England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOPYMENT APPEAL TRIBUNAL
MR JUSTICE ELIAS (PRESIDENT)
UKEAT/0572/05/ZT

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st December 2006

Lady Justice Smith :

Introduction

1. This appeal raises a point of some general importance in relation to the assessment of compensatory awards for unfair dismissal under section 123 of the Employment Rights Act 1996 (ERA). So far as relevant, section 123 provides:

"(1) Subject to the provisions of this section ….. the amount of the compensatory award shall be such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer.

(2) The loss referred to in subsection (1) shall be taken to include-

(a) any expenses reasonably incurred by the complainant in consequence of the dismissal, and

(b) subject to subsection (3), loss of any benefit which he might reasonably be expected to have had but for the dismissal.

(3) ….

(4) In ascertaining the loss referred to in subsection (1) the tribunal shall apply the same rule concerning the duty of a person to mitigate his loss as applies to damages recoverable under the common law of England and Wales or (as the case may be) Scotland "

History of the Litigation

2. Ms Ana Burlo worked as a nanny for Mr Langley and Ms Carter (whom I shall describe as the employers). Her employment began in 1999. It was subject to a written contract which provided for 8 weeks notice of termination on either side. The contract also provided that, during periods of sickness, the employers would pay 'sickness benefit in accordance with government statutory sick pay legislation'.
3. On Tuesday 2^nd March 2004, there was an argument about money between Ms Burlo and Mr Langley. Ms Burlo threatened to resign and Mr Langley said that she would be required to work her notice. Ms Burlo continued at work but on the morning of Friday 5^th March, she had a car accident. Later that day she went to hospital. Soon afterwards, her GP provided a sick note to say that she would be off work until 29^th March. By Monday 8^th March, the employers had engaged another nanny and wrote saying that they would not now require Ms Burlo to work out her notice. In the event, the employee was unfit for work following her car accident until 12^th July 2004.
4. Ms Burlo brought a number of claims in the Employment Tribunal (ET), including claims for wrongful and unfair dismissal. Both these claims succeeded. The ET assessed damages for wrongful dismissal at £3,440 which appears to have been 8 weeks pay at the normal weekly wage. The ET did not explain why they held that the damages should be based on the normal weekly wage rather than on the statutory sick pay (SSP) to which the employee would have been entitled under her contract of employment. The ET then assessed compensation for unfair dismissal. They made a basic award and a compensatory award of £5,736. No part of that sum related to the period of notice because that had been covered in the award for wrongful dismissal.

The Appeal and Cross Appeal in the EAT

5. The employers appealed to the Employment Appeal Tribunal (EAT), presided over by Elias J, the President of the EAT, contending that the ET had erred in basing the damages for wrongful dismissal on the normal weekly wage. The damages should have been based on SSP. However, Ms Burlo put in a cross-appeal which would be pursued only if the appeal succeeded.
6. In argument on the appeal, it was accepted on Ms Burlo's behalf that, under her contract, she was entitled only to SSP while off sick. However, it was submitted that the effect of sections 86 to 88 of the ERA was that she was entitled to full or normal pay for the whole of the notice period notwithstanding that she was unfit for work throughout the relevant period. These sections deal with an employee's entitlement to a minimum period of notice and his/her rights during that period. Section 86 fixes the minimum periods of notice to which an employee is entitled, by reference to length of service. Section 88 provides that, in cases to which the section applies, if an employee who has normal working hours is off sick for all or part of his/her period of notice, s/he will be entitled to receive payment during the minimum notice period at the average hourly rate of remuneration. However, by section 87(4) this provision does not apply to employees whose contract of employment provides for a notice period longer by at least one week than the minimum period stipulated by the statute. In Ms Burlo's case, the minimum period of notice under the statute was 4 weeks and the contractual period of notice was 8 weeks, so the EAT held that section 88 did not apply. It followed that the contractual provision was effective and the employee was only entitled to receive SSP during the notice period. The EAT allowed the appeal. Damages for wrongful dismissal were reduced to eight weeks SSP, the amount to be agreed between the parties.
7. Accordingly, the cross appeal came into play. In this, Ms Burlo contended that, for unfair dismissal, under section 123 of the ERA, she was entitled to receive compensation for the 8 week notice period at the normal weekly wage. Mr Elesinnla, who appeared for Ms Burlo at the EAT and before this court, relied on the principle enunciated in Norton Tool v Tewson [1972] ICR 501, that it was good industrial relations practice for an employer who dismisses an employee without notice to make a payment in lieu of notice. Where such sums are paid, no credit has to be given by the employee for monies earned from other employers during the notice period. That, contended Mr Elesinnla, meant that the employee in this case was entitled to full pay, not just SSP, during her notice period. Mr Elesinnla submitted further that Norton Tool had been followed and approved by the Court of Appeal in Addison v Babcock FATA Ltd [1987] ICR 805 and so was binding on the EAT.
8. Miss Wilkinson, who appeared for the employers at the EAT and before us, submitted that Norton Tool was no longer good law and no longer provided a legitimate basis for awarding full compensation for the notice period. She relied in particular on the decision of the House of Lords in Dunnachie v Kingston upon Hull City Council [2005] 1AC 226; [2004] ICR 1052. She also relied on two recent decisions of the EAT (presided over by Burton J, then President of the EAT) to the effect that there is no room for the proposition that good industrial relations practice can be relied on to increase the amount of compensation so that more is awarded than the true loss incurred as a consequence of the dismissal. These were Hardy v Polk (Leeds) Ltd [2005] ICR 557 and Morgans v Alpha Plus Security Ltd [2005] ICR 525.
9. In the judgment, the EAT set out the relevant authorities at some length. They then stated that there were two issues for decision. The first was whether it was good industrial practice for an employer who dismissed an employee to pay wages in lieu of notice at the normal rate of pay notwithstanding that the employee was unfit for work through sickness during that period. Does good practice require that the employer should pay 'up front' only what it is anticipated that the employee will earn during the notice period, or does it require payment of full pay even though the employee might not have received that sum if s/he had been at work during that period?
10. At paragraph 35 of their decision, the EAT answered that question thus:

