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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Hall v Woolston Hall Leisure Ltd [2000] EWCA Civ 170 (23 May 2000)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/170.html
Cite as: [2001] 1 WLR 225, [2000] EWCA Civ 170, [2000] IRLR 578, [2001] WLR 225, [2001] ICR 99, [2000] 4 All ER 787
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Case No: EATRF/1998/0297
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EMPLOYMENT APPEAL TRIBUNAL
Royal Courts of Justice
Strand, London, WC2A 2LL
Tuesday 23 May 2000
LORD JUSTICE PETER GIBSON
LORD JUSTICE MANCE
and
MR. JUSTICE MOORE-BICK
HALL |
Appellant | |
- and - |
||
WOOLSTON HALL LEISURE LIMITED |
Respondent |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
__________________________________
Mr. Andrew Hochhauser Q.C. and Mr. Charles Ciumei (instructed by Messrs. Stanley Tee & Co. of Bishops Stortford for the Appellant)
The Respondent did not appear and was not represented
Miss Monica Carss-Frisk (instructed by the Treasury Solicitor) appeared as Amicus Curiae
__________________________________
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE PETER GIBSON:
1. This appeal gives rise to an issue of some general importance: where the performance by the employer of a contract of employment involves illegality of which the employee is aware, does public policy bar the employee, when discriminated against on the ground of her sex by dismissal by the employer in contravention of the Sex Discrimination Act 1975 ("the 1975 Act"), from recovering compensation under the 1975 Act?
The facts
2. It is an appeal by the Applicant, Jill Hall, who was employed by the Respondent, Woolston Hall Leisure Ltd. ("the Employer"), as a sous chef from 15 July 1994 and later as head chef at Epping Forest Golf Club until she was dismissed on 1 March 1995. In early 1995 the Employer's managing director, Mr. Pomfrett, was made aware that she was pregnant. She was dismissed, ostensibly on grounds of redundancy and incapability. She applied to an Industrial Tribunal, alleging that the true reason for her dismissal was her pregnancy and that she was being discriminated against on the basis of that pregnancy. By a decision promulgated on 5 June 1996 the Tribunal found that she was unlawfully discriminated against on the ground of her sex contrary to s. 6(2)(b) of the 1975 Act as she would not have been dismissed had she not been pregnant and that she had therefore been treated less favourably by the Employer than it would have treated a man. Mrs. Hall had also complained of unfair dismissal, but having heard the Tribunal's decision she withdrew that complaint.
3. Mrs. Hall's application was then adjourned to a remedies hearing. At that hearing, as at the earlier hearing, Mrs. Hall had only a lay representative appearing for her and although given an opportunity to seek professional representation she opted to go ahead with her lay representative. At the adjourned hearing the Employer through its counsel took the point that the contract of employment was tainted with illegality and that Mrs. Hall could recover nothing. The jurisdiction of the court to hear the claim was questioned. But counsel for the Employer eventually conceded that the Tribunal had jurisdiction to deal with compensation for loss and injury to feelings and, in the light of the decision of the Employment Appeal Tribunal ("the EAT") in Leighton v Michael [1995] I.C.R. 1091, the Tribunal, with some hesitation, accepted that it had jurisdiction to hear a claim for compensation under the 1975 Act.
4. Evidence was given by Mrs. Hall that on her promotion she negotiated a pay rise. She asked for £250 per week net of deductions and that is what she received in cash from the Employer. The weekly payslips which accompanied her pay, however, showed gross pay of £250, deductions of £63.35, and a net sum paid of £186.65. She said that when she queried this with Mr. Pomfrett, he said "It's the way we do business". She further said that she was 5 months pregnant when dismissed, and was very upset by the dismissal, already having two children to look after, and was worried about coping. Mrs. Hall's evidence was accepted by the Tribunal.
5. The Tribunal in its decision promulgated on 3 December 1996 made the following holding:
"We hold that the contract of employment was tainted with illegality. Mrs. Hall was turning a blind eye to the fact that the Respondents were not paying tax on part of her income. Where the payslips differed from the money she received each week there is only one logical conclusion, namely that there was an intention by the Respondents not to pay all the tax that was due. Indeed Mrs. Hall was told by the Respondents that was the way they did business and she in our view knew that the Inland Revenue were being defrauded."
6. The Tribunal accepted the Employer's submissions that as Mrs. Hall was not entitled to enforce the contract whilst it was running, she had no legal rights that were destroyed when the contract was brought to an end. Consequently it held that she suffered no loss and was not entitled to compensation under the 1975 Act. However it awarded £2,000 for injury to feelings.
7. Mrs. Hall appealed to the EAT. For the first time at the appeal hearing on 5 February 1998 she was represented by counsel. But the Employer had ceased to trade on 31 January 1998 and did not appear. His Honour Judge Peter Clark, giving the judgment of the EAT ([1998] I.C.R. 651 at p. 653), referred to the decision of the EAT in Leighton v Michael that the fact that a contract of employment was tainted with illegality did not prevent the entertaining of a complaint of sex discrimination. Judge Peter Clark expressed the EAT's doubts about the correctness of the decision in Leighton v Michael, but said that in the interests of comity the EAT did not depart from the principle there laid down. However he went on to say (at p. 654):
"It is a basic principle of the administration of justice that the court will not lend itself to enforcing an illegal contract involving a fraud on the revenue. To order compensation for loss of earnings, based on a contract of employment performed illegally to the knowledge of the claimant, offends that principle."
The EAT accordingly dismissed the appeal.
8. Mrs. Hall then appealed to this court with the leave of the EAT. That appeal first came on for hearing on 15 October 1999 when Mr. Hochhauser Q.C. and Mr. Ciumei appeared for Mrs. Hall. She has had the advantage of them and their instructing solicitors appearing for her pro bono. The Employer again was not represented. We had the benefit of full argument from Mr. Hochhauser, but we took the view that because of the general importance of the points taken on behalf of Mrs. Hall we should seek the assistance of an amicus. Consequently the hearing was adjourned. Regrettably it has not been possible to have the adjourned hearing until 7 April, when we have had the assistance of Miss Carss-Frisk as amicus. We are most grateful to her, as we are to Mr. Hochhauser, for the admirable arguments which have been presented to us. To save time we called for a transcript of the earlier hearing, and we have treated what was said then as having been repeated to us at this adjourned hearing, to which Mr. Hochhauser added some further submissions, before we heard Miss Carss-Frisk's submissions.
9. Before I turn to those submissions, let me set out the statutory background.
The 1975 Act
10. S. 1 (1) of the 1975 Act provides:
"A person discriminates against a woman in any circumstances relevant for the purposes of any provision of this Act if -
(a) on the ground of her sex he treats her less favourably than he treats or would treat a man ...."
11. Part II of the 1975 Act deals with discrimination in the employment field. By s. 6(2):
"It is unlawful for a person, in the case of a woman employed by him at an establishment in Great Britain, to discriminate against her -
....
(b) by dismissing her ...."
12. By s. 41 anything done by an employee in the course of his employment is to be treated for the purposes of the 1975 Act as done by his employer as well as by him.
13. In Part VII the enforcement provisions of the 1975 Act are to be found. S. 63 gives jurisdiction to the Tribunal to entertain complaints of discrimination. By s. 65(1):
"When an industrial tribunal finds that a complaint presented to it under section 63 is well-founded the tribunal shall make such of the following as it considers just and equitable -
....
(b) an order requiring the respondent to pay to the complainant compensation of an amount corresponding to any damages he could have been ordered by a county court .... to pay to the complainant if the complaint had fallen to be dealt with under section 66 ...."
14. By s. 66(1):
"A claim by any person ("the claimant") that another person ....
