness, injury or incapacity. But as a matter of construction of the contract I cannot hold that the reference to injury would cover an injury which totally disabled him from performing his work under the contract, e.g. if the operation of the milling machine requires the use of his right hand and he lost his right arm, or was rendered quadriplegic in an accident away from work which was not his fault and had nothing to do with his employers. In such a case his accident would have caused his contract of employment to be frustrated as a matter of law. Again, if sickness or incapacity are considered rather than injury, the result would be the same if, e.g., he had a stroke which left his right side permanently paralysed. On the actual facts of the present case, the effect of his coronary could not initially be assessed. But when more than six months later the doctor made his report, both parties appreciated, on the judge's findings, that he was not going to work again. He was totally incapacitated from performing the contract. That was a situation which, in my judgment, was outside the scope of the contract properly construed. To put it another way, the coronary which left him unable to work again was an unexpected occurrence which made his performance of his contractual obligation - to work - impossible and brought about such a change in the significance of the mutual obligations that the contract if performed would he a different thing from that contracted for. In these circumstances I am unable to accept the arguments for the appellant. The judge approached the case on a correct basis and I agree with his conclusion. Accordingly, though I feel much sympathy with the appellant in that his working life has been cut short by illness or incapacity, I would dismiss this appeal. MR JUSTICE SHELDON : I agree. Indeed I agree so entirely both with my lord's conclusion and with his reasons that there is little that I can usefully add. I would, however, refer to and, with respect, adopt the following passage from the judgment of Phillips J in Egg Stores (Stamford Hill) Ltd. v Leibovici (1977) ICR 260 at page 265: "It is impossible to divide into two kinds the events relied upon as bringing about the frustration of a short-term periodic contract of employment. There may be an event (e.g. a crippling accident) so dramatic and shattering that everyone concerned will realise immediately that to all intents and purposes the contract must be regarded as at an end. Or there may be an event, such as illness or accident, the course and outcome of which is uncertain. It may be a long process before one is able to say whether the event is such as to bring about the frustration of the contract. But there will have been frustration of the contract, even though at the time of the event the outcome was uncertain, if the time arrives when, looking back, one can say that at some point (even if it is not possible to say precisely when) matters had gone on for so long, and the prospects for the future were so poor, that it was no longer practical to regard the contract as still subsisting." In the present case, that time arrived when, following the medical report, as the judge found, both sides accepted that the appellant was not going to work again. From that moment, at the latest, the frustration of their contract was established, so that the service thereafter of a notice purporting to terminate his employment was otiose and of no legal effect. Order: Appeal dismissed; legal aid taxation of appellant's costs; appellant to pay-costs limited to amount of his contribution when known; order to lie in the office for ten weeks; leave to appeal to the House of Lords refused. 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