"The view of the lay members (with which the President agrees) is that good industrial relations would require payment in full, at least in circumstances where (as here) the notice period is not unduly long and there is no clear indication at the time of dismissal whether the illness will last for the whole of the notice period."

11. The second issue was whether, assuming that it is good industrial relations practice to make the payment in lieu of notice, the principle established in Norton Tool remained good law. On this issue, the EAT was divided.
12. The majority view, held by the President and one lay member, was that Norton Tool was no longer good law. Briefly stated, the reasoning of the majority was as follows. Application of the principle in Norton Tool could result in the making of a compensatory award greater than the loss actually suffered by the employee in consequence of the (unfair) dismissal. That result would be contrary to the intention of Parliament in section 123 of ERA. That was the point that had been recognised by the two decisions of Burton J. But, Norton Tool had been affirmed by the Court of Appeal in Babcock and was therefore binding on the EAT. However, the effect of the House of Lords' decision in Dunnachie undermined both Norton Tool and Babcock. The majority recognised that the House of Lords had not been directly concerned with the principle in Norton Tool; rather it was concerned with the question of whether compensation under section 123 could include injury to feelings. However, the decision was based on the premise that compensation for unfair dismissal must comply with section 123. The words 'just and equitable' in section 123 were no warrant for a discretionary award of damages greater than the loss actually attributable to the effect of the dismissal. The words 'just and equitable' were intended only to allow tribunals a measure of flexibility in assessing compensation. The majority in the EAT considered that the principle in Norton Tool did not comply with section 123. They declined to apply it or to be bound by Babcock.
13. The member in the minority was of the view that Norton Tool was not undermined by Dunnachie and that it should be applied. However, because of the majority view, the cross appeal failed. The EAT granted permission to Ms Burlo to appeal to the Court of Appeal on the cross appeal.

The Appeal to the Court of Appeal

14. The main issue before this court was whether the EAT had been right to dismiss the cross appeal. However, it soon became apparent that there was also an issue as to whether, even though the result might be right, the reasoning of the EAT was correct.