(a) has committed an act of discrimination against the claimant which is unlawful by virtue of Part III, or
(b) is by virtue of section 41 .... to be treated as having committed such an act of discrimination against the claimant,
may be made the subject of civil proceedings in like manner as any other claim in
tort ...."
15. The 1975 Act contains no public policy defences.
The Directive
16. The Equal Treatment Directive (Council Directive No. 76/207/EEC) ("the Directive") is also in point. This provides (so far as is relevant):
"Article 1
1 The purpose of this Directive is to put into effect in the Member States the principle of equal treatment for men and women as regards access to employment .... and as regards working conditions ....
....
Article 2
1 For the purposes of the following provisions, the principle of equal treatment shall mean there shall be no discrimination whatsoever on grounds of sex either directly or indirectly ....
....
Article 5
1. Application of the principle of equal treatment with regard to working conditions, including the conditions covering dismissal, means that men and women shall be guaranteed the same conditions without discrimination on grounds of sex.
....
Article 6
Member States shall introduce into their national legal systems such measures as are necessary to enable all persons who consider themselves wronged by failure to apply to them the principle of equal treatment within the meaning of Articles 3, 4 and 5 to pursue their claims by judicial process after possible recourse to other competent authorities."
17. Mr. Hochhauser submits that the Tribunal and the EAT erred in law in refusing to award compensation for the unlawful discrimination of the Employer in dismissing Mrs. Hall. Miss Carss-Frisk, approaching the matter objectively as an amicus, has also felt impelled to make submissions that the appeal should be allowed. In the absence therefore of argument from the Employer, we have had to consider with care whether the reasoning of the Tribunal and the EAT could be sustained. But I am satisfied that it cannot.
The Directive
18. I start with the Directive, as even though Mrs. Hall cannot rely on it directly, the Employer not being an emanation of the State, the Tribunal must interpret the national law in the light of the wording and purpose of the Directive and, so far as possible, give effect to the Directive (see, for example, Marleasing S.A. v La Comercial International de Alimentacion S.A. [1990] E C R I-4135 at I-4159 para. 8). The Directive unambiguously guarantees the principle of fair treatment between men and women with regard to working conditions (Article 5 (1)). Moreover by Article 6 it requires the national legal systems to provide effective redress for breaches of the principle. As was said by the European Court of Justice in Von Colson v Land Nordrhein-Westfalen [1984] ECR 1891 at p. 1907 para 18:
"It follows from [Article 6] that Member States are required to adopt measures which are sufficiently effective to achieve the objective of the directive to ensure that those measures may in fact be relied upon before the national courts by the persons concerned."
Further at p. 1908 para. 23:
"Although .... full implementation of the directive does not require any specific form of sanction for unlawful discrimination, it does entail that the sanction be such as to guarantee real and effective judicial protection. Moreover it must also have a real deterrent effect on the employer."
19. The procedural rules of a Member State governing actions for safeguarding rights which individuals derive from Community law must "not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness)" (Levez v T H Jennings Ltd. [1998] I.C.R. 521 at p. 541 para. 18). Further, given that financial compensation is a measure adopted by the United Kingdom to redress any sex discrimination, the European Court of Justice has stated that "it must be adequate in that it must enable the loss and damage actually sustained as a result of the discriminatory dismissal to be made good in full in accordance with the applicable national rules" ( Marshall v Southampton Area Health Authority (No. 2) [1993] ICR 893 at p. 932 para. 26).
20. The Directive, therefore, requires the United Kingdom to give real and effective judicial protection to victims of sex discrimination at work and to provide a sanction with a real deterrent effect on the employer. The 1975 Act, although passed before the Directive, is the means by which the United Kingdom gives effect to its Directive obligations.
21. Can a Member State's national law derogate from the requirements of the Directive? The "basic principle" to which Judge Peter Clark referred in the passage cited in para. 7 above is founded on public policy. Is the national court when faced with a claim under the 1975 Act allowed to give effect to public policy considerations? Mr. Hochhauser and Miss Carss-Frisk submitted that those questions should be answered in the negative.
22. The Directive only refers to the possibility of derogation by a Member State in one particular respect not material to the present case (see Article 2 (2) which allows Member States to exclude from the Directive's field of application certain occupational activities and the training leading thereto). The EC Treaty provides for particular public policy derogations by Member States (see for instance Articles 39 (3) and 46 (1) of the Treaty as amended), but none that is relevant to the present case.
23. In Johnston v RUC [1987] ICR 83 the RUC sought to justify its decision not to employ women as armed full-time members of the Reserve on the grounds of public safety. But the European Court of Justice rejected the argument that the Directive was subject to a public safety proviso. It said (at p. 102):
"26. .... If every provision of Community law were held to be subject to a general proviso, regardless of the specific requirements laid down by the provisions of the E.E.C. Treaty, this might impair the binding nature of Community law and its uniform application.
27. It follows that the application of the principles of equal treatment for men and women is not subject to any general reservation as regards measures taken on grounds of the protection of public safety ...."
24. To the same effect were the decisions of the European Court of Justice in Sirdar v Army Board [2000] I.C.R. 130 and Kreil v Bundesrepublik Deutschland, unreported, 11 January 2000, where it was held that the exclusion of women from the German armed services could only be justified by reference to the specific derogation in Article 2(2) of the Directive.
25. In Draehmpaehl v Urania Immobilienservice [1998] I.C.R. 164 the question was whether German legislation, which made awards of compensation for sex discrimination conditional on proof of fault by the employer, was compatible with the Directive. The European Court of Justice held that it was not. It said that any breach of the prohibition of discrimination must in itself be sufficient to render the employer fully liable and that the Directive did not provide for any ground of exemption from liability and did not make compensation conditional on the existence of fault.
26. The reasoning of the European Court of Justice in the cases to which I have referred suggests that there can be no derogation from the Directive on the ground of public policy, no relevant derogation having been provided for in the Directive or in the EC Treaty. That would accord with the recognition in Defrenne v Sabena [1978] ECR 1365 at p. 1378 paras. 26 and 27 that the elimination of discrimination based on sex formed part of the fundamental personal human rights respect for which is one of the general principles of Community law. But no case has been drawn to our attention where it has been held that there can never be any derogation from the Directive on the ground of public policy. It is possible to think of circumstances, no doubt extreme, where it may be open to question whether the Directive was intended to confer protection (for example the dismissal on the ground of sex of an employee of the Mafia). The point raised is of wide significance, but it is one on which we have heard only one side of the argument. Unless the English law on illegality denies Mrs. Hall, in the far from extreme circumstances of her case, an effective remedy for the discrimination against her on the ground of her sex (and, for the reasons to which I am about to come, I have concluded that it does not), I would prefer not to express a concluded view on that point.
27. Miss Carss-Frisk also raised an argument based on Article 6 of the European Convention on Human Rights. But again in the circumstances I prefer not to say anything on this point, which may be one of significance in other cases relating to a right not governed by European Community law (for example a complaint of race discrimination).
Illegality under English law
28. 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 in Holman v Johnson (1775) 1 Cowp 341 at p. 343:
"No court will lend its aid to a man who founds his cause of action upon an immoral or 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 then the court says he has no right to be assisted."
29. 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).
30. 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 Corp. v Joseph Rank Ltd. [1957] 1 Q.B. 267 at p. 283 per Devlin J.)
31. 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 Ltd. v Dawson Ltd. [1973] 1 W.L.R. 828 Lord Denning M.R. (at p. 833) 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 L.J. (at p. 836):
"But knowledge by itself is not enough. There must be knowledge plus participation .... For those reasons I think the performance was illegal."
