The Court of Appeal in Mackenzie v AA recently held that, when assessing damages for wrongful dismissal claims, the court should assume that the employer would have chosen the least burdensome method of lawfully terminating the contract.
In this case, the claimant (the chief executive of AA) had an employment contract which listed three different ways that his contract could be terminated:
1. dismissal without notice for gross misconduct;
2. 12 months’ notice (during which time he would receive benefits and be eligible for a bonus); or
3. payment in lieu of notice (PILON) limited to basic salary and holiday pay only.
The claimant was involved in an unprovoked assault on a colleague during a work away-day and a week later tried to resign from his position with immediate effect. The AA refused to accept this and instead opted to dismiss the claimant without notice on the grounds of gross misconduct.
The claimant argued that his conduct did not amount to gross misconduct. He brought a number of claims including wrongful dismissal seeking damages comprising of his loss of earnings during the 12-month notice period including the value of ancillary benefits, loss of a discretionary bonus (that he would have received during his notice period) and loss of shares.
The AA argued that, if it was in breach by summarily dismissing, any damages should be assessed on the assumption that it would have exercised its right to terminate the claimant’s employment in the last burdensome manner.
In this case, that meant exercising the PILON clause in the contract, which expressly limited the PILON payment to basic salary and holiday pay, so preventing the claimant from recovering bonus payment and ancillary benefits.
The High Court struck out this part of Mr Mackenzie’s claim as having no real prospect of success and the Court of Appeal agreed. It held that it remained good law that when assessing damages the court will assume that the employer would choose the ‘least burdensome’ method of terminating a contract.
In this case, the least burdensome method of terminating would have been to rely on the PILON clause (which did not include payment for benefits other than salary). The court said it was implausible for Mr Mackenzie to suggest that it would have been less burdensome to give him 12 months’ notice and place him on sick leave (he was signed off sick prior to dismissal) pending the uncertain prospect of his return to work.
There may be some cases in which the courts need to conduct a factual enquiry into what the least burdensome mode of performance would be.
However, the courts will not entertain any arguments about the claimant’s loss of other benefits (such as entitlement to a bonus) if there is a clear contractual entitlement to terminate on less burdensome terms.
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