The Submissions

15. Mr Elesinnla for the appellant advanced the same arguments as he had advanced to the EAT. Norton Tool was authority for the proposition that it was good employment practice for an employer who has dismissed an employee without notice to make a payment in lieu of notice and that, in assessing compensation for dismissal, this payment should not be subject to any deduction for sums earned in other employment during the notice period. The court asked Mr Elesinnla to explain how that principle (which we came to described as 'the narrow Norton Tool principle') could be said to govern the amount of pay to which an employee was entitled as a payment in lieu of notice or as compensation for loss during the notice period. It was pointed out that, in Norton Tool, the question before the National Industrial Relations Court (NIRC) had been whether the employee had to give credit for the earnings he had received from another employer after the dismissal but before the expiry of the notice period. It was assumed in that case that the normal weekly wage would be applied in the calculation because that was what the employee would have earned if he had not been dismissed. The question did not arise in that case as to whether any other rate of pay might be applied. The whole issue in the instant appeal was what rate of pay should be applied. During the hearing, we referred to this point as 'the pay point'.
16. This discussion led Mr Elesinnla (with some assistance from Mummery LJ) to formulate what we came to describe as 'the wider Norton Tool principle'. This was that, in assessing compensation for unfair dismissal, it was appropriate to take into account the effect of other precepts of good industrial or employment practice, besides the one that specifically arose in Norton Tool itself. An applicant would be entitled to be compensated for the breach of such good employment practice. Applying this wider principle to the EAT's holding that it was good employment practice for an employer to pay the employee at the normal weekly rate during the whole of the contractual notice period, even though s/he was off sick at the time, the EAT should have held that Ms Burlo was entitled to 8 weeks pay in lieu of notice at the full rate or compensation of that amount.
17. Mr Elesinnla also submitted to us, as he had submitted to the EAT, that Babcock had affirmed the correctness of Norton Tool and that it was binding on this court. He further submitted that Dunnachie had had no effect at all on either Norton Tool or Babcock. It had been concerned only with the question of whether compensation for unfair dismissal could include an element for injured feelings. Therefore, Norton Tool was still good law and this court must apply it.
18. Miss Wilkinson for the employers mounted a strong attack on each of these propositions. First, she submitted that the ratio decidendi of Norton Tool was limited to the narrow principle, as stated in paragraph 15 above. That was all that was necessary for the decision and any wider statement of principle, if there was one, was an obiter dictum. Second, she submitted that the Court of Appeal's decision in Babcock did not cover the same issue as Norton Tool. That case was concerned with whether an employee who had received payment in lieu of notice at the time of (unfair) dismissal could recover compensation in respect of the same period. The answer was that he could not, as that would amount to double recovery. In so far as Norton Tool had been discussed, with approval, in Babcock, it was obiter and not binding on this court. Third, she submitted that, although Dunnachie was concerned with the question of compensation for injury to feelings, the speech of Lord Steyn (with whom all their Lordships agreed) contained dicta (in particular about the meaning of the words 'just and equitable' in section 123) from which it was clear that it was not permissible to award compensation of an amount greater than the loss actually attributable to the dismissal.
19. In order to evaluate those submissions, it is necessary to examine carefully what Lord Steyn said in Dunnachie and what was actually decided in Norton Tool and Babcock.

Norton Tool v Tewson

20. Norton Tool was a decision of the NIRC, presided over by its President, Sir John Donaldson, as he then was. The decision related to the assessment of compensation under section 116 of the Industrial Relations Act 1971. Before examining the judgment, it is worth setting the decision in its historical context. The Industrial Relations Act 1971 enacted major reforms of industrial relations law, following a period of industrial unrest. Its purpose was to promote good industrial relations in accordance with general principles which included 'the principle of freedom and security for workers protected by adequate safeguards against unfair industrial practices, whether on the part of employers or others'. The jurisdiction of industrial tribunals was much enlarged and the NIRC was created. The Act required the Secretary of State to promulgate a code of good industrial relations practice. The Act also defined a number of unfair industrial practices. For example, by section 5 it was declared to be an unfair industrial practice to prevent or deter a worker from exercising his rights to membership of the trade union of his choice, including the right to take part in its activities and to hold office. Section 22 created, for the first time, the right of a worker not to be unfairly dismissed. Section 101 conferred the right on a worker to complain to an industrial tribunal of any defined unfair industrial practice. If the complaint were upheld, the tribunal would have the power inter alia to make an award of compensation. A complaint under sections 5 or 22 was to be made to an industrial tribunal and the remedies for such a complaint, if well founded, included an award of compensation.
21. Section 116 described the general principles to be applied in the assessment of compensation for a complaint made under any provision of the Act. Thus, in addition to complaints of unfair dismissal, it applied to a large number of different types of complaint of unfair industrial practice. Section 116 was inevitably in slightly wider terms than section 123 of ERA 1996 which applies only to the assessment of a compensatory award following unfair dismissal. So far as relevant, section 116 provided:

"(1) Where in any proceedings on a complaint under this Act the Industrial court or tribunal makes an award of compensation to be paid by a party to the proceedings (in this section referred to as "the party in default") to another party (in this section referred to as "the aggrieved party"), the amount of the compensation shall, subject to the following provisions of this Part of this Act, be such amount as the Court or tribunal considers just and equitable in all the circumstances, having regard to the loss sustained by the aggrieved party in consequence of the matters to which the complaint relates, in so far as that loss was attributable to action taken by or on behalf of the party in default.

(2) The loss sustained by the aggrieved party, as mentioned in the preceding subsection, shall be taken to include-

(a) any expenses reasonably incurred by him in consequence of the matters to which the complaint relates, and

(b) loss of any benefit which he might reasonably be expected to have had but for those matters,

Subject, however, to the application of the same rule concerning the duty of a person to mitigate his loss as applies in relation to damages recoverable under the common law of England and Wales or of Scotland, as the case may be.