32. In the employment law field the test of knowledge plus participation has also been recognised for illegality to be a defence. Thus in Davidson v Pillay [1979] I.R.L.R. 275 Slynn J., giving the judgment of the EAT, referred to Tomlinson v Dick Evans "U" Drive Ltd. [1978] I.R.L.R. 77 as a case where the employer and employee were parties to a deliberate fraud on the Revenue and the employee could not rely upon an illegal contract. He said (at p. 77 para. 3):
"We follow and accept the decision in that case as properly stating the law where both the employer and employee are a party to the illegality and have knowledge of it."
33. In Coral Leisure Group Ltd. v Barnett [1981] I.C.R. 503 the EAT at p. 508 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 EAT 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.
34. In Newland v Simons & Willer (Hairdressers) Ltd. [1981] I.C.R. 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 ("NIC") in respect of her wages. The majority of the EAT 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 at p. 533 May J. said:
"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."
35. In Hewcastle Catering Ltd. v Ahmed [1992] I.C.R. 626 the employer, a club proprietor, had devised a scheme fraudulently to avoid VAT, and the employee waiters were required to implement the scheme. After giving evidence for the prosecution, the waiters were dismissed. They complained to a tribunal. The employer alleged that the contracts of employment were tainted with illegality and that the waiters knowingly participated in the fraudulent evasion of tax. The tribunal found that the waiters were unfairly dismissed. The EAT dismissed the employer's appeal, as did this court. Beldam L.J. (at p. 637) took into account a number of factors which would lead a court to conclude that public policy did not preclude the waiters' claim. They were that the obligation to make VAT returns and keep proper records was that of the employer, that the contract of employment was not one by which the employee was engaged to assist in the fraud, that to deny an employee the right to claim compensation could well discourage disclosure of the fraud, that the steps taken by the waiters and the implementation of the fraudulent scheme were not essential or significant and that (applying the test of an affront to public conscience) there would be no such affront in giving the waiters relief. The test of an affront to public conscience was subsequently held by the House of Lords in Tinsley v Milligan [1994] 1 AC 340 to be an inappropriate test. Nevertheless the other factors which weighed with Beldam L.J. are proper considerations to be taken into account in determining whether the defence of illegality should prevail.
36. In Salvesen v Simons [1994] ICR 409 the EAT had to consider whether the payment, pursuant to an arrangement between employer and employee, of part of the employee's salary without deduction of tax and NIC rendered a contract illegal and unenforceable with the result that the employee could not pursue a claim for constructive dismissal. The EAT held that it was unenforceable. Lord Coulsfield (at p. 424) said that the ex turpi causa rule, being based on public policy, should be applied pragmatically and fairly, even in cases where the claim was directly founded upon a contract tainted with illegality. But in that case the employee, although innocent of deliberate illegality, had suggested the arrangement which was made, and so it was held that the contract of employment should be treated as unenforceable.
37. The next case to which I should refer is Johal v Adams, an unreported decision of the EAT on 11 January 1996. In that case part of the remuneration of the employee was paid by the employer in cash to defraud the Revenue. The Tribunal found the employee knew of the fraud and, although not very happy, had acquiesced in the arrangement. The Tribunal held that the contract of employment was unenforceable. On appeal to the EAT, Judge Peter Clark said that Salvesen v Simons was a case where it was held that a party to an illegal contract who knew what was being done could not pursue a complaint of unfair dismissal founded on the contract. He further said that in employment cases it had traditionally been held that complaints of unfair dismissal were based upon the contract of employment. The EAT therefore dismissed the appeal in relation to the complaint of unfair dismissal. It also dismissed a racial discrimination complaint on the ground that the detriment alleged was the employee's dismissal and the Judge said that because dismissal was an essential ingredient of the employee's complaint, the practice in relation to unfair dismissal also applied, the complaint being founded on the contract of employment.
38. With all respect to the Judge, his view of the unfair dismissal cases is an over-simplified one. In cases where the contract of employment is neither entered into for an illegal purpose nor prohibited by statute, the illegal performance of the contract will not render the contract unenforceable unless in addition to knowledge of the facts which make the performance illegal the employee actively participates in the illegal performance. It is a question of fact in each case whether there has been a sufficient degree of participation by the employee. And as Coral Leisure Group shows, even if the employee has in the course of his employment done illegal acts he may nevertheless be able subsequently to rely on his contract of employment to enforce his statutory rights. The Salvesen case on its facts was not a case of mere knowledge of the facts constituting illegality: the employee's involvement was much greater. The Hewcastle case shows some of the factors which may be relevant to determining whether the statutory employment rights conferred on an employee are not to be defeated by illegality in the performance of the contract of employment.
39. I turn next to illegality as a defence in relation to a claim in tort. In Clunis v Camden and Islington Health Authority [1998] QB 978 this court specifically held that the defence applies in cases of tort, Beldam L.J. at p. 987 saying:
"We do not consider that the public policy that the court will not lend its aid to a litigant who relies on his own criminal or immoral act is confined to particular causes of action."
40. But in Standard Chartered Bank v Pakistan National Shipping Corp., unreported, 3 December 1999, Evans L.J. said at para. 44 that the authorities supported the pragmatic approach described by Bingham L.J. in Saunders v Edwards [1987] 1 W.L.R. 1116 at p. 1134:
"When the plaintiff's action in truth arises directly ex turpi causa, he is likely to fail .... Where the plaintiff has suffered a genuine wrong, to which the allegedly unlawful conduct is incidental, he is likely to succeed."
In Saunders v Edwards the fraud against the Revenue perpetuated by the plaintiff was not considered a bar to his suing the defendant for the consequences of the defendant's fraud. Evans L.J. said in Standard Chartered at para. 53 that the harshness of the application of the defence meant that it was likely to be applied sparingly so as not to defeat in particular cases what were perceived to be just or genuine claims.
41. In Markesinis and Deacon: Tort Law 4th ed. (1998) p. 710 it is said that for the defence to apply it is necessary to show that there was a causal link between the illegality in which the claimant was implicated and the loss of which he is now complaining. That is supported by the decision of this court in Cross v Kirkby, unreported, 18 February 2000. Beldam L.J., with whom Otton L.J. agreed, said (at para. 76) that for the ex turpi causa principle to operate, the claim made by the claimant must arise out of criminal or illegal conduct on his part, a causal connection between the illegal conduct and the claim being necessary. He continued:
"In my view the principle applies when the claimant's claim is so closely connected or inextricably bound up with his own criminal or illegal conduct that the court could not permit him to recover without appearing to condone that conduct."
In a similar vein Judge L.J. (at para 103) said:
"In my judgment, where the claimant is behaving unlawfully, or criminally, on the occasion when the cause of action in tort arises, his claim is not liable to be defeated ex turpi causa unless it is also established that the facts which give rise to it are inextricably linked with his criminal conduct."
42. As ss. 65 and 66 of the 1975 Act indicate, sex discrimination which is unlawful under the 1975 Act is a statutory tort, to which the tortious measure of damages is applicable if the remedy in s. 65 (1)(b) is that chosen by the Tribunal as being the just and equitable remedy (see Ministry of Defence v Cannock [1994] I.C.R. 918 at pp. 936-7). It therefore follows that the correct approach of the Tribunal in a sex discrimination case should be to consider whether the applicant's claim arises out of or is so clearly connected or inextricably bound up or linked with the illegal conduct of the applicant that the court could not permit the applicant to recover compensation without appearing to condone that conduct.
43. Leighton v Michael [1995] I.C.R. 1091 was a case before the EAT under the 1975 Act. The employee worked in a fish and chip shop, first for employers, who properly deducted tax and NIC from her wages, and then, when the business was sold, for a new employer. He refused to make such deductions, despite her complaint, and when she had additional earnings for additional work, she knew that deductions should have been made, but were not, from the earnings. After 9 months she left her employment. She claimed sexual harassment and victimisation on the basis that she was dismissed because her solicitors wrote a letter of complaint just before she left. The Tribunal dismissed her claims because the carrying out of her contract of employment involved a fraud on the Revenue and because she was not entitled to rely on her contract by reason of the illegality to which she was a party.