22. The facts of Norton Tool were that Mr Tewson was summarily dismissed after 11 years' service. By reason of his length of service, he was entitled to six weeks notice. He had been earning £25.60 per week. He found another job after 4 weeks. A tribunal found that his dismissal had been unfair and awarded him £250 compensation which included 4 weeks' loss of wages. The balance was by way of general damages to account for the abrupt and insulting manner of the dismissal. Both sides appealed against the award of compensation. The employers contended that there was no power under section 116 to award damages for injury to feelings. That was held to be right. The employee contended that he should have been awarded wage loss for the whole of the six weeks notice period, without deduction of the wages he had earned in the last two weeks. He also submitted that he should have received something for loss of his statutory rights. The court accepted both those submissions.
23. This was the first decision of the NIRC under section 116 of the new Act. At page 504d, Sir John Donaldson explained the general principles to be applied. He said:

"In our judgment, the common law rules and authorities on wrongful dismissal are irrelevant. That cause of action is quite unaffected by the Industrial Relations Act 1971 which has created an entirely new cause of action, namely, the "unfair industrial practice" of unfair dismissal. The measure of compensation for that statutory wrong is itself the creature of statute and is to be found in the Act of 1971 and nowhere else. But we do not consider that Parliament intended the court or tribunal to dispense compensation arbitrarily. On the other hand, the amount has a discretionary element and is not to be assessed by adopting the approach of a conscientious and skilled cost accountant or actuary. Nevertheless, that discretion is to be exercised judicially and upon the basis of principle.

The court or tribunal is enjoined to assess compensation in an amount which is just and equitable in all the circumstances, and there is neither justice nor equity in a failure to act in accordance with principle. The principles to be adopted emerge from section 116 of the Act of 1971. First, the object is to compensate, and compensate fully, but not to award a bonus; save possibly in the special case of a refusal by an employer to make an offer of employment in accordance with the recommendation of the court or a tribunal. Secondly, the amount to be awarded is that which is just and equitable in all the circumstances, having regard to the loss sustained by the complainant. "Loss" in the context of section 116 does not include injury to pride or feelings. In its natural meaning the word is not to be so construed, and that this meaning is intended seems to us to be clear from the elaboration contained in section 116 (2). The discretionary element is introduced by the words "having regard to the loss". This does not mean that the court or tribunal can have regard to other matters, but rather that the amount of the compensation is not precisely and arithmetically related to the proved loss. Such a provision will be seen to be natural and possibly essential, when it is remembered that the claims with which the court and tribunals are concerned are more often than not presented by claimants in person and in conditions of informality."

24. Later, the judge dealt with the instant case and said:

"The Contracts of Employment Act 1963, as amended by the Act of 1971, entitles a worker with more than ten years' continuous employment to not less than six weeks' notice to terminate his employment. Good industrial practice requires the employer either to give this notice or pay six weeks' wages in lieu. The employee was given neither. In an action for damages for wrongful, as opposed to unfair, dismissal he could have claimed that six weeks' wages, but would have had to give credit for anything which he earned during the notice period. In the event he would have had to give credit for what he earned in the last two weeks, thus reducing his claim to about four weeks' wages. But if he had been paid the wages in lieu of notice at the time of his dismissal, he would not have had to make any repayment upon obtaining further employment during the notice period. In the context of compensation for unfair dismissal, we think that it is appropriate and in accordance with the intentions of parliament that we should treat an employee as having suffered a loss in so far as he receives less than he would have received in accordance with good industrial practice. Accordingly, no deduction has been made for his earnings during the notice period."

25. It is that passage which Mr Elesinnla submitted founds the wider Norton Tool principle that an employee is entitled to recover compensation to reflect the difference between what he in fact received from the employer and what he would have received if the employer had acted in accordance with good industrial practice. The precept of good industrial practice relied on in Norton Tool was just one example of how this wider principle would operate. There might be any number of other precepts of good industrial practice to which the principle might apply. In effect, the wider principle as set out by Sir John Donaldson was the chicken or governing principle and the narrow principle merely one of several eggs it might lay.
26. Norton Tool was followed with approval in a number of cases in the NIRC. These were Stepek (J) Ltd v Hough [1973] 8 ITR 516 NIRC, Vaughan v Weighpack Ltd [1974] ICR 261, Hilti (Great Britain) Ltd v Windridge [1974] ICR 352 and Everwear Candlewick Ltd v Isaac [1974] ICR 525. These cases all involved a similar although not identical factual issue as Norton Tool, the deductibility of post-dismissal earnings during the notice period. However, whereas in Norton Tool, the employee had received pay in lieu for the whole of the statutory notice period, in Hilti, he had received pay in lieu for only part of the notice period. The narrow principle in Norton Tool was extended so that an employee was to be entitled to keep the amount he should have received as pay in lieu of notice, without deduction of post dismissal earnings, regardless of whether or not he actually received the pay in lieu to which he was entitled.
27. That much was clear from the words of Sir John Brightman, as he then was, in Everwear (supra). After referring to Norton Tool, Stepek and Hilti, at page 527h, he said:

"The principle behind these three cases is clear. If an employee is unfairly dismissed without due notice and without pay in lieu of notice, he is prima facie entitled to compensation equal to his net pay for the proper period of notice. No deduction is to be made for anything which the employee may earn elsewhere, for example, from another employer, during the period for which he should have received notice."

28. It should be noticed that Sir John Brightman said nothing about any wider principle relating to the loss that the employee had suffered as the result of not being treated in accordance with good industrial practice. He did, however, make it plain that the principle in Norton Tool was not a rule of law. The employee was 'prima facie' entitled to avoid having to bring wages received in the notice period into account but in some circumstances this would not apply (for example, if the notice period were very long).
29. In Vaughan, Sir Hugh Griffiths echoed the words of Sir John Donaldson, saying that, in a claim for compensation for unfair dismissal, the employee should be treated as having suffered a loss in so far as he received less than he would have received in accordance with good industrial practice. However, he applied the principle as it had been applied in all the previously cited cases and held that the employee who had been entitled to 3 months notice was entitled to recover earnings for that period, without deduction of post dismissal earnings, as 'an irreducible minimum' compensatory award.
30. The narrow principle in Norton Tool was reaffirmed by the EAT in Blackwell v GEC Elliott Processes [1976] IRLR 144. However, it was successfully challenged in 1981 in Tradewinds Airways Ltd v Fletcher, [1981] IRLR 272 when the EAT (Bristow J presiding) held that, since the introduction of the basic award of compensation in 1975 and bearing in mind the duty to mitigate loss, the assessment of a compensatory award under section 74 (1) of the Employment Protection (Consolidation) Act 1978 (the 1978 Act), which was in similar terms to section 123 of the ERA, must reflect the employee's true wage loss and credit must be given for earnings received in the notice period.
31. About two years later, the issue was again before the EAT in TBA Industrial Products Ltd v Locke [1984] ICR 228. In that case, the employee was (unfairly) dismissed with 12 weeks pay in lieu of notice. The EAT (presided over by Browne-Wilkinson J, then President of the EAT) reaffirmed the correctness of the narrow principle of Norton Tool and said that that case should be followed unless and until overruled by the Court of Appeal. The judgment in that case also deals with an issue of double recovery to which I will come in due course.
32. It should be noted that, in all the cases I have cited, the issue was whether the employer had to give credit for sums earned from another employee during the notice period. Until 1981, no attempt was made to rely on any wider principle embracing other precepts of good industrial practice. In the early 1980s, an attempt to do so was made in a line of cases which led eventually to the Court of Appeal's decision in Babcock.
33. What was the ratio decidendi of Norton Tool? I shall leave aside for the moment what the Court of Appeal had to say about it in Babcock, to which I will come. I would accept Mr Elesinnla's submission that Sir John Donaldson enunciated a wide principle which might apply to any number of as yet unformulated precepts of good industrial practice. However, only one precept of good industrial practice was formulated at that time and that was all that was necessary for the decision itself. For many years after the decision, it was understood to lay down only the narrow principle based upon its particular facts. Leaving aside Babcock, I would therefore accept Miss Wilkinson's first submission, that the ratio of Norton Tool was the narrow principle and that, in so far as Sir John Donaldson enunciated a wider principle, it was obiter.
34. I can well understand why, at the time of Norton Tool, the NIRC might have wished to make a general statement of principle. The Act was new. One of its main purposes was to foster good employment practice and it was wholly understandable that the NIRC should wish to encourage and enforce good industrial practices through the new legislation. In the intervening years, the NIRC and its successor the EAT have made many pronouncements about good employment and industrial relations practice. These have been founded in the codes of practice and in the experience of the lay members. In the main, these pronouncements have related to matters such as consultation, the giving of warnings about misconduct and the conduct of grievance and disciplinary procedures. These are matters which tribunals have to consider when deciding whether a dismissal has been fair or unfair and are frequently relevant to the statutory question posed now by section 98(4) of the ERA, namely whether the employer acted reasonably in treating the reason for the dismissal as a sufficient reason for dismissing the employee, that question being determined in accordance with equity and the substantial merits of the case.
35. In my view, that process is a very different matter from applying precepts of good industrial practice to the assessment of compensation, if the effect of that process might result in awards of compensation greater than the loss the employee has suffered as the result of the dismissal. To my knowledge, there have been only two attempts to establish other precepts of good industrial practice, different from that in Norton Tool, which would have a direct effect on how much compensation is awarded. One of those is the instant case. The other was in a line of cases which culminated in Babcock, to which I will shortly turn.
36. I shall defer consideration of Miss Wilkinson's third submission, as to the compatibility of the ratio in Norton Tool with section 123 of ERA.