44. The EAT allowed the employer's appeal. One member did not regard the employee as knowingly a party to a fraud on the Revenue. The majority in their reasons given by Mummery J. at p. 1087 accepted that where the employee's claims are directly founded upon a contract knowingly tainted with illegality, they will be treated as unenforceable on the ground of public policy. At p. 1098 they distinguished cases in which an illegal contract of employment has been held to disqualify applicants for unfair dismissal and redundancy payments, being cases founded on the contract of employment, from claims under the 1975 Act, saying:
"(11) Protection under the Act of 1975 against sex discrimination involves a reference to the contract to determine whether the person is "employed" within the meaning of the statute, but the claim of sex discrimination does not involve enforcing, relying on or founding a claim on the contract of employment. In brief, the right not to be discriminated against on the grounds of sex is conferred by statute on persons who are employed. There is nothing in the statute to disqualify a person, who is in fact employed, from protection by reason of illegality in the fact of, or in the performance of, the contract of employment. There is nothing in public policy to disqualify a person from the protection of the statute, if the claim to the statutory protection is not founded on, or is not seeking to enforce, contractual obligations."
45. Judge Peter Clark has made plain his disquiet with the distinction drawn in Leighton v Michael. He did so both in the present case and also in another decision of the EAT, Chilton v HM Prison Service, unreported, 15 July 1999, where he said:
"We have grave reservations as to the correctness of Leighton. We are unable to appreciate the distinction between statutory claims of unfair dismissal and sex discrimination for the purposes of applying the public policy doctrine of illegality. Both statutory causes of action depend upon the contract as a prerequisite for the claim."
46. It is undoubtedly correct that where the complaint is of sex discrimination by dismissing an employee, the employee must establish that she was employed and was dismissed from that employment, so that to that extent reliance must be placed on the contract of employment. But in my judgment it could not properly be said that the complaint of sex discrimination by dismissal was based on the contract of employment, still less that her claim of such discrimination was so closely connected with or inextricably bound up or linked with the acquiescence by the employee in the unlawful failure by the employer to deduct PAYE and NIC that the court would be seen to be condoning unlawful conduct by the employee. It is the sex discrimination that is the core of the complaint, the fact of employment and the dismissal being the particular factual circumstances which Parliament has prescribed for the sex discrimination complaint to be capable of being made. The illegality consists only of the employer's mode of paying wages. In my judgment Leighton v Michael was rightly decided and the awareness of the employee that the employer was failing to deduct tax and NIC and to account to the Revenue does not of itself constitute a valid ground for refusing jurisdiction.
47. In the present case, the employment contract of Mrs. Hall at its inception and on its variation when she successfully bargained for increased wages on her promotion was entirely lawful. It did not incorporate a term that adopted the subsequent illegality. When on performance of the varied contract by the Employer the illegality appeared in the form of the false payslip, Mrs. Hall queried it. The obligation to pay PAYE and NIC rested on the Employer (in the absence of a direction from the Revenue that Mrs. Hall was to account for the tax and NIC: see I.R.C. v Herd [1993] 1 WLR 1090). There was no active participation by her in the illegality. With the aid of counsel we have considered whether Mrs. Hall herself was guilty of any illegality under the fiscal legislation, or at common law by reason of the offence of cheating the public revenue, but I have seen nothing that shows that she herself was guilty of any unlawful conduct. No benefit is shown to have been received by her from the Employer's failure to deduct tax and NIC and to account for the same to the Revenue. Her acquiescence in the Employer's conduct, which is the highest her involvement in the illegality can be put, no doubt reflects the reality that she could not compel the Employer to change its conduct. That aquiescence is in no way causally linked with her sex discrimination claim. In the circumstances it would seem to me to be deplorable if someone in the position of Mrs. Hall were left by English law unable to enforce her statutory claim. I am glad to be able to reach the conclusion that that is not the law and that public policy does not so require.
48. This conclusion seems to me supported by the Directive. A person in Mrs. Hall's position is to my mind clearly within the ambit of the Directive, designed as it was to protect employees being discriminated against on the ground of their sex. The dismissal of Mrs. Hall because of her pregnancy contravenes the purpose of the Directive, which also supports her not being denied an effective remedy under the 1975 Act.
49. In my judgment the Tribunal and the EAT failed to adopt the correct approach to the claim in respect of the statutory tort under the 1975 Act. I would add that for similar reasons the decision by the EAT to dismiss the racial discrimination claim in Johal v Adams was in my view wrong.
Conclusion
50. For these reasons, which owe much to Mr. Hochhauser's and Miss Carss-Frisk's lucid submissions, I would allow this appeal and set aside the determination made by the Tribunal at the remedies hearing. I would remit Mrs. Hall's application to the Tribunal to determine the compensation to which she is entitled, if possible to the same Tribunal as heard her application, though I recognise that after this lapse of time that may not be possible.
LORD JUSTICE MANCE:
51. By decision sent to the parties on 5th June 1996 (albeit dated on its last page 23rd December 1996), the Industrial Tribunal held that the appellant, Mrs Hall, had been unlawfully discriminated against on the grounds of her sex, by being dismissed by the respondent from her post as head chef at Epping Forest Golf Club on 1st March 1995 because she was pregnant. A remedies hearing was fixed for 8th November 1996. By decision dated 3rd December 1996 the Tribunal, after considering Leighton v. Michael [1995] ICR 1091 (EAT) held, with some hesitation, that it had jurisdiction to hear Mrs Hall's claims for damages for injury to feelings and financial loss, awarded her £2,000 on the former account but held that her contract of employment was tainted by illegality, and therefore that
"... as she was not entitled to enforce the contract whilst it was running, she had no legal rights that were destroyed when the contract was brought to an end. Consequently she suffered no losses in law and is not entitled ... to any compensation under s. 65 of the Sex Discrimination Act 1975".
52. On 5th February 1998 the Employment Appeal Tribunal upheld this decision. Neither before it nor before us was the respondent employer represented, having ceased to trade in January 1998. Although we have had the considerable benefit of Miss Carss-Frisk's assistance as amicus curiae, as well as Mr Hochhauser's submissions for Mrs Hall, we have not heard argument supporting the submissions which counsel for the employer persuaded the Industrial Tribunal to accept.
53. The nature of the illegality which the Tribunal found and which in its view tainted the contract of employment has been set out in the judgment given by Peter Gibson L.J. There was nothing illegal about Mrs Hall's contract when she was first appointed sous chef on 15th July 1994, or when it was varied by her promotion to head chef in or about September 1994 at an increased pay of £250 per week net of deductions. There is nothing necessarily wrong or illegal in agreeing to pay an employee a sum net of deductions: see Miller v. Karlinski (1945) 62 TLR 85, 86 per du Parcq LJ cited in Newland v. Simons & Willer Ltd. [1981] ICR 521, 527D-E. After her pay increase, however, although Mrs Hall received £250 net as agreed, she noticed that her pay slips showed a gross pay of £250 and a net pay of £186.65, with deductions purportedly made of £63.35 per week. On querying this with the respondent she was told simply "It's the way we do business". So matters continued, evidently, for some 5 or so months. The Industrial Tribunal held that Mrs Hall was turning a blind eye to the fact, and knew, that the Revenue was being defrauded.