Addison v Babcock FATA Ltd

37. In Babcock, the employee was unfairly dismissed for redundancy on 20^th July 1984. He was given 5 weeks pay in lieu of notice (£704), a statutory redundancy payment and a further sum (described as a severance payment) under the employers' own scheme. He did not obtain another job until January 1985, well after his period of notice had expired. In August 1985, a tribunal assessed compensation in the knowledge that the factory was to close on 30^th September 1985 and that the employee would have been made redundant then, even if he had not been unfairly dismissed the previous year. They awarded compensation for loss of earnings for the whole period, 20^th July 1984 to 30^th September 1985, and deducted £704 which was the 5 weeks' pay in lieu of notice. They added the sum of £140 to reflect the fact that, if the employee had been made redundant in September 1985 instead of being dismissed in 1984, he would have been entitled to an extra week's pay in lieu of notice. The tribunal deducted the severance payment and the earnings the employee received from his new employment after January 1985.
38. On appeal by the employee to the EAT, he contended that the tribunal ought not to have deducted the 5 weeks pay in lieu of notice or the severance payment. The EAT held that the severance payment should not have been deducted and that was accepted as correct and no point arose on it in the Court of Appeal. The employee's argument on the £704 was that the money he had received as pay in lieu of notice should be regarded as a thing apart to which he was absolutely entitled and that the calculation of his loss flowing from the dismissal should begin from the date of dismissal and should not bring the payment in lieu of notice into account. In effect, he was saying that he should be paid twice over for that period, first by pay in lieu of notice and second by compensation from the tribunal.
39. That point had been the subject of conflicting decisions in the EAT. In Clydebank Cooperative Society v Mackie (unreported) 22^nd August 1983, the EAT sitting in Scotland had accepted the argument that, as a matter of good industrial practice, pay in lieu of notice should be treated as a thing apart and should not be taken into account in the employer's favour in the assessment of compensation. The following year, in TBA Industrial Products v Locke, to which I referred earlier, the EAT took the opposite view, saying, at page 231:

"There can be no circumstances in which the …employer is not given credit for the payments he has made to the employee on account of his claims for wages and other benefits."

40. In 1985, in Finnie v Top Hat Frozen Foods Ltd [1985] ICR 433, the EAT sitting in Scotland followed Clydebank. Thus, the EAT in Babcock was faced with a conflict of authority and chose to follow Finnie and Clydebank, mainly on the ground that the decisions were in accordance with good industrial practice.
41. On appeal to the Court of Appeal, Mr David Pannick for the employers argued that the pay in lieu of notice should have been deducted from the computation of loss. He submitted that, in section 74 of the 1978 Act, it was the intention of Parliament to provide compensation and not to provide a bonus. The EAT's decision resulted in the employee receiving a bonus. Compensation was to be that which was just and equitable up to the level of the employee's loss but not beyond. He submitted that, to the extent that the decision in Norton Tool could result in an award greater than the employee's loss, it was wrong.
42. Mr Andrew Hogarth for the employee argued that the EAT had been right to follow Finnie. It should not have deducted the £704. However, he also contended that the employee ought to be able to recover, as part of the compensatory award, the sum (£844) he would have received as pay in lieu of notice in September 1985, when he would have been made redundant if he had not been dismissed the year before. That sum was greater than the pay in lieu he received in July 1984 because of the extra year's service. Moreover, Mr Hogarth sought to rely on Norton Tool as support for the contention that the employee need not give credit for the wages he would earn from his new employer during that notional period of notice. On this last point, Mr Pannick conceded that the employee should be entitled to receive the notional pay in lieu of notice for September 1985 but contended that he must bring into account the sums received from his new employment. That would reduce the £844 to £240.
43. Ralph Gibson LJ gave the first judgment. After outlining the facts, he referred to the conflicting lines of authority on the question of whether a payment in lieu of notice was to be treated as a thing apart and left completely out of the calculation of compensation. He cited the short passage from TBA v Locke which I have cited above and referred to the principle underlying the decisions in Finnie and Clydebank. Ralph Gibson LJ held that, in following Finnie, the EAT had made an error of law. They had failed to distinguish properly between earnings from a new employer during the period of notice (which were not to be deducted) and a payment made by the old employer in respect of the period of notice (which was). At page 813d, he said:

"In the absence of an agreement … to the contrary effect, it seems to me to be clear that the … employers are to be given credit for all payments they have made to the employee on account of claims for wages and other benefits."

He said that that principle was in accordance with the authority of Hilti and Everwear and was correct. He referred to section 74(4) of the Act of 1978 which provided (as section 123(4) now does) that the common law rules on mitigation of damage were to be applied. He then continued:

"It is not open to the industrial tribunal or the EAT to devise by decision a rule of law which conflicts with the statutory provisions whether or not based upon or supported by a principle of good industrial practice."

44. In effect that disposed of the point. There was to be no bonus or double recovery. However, Ralph Gibson LJ then went on to discuss Norton Tool. He explained the narrow principle that if a payment in lieu of notice was made the employee did not have to give credit for earnings received during the notice period. He cited passages from Norton Tool and Everwear. He noted a departure from that principle in Tradewinds and the return to the Norton Tool principle in TBA v Locke. Then, at Page 817c, he said:

"For my part, I would uphold the principle established by NIRC in the Norton case and followed since in the EAT but in my judgment it is necessary to clarify the extent to which it states a rule of law."

He continued at 817d:

"I would uphold the principle first because it is not shown to have worked unfairly or in a manner which was contrary to the intention of Parliament in the limited form in which it was stated and applied in the cases cited (my emphasis)."

45. He then analysed the reasoning behind the (narrow) principle in Norton Tool, observing that the precept of good industrial practice on which it was based was one which it would be good and sensible to apply in most cases but at page 818c made it plain that there was no rule of law which

"requires that in all circumstances, irrespective of the terms upon which a payment in lieu of notice was made, and of any justification for not making payment in full of wages in advance for the full period of notice, the employee is entitled in claiming a compensatory award …to disregard wages earned from another employer in the notice period."

46. At page 818e, Ralph Gibson LJ said that, before dealing with the extension of the principle which had been effected in Finnie and by the EAT in the instant case, it was necessary to consider the limits of the principle in Norton Tool. He stressed that the principle was limited to the right of the employee to avoid having to give credit for earnings from a new employer during the notice period. At 818g, he said:

"If the employee does not get employment during the period of notice, no principle of good industrial practice can secure to the employee any further payment by way of lost wages in respect of the period of notice; he has received the wages for that period and, if he is to recover the same amount again, it must be by reference to some rule of law outside the provisions of the Act of 1978 and in my view no such rule exists."

47. Ralph Gibson LJ then referred again to the cases of Clydebank and Finnie and restated his conclusion that these cases were wrongly decided. The principle followed resulted in double recovery or a bonus which was in conflict with section 74 of the Act of 1978. The EAT had been wrong to refuse to deduct the sum of £704.
48. Ralph Gibson LJ then turned to deal briefly with the question of whether the employee should be entitled to receive £844 which was the pay in lieu of notice he would have received in September 1985 without deduction of the wages he would earn during that period of notice. He concluded that the principle in Norton Tool should not apply to that sum because it was not in fact a payment in lieu of notice. The facts were outside the scope of principle in Norton Tool.
49. Thus, it appears to me that the ratio of Ralph Gibson LJ's decision on the main issue in the appeal was that the principle in Norton Tool should be restricted to the limited form in which it had been applied for many years and should not be extended so as to embrace other precepts of good industrial practice if this would result in an award of compensation greater than the employee's actual loss. Therefore the principle did not apply to the attempt to obtain double recovery which had been permitted in Finnie. Double recovery for the actual period of notice was not to be allowed; it was contrary to the statute. In respect of the second issue, he held that the principle in Norton Tool was not a rule of law of general application although it produced sensible and just results in most cases. He would uphold it to the limited extent in which it had usually been applied. But it was not to be applied to the notional payment in lieu of notice from September 1985.
50. Sir John Donaldson MR also gave a full judgment. He approached matters rather differently from Ralph Gibson LJ in that he recorded that Mr Hogarth, for the employee, agreed with Mr Pannick that the £704 (the 5 weeks pay in lieu of notice received in July 1984) should have been set against the calculation of loss. As the matter was apparently agreed, he did not deal with it in detail.
51. The Master of the Rolls considered his own decision in Norton Tool and at page 827d, said:

"If the Norton case was rightly decided, and I think that it was, or, if it was not, it should not be disturbed because it has been so widely accepted as correct for so long, it does indeed lay down a rule of law, but one which is more limited than is sometimes appreciated. That rule is that, in assessing compensation for unfair dismissal, it is just and equitable to regard a claimant as having suffered an additional loss if the employer in unfairly dismissing him did not otherwise act in accordance with good industrial practice…. What the Norton case did not, and could not, decide as a rule of law, was that in all circumstances good industrial practice required that notice of dismissal should be accompanied by the payment of "money in lieu". Good industrial relations practice can change and, in any event, what is good industrial practice in relation to a weekly wage earner entitled to notice measured in weeks, may be quite different from that which is appropriate in the case of senior salaried staff entitled to notice measured in months or years."