54. In Leighton v. Michael the Employment Appeal Tribunal was concerned with an initial question of jurisdiction, whether it was open to an employee to pursue any claim for sex discrimination in circumstances where her contract of employment was illegal (the illegality in that case being taken by the majority to arise not merely from continuing to receive pay in the knowledge that no deductions were being made, but also from beginning a new job peeling potatoes in the knowledge that no such deductions would be made). The majority held that, although under the Sex Discrimination legislation (see ss. 6(2) and 81(2) of the 1975 Act), employment by reference to a contract is a factual pre-condition to the form of sex discrimination claim pursued in both that case and this, the claim is conferred by statute and does not involve enforcing, relying on or founding a claim on the contract of employment (p.1098, para.11). In Leighton v. Michael the claim included by amendment a claim of discrimination by dismissal (see p.1095F-G). The judgment does not suggest that this claim might have to be disregarded when remedies came to be considered, but the argument that it might require special treatment was evidently not mooted, at least at the preliminary stage reached in that case.
55. We are in this case faced with a half way situation, in so far as the Industrial Tribunal has held that it had jurisdiction to make a limited award of compensation, despite the illegality which it identified, but has refused damages for financial loss flowing from the dismissal. Although there has been no appeal challenging Mrs Hall's right to seek any compensation at all, it is impossible to avoid looking at the position overall in considering the impact of the suggested illegality on her claim under the 1975 Act. But I do not doubt that English law recognises situations in which a claimant will be barred on grounds of illegality from pursuing a particular head of relief, rather than the whole of his or her claim. An example from a different area is provided by Hunter v. Butler (CA, 19 December 1995, ref. C0003516, unreported). See also Meah v. McCreamer [1985] 1 AER 367; and [1986] 1 AER 943 (No.2), 951, the relevant passages from which were cited in Clunis v. Camden and Islington Health Authority [1998] 2 WLR 902, 911C-F.
56. Whether and to what extent Mrs Hall can in the present case claim compensation for her financial loss is a matter of domestic law, which depends upon the construction of the Sex Discrimination Act 1975 and the application of principles of common law. However, both the construction of the Act and the identification or development of relevant common law principles may be influenced by sources which do not, presently at least, form part of domestic law. They are, first, Council Directive No. 76/207/EEC and, secondly, article 6 of the Human Rights Convention. The close relationship between the Directive and the 1975 Act was highlighted in both the European Court of Justice's reasoning in Coote v. Granada Hospitality Ltd. [1999] ICR 100, 112, esp. at para. 18 and the subsequent Employment Appeal Tribunal decision [1999] IRLR 452. Although, technically, the Act preceded the Directive by two months, the Directive was at the time in draft, and the UK Government has introduced no other measure to give effect to it on the basis that the Act constitutes compliance with the Directive. The Act is, in the European Court of Justice's terms, to be viewed as "specially introduced in order to implement the Directive".
57. The Directive cannot be relied upon as creating any rights directly enforceable in the present case, since the respondent is a private sector employer: see Coote [1999] ICR at p.111, para. 17. But, it has been stated repeatedly by the European Court of Justice that:
"... The Member States' obligation arising from a directive to achieve the result envisaged by the directive and their duty under Article 5 of the Treaty [of Rome] to take all appropriate measures, whether general or particular, to ensure the fulfilment of that obligation is binding on all the authorities of the Member State including, for matters within their jurisdiction, the courts. It follows that, in applying the national law and in particular the provisions of a national law specifically introduced in order to implement Directive No 76/207, national courts are required to interpret their national law in the light of the wording and the purpose of the directive in order to achieve the result referred to in the third paragraph of Article 189".
58. The quotation is from paragraph 26 of the Court's decision in Von Colson v. Land Nordrhein-Westfalen [1984] ECR 1891, 1909. The reference to the third paragraph of article 189 is to the provision in the Treaty making directives binding as to the result to be achieved on all member states, but leaving to national authorities the choice of forum and methods. In Marleasing SA v. La Comercial Internacional de Alimentacion SA [1990] ECR I-4135, paras. 7 and 8, the Court, after repeating the substance of the first sentence of the above quotation, went on:
"... It follows that, in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and therefore comply with the third paragraph of Article 189 of the Treaty."
59. The principle of interpretation of national law "as far as possible" in conformity with the wording and purpose of the Directive may represent a precursor to the approach to statutory construction which will from 2nd October 2000 be mandatory in the context of human rights (Human Rights Act 1998, s.3(1)). The principle was reiterated by the Court in Coote [1999] ICR 100, 111-2, para. 18 and is illustrated by the reasoning adopted when the matter returned to the Employment Appeal Tribunal: [1999] IRLR 452.
60. The Directive provides:
"Article 1
1. The purpose of this Directive is to put into effect in the Member States the principle of equal treatment for men and women as regards access to employment, including promotion, and to vocational training and as regards working conditions ....
Article 2
1. For the purposes of the following provisions, the principle of equal treatment shall mean that there shall be no discrimination whatsoever on grounds of sex either directly or indirectly by reference in particular to marital or family status.
Article 3
1. Application of the principles of equal treatment means that there shall be no discrimination whatsoever on grounds of sex in the conditions, including selection criteria, for access to all jobs or posts ... and to all levels of the occupational hierarchy.
2. To this end, Member States shall take the measures necessary to ensure that: (a) any laws, regulations and administrative provisions contrary to the principle of equal treatment shall be abolished; ....
Article 5
1. Application of the principle of equal treatment with regard to working conditions, including the conditions governing dismissal, means that men and women shall be guaranteed the same conditions without discrimination on grounds of sex.
Article 6
Member States shall introduce into their national legal systems such measures as are necessary to enable all persons who consider themselves wronged by failure to apply to them the principle of equal treatment within the meaning of Articles 3, 4 and 5 to pursue their claims by judicial process after possible recourse to other competent authorities."
61. In Coote, para. 20, the European Court of Justice also said with reference to article 6 that:
"It follows from that provision that the member states must take measures which are sufficiently effective to achieve the aim of the Directive and that they must ensure that the rights thus conferred can be effectively relied upon before the national courts by the persons concerned."
62. The Court went on:
"The requirement laid down by that article that recourse be available to the courts reflects a general principle of law which underlies the constitutional traditions common to the member states and which is also enshrined in article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms of 4 November 1950 (1953) Cmnd. 8969): see in particular Johnston v. Chief Constable of The Royal Ulster Constabulary (Case 222/84) [1987] ICR 83, 100, para. 18."
63. Any indirect assistance which the present applicant might obtain from article 6 of the Human Rights Convention, before provisions of that Convention are directly incorporated in domestic law, is thus subsumed within the principles of European law to be derived from Von Colson, Marleasing and Coote.
64. In the applicant's submission, the Directive provides for and admits no relevant exceptions, and the courts must therefore, as far as possible, accommodate domestic law to this position. In Johnston the European Court of Justice considered, in the context of Northern Ireland, whether the Directive was subject to any exception in respect of discrimination introduced for the purpose of safeguarding national security or of protecting public order or more particularly safety. It held that there existed no such general reservation, with the possible exception of article 224 of the Treaty which was in the circumstances (as it clearly also is in the present case) inapplicable. The same principle was recognised in Sirdar v. Army Board [2000] ICR 130 and Kreil v. Bundesrepublik Deutschland (ECJ, 11 January 2000, unreported). In Draempaehl v. Urania Immobilienservice o.h.G. [1998] ICR 164, 180 para. 22, the European Court held that, "when a member state chooses to penalise, under rules governing civil liability, breach of the prohibition of discrimination", then provisions of domestic law which make reparation of damage suffered as a result of discrimination on grounds of sex in the making of an appointment dependent on proof of fault are inconsistent with the Directive.
65. I do not consider that one can go straight from the proposition that the Directive admits no general reservation or qualification to a conclusion that it is axiomatically irrelevant if a particular employment is tainted by illegality under domestic law. The Directive states its purpose in terms of access to employment and vocational training and working conditions, including conditions governing dismissal. The duty on member states, and, for matters within their jurisdiction, the courts, is "to take measures which are sufficiently effective to achieve the aim of the Directive and [to] ensure that the rights thus conferred can be effectively relied upon before the national courts by the persons concerned". In none of the cases before the European Court of Justice was the nature of the prospective employment, vocational training or working conditions in any way tainted by illegality. The elimination of discrimination based on sex is a fundamental personal human right, which the Directive is intended to ensure: see Defrenne v. Sabena [1978] ECR 1365, paras. 26-27. But, on a proper understanding of both the Directive and this fundamental principle, there may be limits, in terms of legitimacy, to the "access to employment" and "working conditions" in relation to which the Directive aims at eliminating discrimination. The draftsmen of the Convention are unlikely to have set out to confer protection in respect of - indeed are probably unlikely even to have contemplated - employment, vocational training or working conditions the essence of which was illegal, for example employment, training or working conditions as part of a hit-squad or by a company known to have been established to carry out bank robberies or to launder stolen money. It would seem improbable, therefore, that a national court called upon to shape its national law as far as possible "in the light of the wording and purpose of the directive in order to achieve the result pursued by the latter" would be expected to afford a remedy even for sex discrimination in such a context. But any limitation of this nature in the protection in respect of sex discrimination afforded by the Directive must be derived from the wording and purpose of the Directive. It cannot be determined by any rule of domestic public policy, especially one which is not a principle of justice and may operate indiscriminately. I have in mind in this respect of course Lord Goff's description of the English doctrine of illegality in Tinsley v. Milligan [1994] 1 AC 340, 355B-C (cited more fully below).
66. Nevertheless, rather than assume that English domestic law would, apart from the Directive, necessarily reach a result which would involve conflict between the aims of the Directive and what would otherwise represent domestic law, I consider that our first task should be to consider the domestic legal position, informing ourselves with the spirit and aim of the Directive as we do so. Approaching the matter in that way, I note first that both the Directive and the 1975 Act are aimed at conduct, sex discrimination, which can take place independently of the conclusion of any contract. In the Directive this is clear from the statement of purpose in article 1 as well as from the subsequent articles regulating access to employment and access to vocational training as well as "working conditions". In the Act, it is clear from s.6, which reads:
"(1) It is unlawful for a person, in relation to employment by him at an establishment in Great Britain, to discriminate against a woman:
in the arrangements he makes for the purpose of determining who should be offered that employment, or
in the terms on which he offers her that employment, or
by refusing or deliberately omitting to offer her that employment.
It is unlawful for a person, in the case of a woman employed by him at an establishment in Great Britain, to discriminate against her-
in the way he affords her access to opportunities for promotion, transfer or training, or to any other benefits, facilities or services, or by refusing or deliberately omitting to afford her access to them, or
by dismissing her, or subjecting her to any other detriment."
67. S.82(1) states that "employment means employment under a contract of service or of apprenticeship or a contract personally to execute any work or labour, and related expressions shall be construed accordingly." While, therefore, s.6(1) looks to the potential conclusion of such a contract, there is no need for any such contract actually to have been concluded. And neither subsection is concerned with enforcing contractual entitlement. The Directive and the Act are aimed at providing relief which affords "real and effective judicial protection" in respect of discriminatory conduct (see Johnston, para. 23), rather than relief which reflects any contractual entitlement which may or may not exist. The Court said in relation to remedies in Von Colson, para. 18:
"Such measures may include, for example, provisions requiring the employer to offer a post to the candidate discriminated against, or giving the candidate adequate financial compensation, backed up where necessary by a system of fines. However, the directive does not prescribe a specific sanction; it leaves Member States free to choose between the different solutions suitable for achieving its objective."
68. In the English Act, this is reflected in the provisions on remedies, found in ss.65 and 66. Under s.65, the court may choose, as it considers just and equitable, between the three possibilities of (a) an order declaring the rights of the complainant and respondent in relation to the act of discrimination, (b) "an order requiring the respondent to pay to the complainant compensation of an amount corresponding to any damages he could have been ordered by a county court .... to pay to the complainant if the complaint had fallen to be dealt with under section 66", (c) a recommendation that the respondent take within a specified period action appearing to the tribunal to be practicable for the purpose of obviating or reducing the adverse effect on the complainant of the act of discrimination. S.66 provides:
"(1) A claim by any person ("the claimant") that another person ("the respondent") -
(a) has committed an act of discrimination against the claimant which is unlawful by virtue of Part III, ....
may be made the subject of civil proceedings in like manner as any other claim in tort or (in Scotland) for reparation for breach of statutory duty.
(2) Proceedings under subsection (1)-
(a) shall be brought in England and Wales only in the county court, ...."
69. In a claim for tortious damages, the court looks at the actual loss suffered. In a contractual claim, the court measures damages by reference to contractual entitlement.
70. Both contractual and, as recent authority examined below confirms, tortious claims may be affected by illegality. The underlying principle was identified by Lord Mansfield in Holman v. Johnson (1775) 1 Cowp 341:
"The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. 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. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis.
The question therefore is, whether, in this case, the plaintiff's demand is founded upon the ground of any immoral act or contract, or upon the ground of his being guilty of any thing which is prohibited by a positive law of this country."
71. The application of this principle in contract thus involves asking whether the contract was at its outset made for an illegal purpose or prohibited by statute or whether, if legal at its outset, it has become unenforceable due to the manner of its performance. The conceptual basis upon which a contract not illegal or prohibited when made may become unenforceable due to the manner of its performance is open to debate. Devlin J. concluded in St. John Shipping Corporation v. Joseph Rank Ltd. [1957] 1 QB 267, 284 that the true analysis was that this only occurred if "the way in which the contract was performed turned it into the sort of contract that was prohibited by the statute" (to which the Employment Appeal Tribunal added the words "or common law" in Coral Leisure Group Ltd. v. Barnett [1981] ICR 503, 509A-C and Newland v. Simons & Willer (Hairdressers) Ltd. [1981] ICR 521, 530). The St. John Shipping case was a case where illegality in performance, consisting in deliberately overloading the ship and submerging her load line in breach of the Merchant Shipping (Safety and Loadline Conventions) Act 1932, although this contributed to the earning of more freight overall, did not disable the shipowners from enforcing individual bill of lading contracts under which the excess freight had been earned. On the other side of the line are cases such as Anderson Ltd. v. Daniel [1924] 1 KB 138 (where the statute imposed on the plaintiff seller a duty to supply an invoice for the buyer's protection) and Ashmore, Benson Ltd. v. Dawson Ltd. [1973] 1 WLR 828 (where the statute made it unlawful to use a vehicle not complying with the regulations). In the latter case, in passages which Peter Gibson LJ has cited, both Lord Denning MR at p.833 and Scarman LJ at p.836 underlined the need for both knowledge and participation in the illegal method of performance before a party might disable himself from suing on the relevant contract.
72. In the context of contract Lord Goff said in Tinsley v. Milligan [1994] 1 AC 340:
"It is important to observe that, as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover, the principle allows no room for the exercise of any discretion by the court in favour of one party or the other."
73. Lord Browne-Wilkinson observed in Tinsley v. Milligan that "the effect of illegality is not substantive but procedural" (p.374D-E). But this was a statement made when explaining how an equitable interest might pass under an illegal transaction, though remaining unenforceable in some circumstances. I would not myself view the concept of "procedure" as an appropriate characterisation of the relevant rule of public policy when, for example, considering the scope allowed under the Treaty of Rome to domestic courts in procedural matters. The description of the doctrine of illegality as involving "personal disability" appears more appropriate: cf Hardy v. Motor Insurers' Bureau [1964] 2 QB 745.
74. Although the underlying principle is as applicable to tort as to contract, its impact differs. So much so that in its recent consultation paper No. 154, Illegal Transactions: The Effect of Illegality on Contracts and Trusts, the Law Commission said that it was not aware that the law on illegality in relation to tort claims gave rise to any concern, and focused its attention on contracts and trusts. In contract, the scope for the existence or commission of relevant illegality - whether in the aim, nature or performance of the contract - is necessarily greater than is the case in tort.
75. In the first case which I wish to cite on illegality in tort, it was recognized expressly that circumstances in which a tortious claim may be barred by illegality may be expected to be rare: National Coal Board v. England [1954] AC 403, 429 per Lord Asquith (distinguishing negligence by one of two burglars in handling an explosive charge intended to blow open a safe from pick-pocketing by the one of the other en route to the premises which they intend to burgle). This passage was cited in Pitts v. Hunt [1991] 1 QB 24, 42 per Beldam LJ. In that case Beldam LJ also cited and Balcombe LJ specifically approved the dictum of Mason J in Jackson v. Harrison 138 CLR 438 that:
"If a joint participant in an illegal enterprise is to be denied relief against a co-participant for injury sustained in that enterprise, the denial of relief should be related not to the illegal character of the activity but rather to the character and incidents of the enterprise and to the hazards which are necessarily inherent in its execution."
76. Dillon LJ preferred (to any test which depended on the court's view of what the public conscience required or upon an assessment of moral turpitude) a test, based on Bingham LJ's dichotomy in Saunders v. Edwards [1987] 1 WLR 1116, between "cases where the plaintiff's action in truth arises directly ex turpi causa and cases where the plaintiff has suffered a genuine wrong to which allegedly unlawful conduct is incidental .". On the facts in Pitts v. Hunt a pillion driver's claim against the deceased driver's estate for personal injuries suffered in the accident which killed the driver failed because he had been participating jointly with the driver in drunken and reckless driving, involving attempts to frighten other road users.
77. Cross v. Kirkby (CA, 18 February 2000) was a claim in tort by a hunt saboteur, seriously injured by a single blow from a farmer who had wrested a broken baseball bat from the saboteur after the saboteur had committed a whole series of goading insults, assaults and blows with the bat on the farmer. The claim failed. Beldam LJ, with whom Otton LJ agreed, quoted Lord Mansfield's words in Holman v. Johnson, and continued (para. 76):
"I do not believe that there is any general principle that the claimant must either plead, give evidence of or rely on his own illegality for the principle to apply. Such a technical approach is entirely absent from Lord Mansfield's exposition of the principle. I would, however, accept that for the principle to operate the claim made by the claimant must arise out of criminal or illegal conduct on his part. In this context "arise out of" clearly denotes a causal connection with the conduct, a view which is implicit in such different cases as Lane v Holloway and the recent case to which we were referred in this court, Standard and Chartered Bank v Pakistan National Shipping Corporation & Ors, Court of Appeal transcript, Friday 3rd December, 1999. In my view the principle applies when the claimant's claim is so closely connected or inextricably bound up with his own criminal or illegal conduct that the court could not permit him to recover without appearing to condone that conduct."
78. Judge LJ referred to the distinction drawn by Bingham LJ in Saunders v. Edwards and adopted by Dillon LJ in Pitts v. Hunt between behaviour "incidental" to and "directly" connected with the criminal conduct, and concluded that a claim in tort was not liable to be defeated by the fact that the claimant was behaving unlawfully or criminally when his cause of action in tort arose, "unless it is also established that the facts which give rise to it are inextricably linked with his criminal conduct" (paras. 102-3).
79. While the underlying test therefore remains one of public policy, the test evolved in this court for its application in a tortious context thus requires an inextricable link between the facts giving rise to the claim and the illegality, before any question arises of the court refusing relief on the grounds of illegality. In practice, as is evident, it requires quite extreme circumstances before the test will exclude a tort claim.
80. In the present case, the position is in my view as follows:
(A) At the root of the Industrial Tribunal's and Employment Appeal Tribunal's decisions lie the proposition that Mrs Hall was involved in the illegality in a manner which would have prevented her from enforcing her contract of employment by any contractual claim. I agree with Peter Gibson LJ's conclusion that on the facts of this case this conclusion was itself in error. The contract as made and as varied was legal. It was at no stage expressly prohibited by any statute. The suggested illegality arose simply from the method of its performance, involving the employers' failure to make or account for deductions to the Revenue and DHSS, and issue of false PAYE slips. Before this could disable the appellant from enforcing her contract of employment, there would - applying the statements of Lord Denning MR at p.833 and Scarman LJ at p.836 in Ashmore, Benson Ltd. v. Dawson Ltd - have to be shown both knowledge and participation on her part in the illegal method of performance.
Thus, in Coral Leisure Group Ltd. v. Barnett the Employment Appeal Tribunal held that the Industrial Tribunal had jurisdiction in a claim for unfair dismissal under the Employment Protection (Consolidation) Act 1978, although after making an initially lawful contract, the relevant employee had knowingly participated in the finding of prostitutes for punters and in paying for them out of funds provided by his employers. The contract of employment itself, as distinct from the mode of its performance, was not prohibited by law: see per Browne-Wilkinson J. at p.509. Even minor though inessential participation by an employee in a scheme for the fraudulent evasion of VAT by and for the benefit of his employers was held not to preclude a claim for unfair dismissal under the 1978 Act in Hewcastle Catering Ltd. v. Ahmed [1992] ICR 626. The reasoning in that case was influenced by the "public conscience" test, since rejected in Tinsley v. Milligan. But the first five factors mentioned by Beldam LJ at pp.637-8 would still point to the same conclusion, although it is unnecessary to form any decided view on that in this case.
Newland v. Simons & Willer (Hairdressers) Ltd. was concerned with a similar subject-matter to the present. But the employee had been employed over the end of a tax year, and any awareness on her part that proper deductions were not being made was said to have derived from her receipt of her P60 at the end of that tax year. In the view of the majority in the Employment Appeal Tribunal the essential question was "Has the employee knowingly been party to a deception on the revenue?" However, I have to say, reading the judgment, that the majority appears also to have considered that it would be sufficient to make her "party to the deception" if she either took part in "or continued working knowing of the illegal mode of performance by her employers of her contract of employment": see p.528A-B. Further, the majority took a stern view towards the argument that, even if the contract "on its face or in its performance to his knowledge involves a fraud on the revenue", the employee should not be deprived of his rights under the employment protection legislation: see p.533D-F. May J. said:
"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."
We are not directly concerned with the employment protection legislation, and the facts are not identical with those in issue in Newland v. Simons & Willer (Hairdressers) Ltd. But I confess to doubt about both the reasoning and the outcome in it.
In the present case also, the Industrial Tribunal evidently considered that knowledge alone would suffice. After contracting lawfully, Mrs Hall was given payslips which she queried. She was dismissed before the end of any tax year. The Tribunal reasoned that she "was turning a blind eye to the fact that the Respondents were not paying tax on part of her income". It is a fact that Mrs Hall continued to receive payslips and did not report her employers to any authorities. But, as Peter Gibson LJ has said, there was no positive duty on Mrs Hall to pay or do anything (cf IRC v. Herd [1993] 1 WLR 1090), nor was she herself guilty of any unlawful conduct. Her continuing passive receipt of payslips, after her initial query, cannot in my view be regarded as making her a party to her employers' plan to deceive, or as amounting to participation in it such as to preclude her from enforcing her contract of employment. We need not consider what might have been the position after the end of a tax year, when it might have become her duty to make a tax declaration in respect of income which was to her knowledge untaxed. She was dismissed before any tax year had ever expired. I say only that I should require persuasion that non-compliance with a duty under the taxes legislation to make her own tax return then should be viewed as impliedly prohibiting or affecting the enforceability of her contract of employment. In these circumstances, I consider that the Industrial Tribunal and Employment Appeal Tribunal were wrong to regard Mrs Hall as involved in her employer's unlawful scheme in any way that disabled her under English law from enforcing her contract of employment, even if she had, by her present claim, been seeking to enforce it.
(B) I turn to consider the position assuming that Mrs Hall's continuing employment in the knowledge of her employers' scheme to defraud the Revenue and DHSS should be viewed as disabling her from enforcing her contract of employment. I find this an uneasy assumption, because, as I have indicated, I do not accept it. It is therefore difficult and perhaps dangerous to try to indicate how the Act might apply on such a hypothesis. There are two aspects to address. The first concerns the reference in s.6(2) to employment, meaning in the present context a contract of service. The second concerns the actual claim, of a tortious nature, sought to be made under s.65(1)(b), read with s.66(1).
Taking the first, the domestic legal requirement, in circumstances within s.6(2)) of the Act, that there should be employment under a contract constitutes, at highest, a pre-condition to the complaint and the cause of action arising in a case of discrimination. Here, the requirement was on the face of it satisfied by the existence of a contract of employment, which was - both when originally made and when varied by Mrs Hall's promotion to head chef - legal. To introduce in the context of a sex discrimination claim the additional condition that the contract should have been performed legally and be enforceable as a contract under English law would, construing the Act in the light of the Directive, appear inappropriate. It would also mean, logically, that an employee who had participated in illegal performance of her contract of employment in the manner suggested in this case, would be debarred from pursuing not merely any claim for financial loss, but any other claim, including one for injury to feelings in the event of discrimination on the grounds of sex.
(C) Further, construing the 1975 Act in the light of the Directive, I doubt whether it is appropriate in any event to treat the statutory requirement of a contract as subject to domestic conceptions of public policy which would prevent an employee from enforcing it in the English courts if she had sued upon it. The Directive contains no such reservation. It speaks of "access to employment" and "working conditions" without actual reference to contract at all. These phrases appear (as the majority in Leighton v. Michael thought at p.1096, para.(6)) to address the factual, rather than contractual, aspects, of access to employment and conditions of work. The protection of someone in Mrs Hall's particular position, before and after her promotion, would also appear to me to fall within the wording and purpose of the Directive - despite the Industrial Tribunal's finding that she knew that the Inland Revenue (and presumably the DHSS) were being defrauded. That too was evidently the view of the Employment Appeal Tribunal in Leighton v. Michael, which distinguished cases on other domestic employment legislation, governing unfair dismissal and redundancy. We are not directly concerned with that legislation, and I see no need to say more about it than that (a) it would require to be considered according to its own wording and background and (b) I take a more relaxed view of the objective and aims of the Directive than the majority of the Employment Appeal Tribunal in Newland v. Simons & Willer (Hairdressers) Ltd. [1981] ICR 521 was apparently willing to take of the domestic employment legislation. But that is not to prejudge the extent or effect of any distinction that may be drawn between them.
Here, the salient facts are that the fraud was not Mrs Hall's. She was in effect simply confronted with it. She may have had little real choice but to submit. Bearing in mind the imbalance which may often exist in the bargaining positions of employer and employee, it would be strange if the purpose of the Directive did not extend to protect employees from discrimination in such circumstances. Otherwise, employers - having, in effect, imposed on their employees unlawful pay conditions as a condition of employment or continued employment - could thereafter discriminate against them on grounds of sex with impunity. This is not an extreme case, coming near any of the examples of employment as a member of a hit-squad, or by a company known to have been set up for the purpose of committing robberies or washing stolen money which I have given earlier in this judgment. The language of the English statute should, as far as possible, be read as offering the same scope of protection as the Directive. The statutory conception of employment under a contract should, if possible, be interpreted consistently with the Directive. In my judgment, it can be by treating it as referring to any actual employment which (a) falls within the objectives and aims of the Directive where (b) the relevant contract is one which would be enforceable under domestic law disregarding any personal disability flowing from the claimant's participation in illegality. The statute on this basis reflects European law's rejection of any general reservation or limitation on the application of the Directive not found in the language or aims of the Directive.
(D) Assuming that the statutory pre-condition in s.6(2) creates no obstacle to Mrs Hall's claim, I see no basis on which any involvement on Mrs Hall's part in illegal performance of her contract of employment can or should lead to her forfeiting any claim to damages for financial loss arising from the sex discrimination involved in her dismissal. Her claim is not to enforce the contract. The basis of the claim does not relate to, and any compensation ordered does not fall to be measured by, any contractual entitlement that the claimant may have had. The damages recoverable in tort for sex discrimination involving dismissal do not depend on the period for which the claimant was employed or the notice period to which she was entitled, as they would in contract. The claim is for unlawful discrimination based on conduct in dismissing her from a post in which, whether or not Mrs Hall had a contract that she could have enforced if she had sued on it, she was in fact receiving £250 per week. I note in parenthesis that, when she made her tribunal complaint, the parties completed forms in which she stated, entirely accurately, her take-home pay, which the respondent admitted. Further, any compensation ordered by the Industrial Tribunal would not itself be subject to any tax (Income and Corporation Taxes Act 1988 s.148). The Industrial Tribunal's reasoning that, since Mrs Hall "had no legal rights that were destroyed when the contract was brought to an end, consequently she suffered no losses in law" and could not recover compensation under the Act, is fallacious. Leaving aside the bar which it is suggested that she faces due to illegality, Mrs Hall could have claimed damages for sex discrimination, even if her employers had, when discriminating against her on the ground of her pregnancy, given her the requisite notice period to terminate her employment. Likewise, under s.6(1) discrimination would necessarily consist in not offering or making a contract, or not making it in a particular way or on particular terms. In these circumstances, I see no basis for regarding any involvement which she may have had in illegal performance of her contract of employment as directly, immediately or inextricably connected with the discrimination of which she complained or with the relief by way of compensation for financial loss which she now seeks. To adapt Mason J's words to this different situation, neither the character nor the incidents of the illegality nor any hazards necessarily inherent in its execution have or had anything to with the discrimination which she suffered or her resulting claim. This is not, therefore, a case where the court is, in my view, faced with any conflict between the objective and aims of the Directive and the result which follows from an application of established domestic principles governing illegality in tort to the 1975 Act.
81. For these reasons, I agree that this appeal succeeds, and that the matter should be remitted to the Industrial Tribunal, if possible of the same constitution, for it to determine the compensation due to Mrs Hall.
MR JUSTICE MOORE-BICK:
82. For the reasons given by Peter Gibson L.J. and Mance L.J. I too am satisfied that Mrs. Hall is not prevented by illegality from enforcing her contract with the respondent and that this appeal should therefore be allowed.
83. I also agree with them that Leighton v Michael [1995] I.C.R. 1091 was correctly decided and that even if Mrs. Hall would have been prevented by reason of illegality from enforcing her contract of employment as such she would nonetheless be entitled to recover substantial compensation for wrongful discrimination under the Sex Discrimination Act 1975.
84. As far as the effect of the Equal Treatment Directive (Council Directive No. 76/207/EEC) is concerned, I can see force in the submissions made by both Miss Carss-Frisk and Mr. Hochhauser Q.C. that there can never be any room in relation to a claim under the Sex Discrimination Act 1975 for the operation of the rules of domestic public policy reflected in the established law relating to illegality. However, I share the reservations expressed by Peter Gibson L.J. and Mance L.J. and in common with them prefer not to express any final view on this aspect of the argument. I should, however, like to acknowledge the assistance which we have had from the admirable submissions of both counsel on this and all other issues which were raised in the course of argument.
(Order does not form part of the approved judgment)