52. I pause to observe, with great respect, that, having said that the rule of law in Norton Tool was narrower than is sometimes appreciated, he went on to set it out in its widest form. Immediately thereafter, he said that there was no rule of law that in all circumstances good industrial practice required that a payment in lieu should accompany notice of dismissal. In effect, good industrial practice depended on the circumstances of the case.
53. Then at page 827f, the Master of the Rolls said that, in Clydebank and Finnie, there had been an attempt to take Norton Tool a good deal further. This attempt had resulted in an assertion that the employee was entitled to be paid twice for the period of notice. That was wrong. The EAT had fallen into error in refusing to deduct the £704 from the computation of loss.
54. He then turned to deal with the notional pay in lieu of notice of September 1985. He noted Mr Hogarth's submission that application of the Norton Tool principle would mean that the employee would receive this sum without deduction of earnings received during the notice period but said that the argument was, in the circumstances of this case, fallacious. His reasoning was that, by being unfairly dismissed in July 1984, the employee had received an advantage in that, by the time he would have been made redundant in September 1985, he had already found a new job. Accordingly, the value of the benefit which he had lost was the notional pay in lieu less the wages he would earn in that notice period. In other words, he, like Ralph Gibson LJ, considered that the facts fell outside the principle of Norton Tool.
55. Bingham LJ, as he then was, simply agreed with both judgments.
56. There were two decisions in Babcock and therefore potentially two different rationes decidendi. On the first issue, the ratio of Ralph Gibson LJ's judgment was that compensation for unfair dismissal must be assessed under the statute, which requires that it should reflect the employee's actual loss. There must be no double recovery. Although he seemed to be basing his decision on the correctness of the principle in Norton Tool, on a proper analysis, he was not because the facts were different from Norton Tool and the principle did not apply. His reference to Norton Tool in the context of the first issue was obiter. Sir John Donaldson reached the same conclusion, and, I think, for the same reasons. He said that he thought that Norton Tool was rightly decided but, again, and for the same reason, that statement was obiter. The question whether Norton Tool was good law, in the sense of whether or not it offended section 74 of the 1978 Act, had not arisen for decision.
57. On the second issue, where the narrow principle of Norton Tool might have applied (assuming that it was correct) but was not applied on the particular facts of the case, the ratio seems to me to have been that, assuming it to be correct, the principle in Norton Tool is not a strict rule of law and can readily be disapplied if the circumstances warrant it, as they did there. I say 'assuming it to be correct' because the language used in both judgments suggests that the correctness of the principle was not being decided. Mr Pannick's submission that Norton Tool is wrong was not accepted but was not definitively ruled on because that was not necessary for the decision. I conclude therefore that the correctness of the (narrow) rule in Norton Tool cannot properly be said to have been confirmed as the ratio of the second issue.

Discussion

58. For the reasons I have just given, I conclude that the decisions of this Court in Babcock did not affect the jurisprudential standing of the narrow Norton Tool principle one way or the other. The court did not rule, as part of either ratio decidendi, that the principle in Norton Tool either did or did not offend against section 74 of the 1978 Act. All that was said in Babcock about the correctness of the narrow principle of Norton Tool was obiter. Norton Tool remains a decision of the NIRC which, in its narrow form, has been followed with approval on many occasions in the NIRC and the EAT but on which the Court of Appeal has not yet ruled.
59. However, the Court of Appeal in Babcock has in my view made clear that there is in Norton Tool no wider principle by which newly formulated precepts of good industrial or employment practice can be applied to the assessment of compensation under section 123 of ERA 1996 if the result of such application would be an award greater than the loss caused to the employee as a consequence of the dismissal.
60. Accepting therefore, for the moment, that the EAT was right to say that good industrial practice requires that an employee who is summarily dismissed while unfit for work through sickness should receive pay in lieu of notice at the normal rate of pay, the decision in Babcock makes it plain that that precept cannot be prayed in aid in the assessment of compensation in the instant case. If Ms Burlo had not been dismissed, she would have received SSP during her period of absence. Therefore SSP is the correct measure of her weekly loss during the notice period.
61. That disposes of this appeal in favour of the respondent employers. I would add, however, that I am not convinced that it is or should be a precept of good industrial practice, as the EAT held in this case, that an employer should pay wages in lieu of notice at the full weekly rate to an employee who is unfit through sickness, in cases which fall outside section 88 of ERA. It seems to me that Parliament has laid down the extent to which the obligation exists to provide pay in lieu of notice at the full rate when the employee is unfit for work. Nor, more generally, am I convinced that the concept of 'good industrial practice' should be used to create new bases upon which loss can be claimed. However, those points do not arise for decision for reasons which should by now be clear.
62. I have felt able to reach a conclusion on this case without reference to the House of Lords' decision in Dunnachie. In my view, the EAT reached the right conclusion, on the cross appeal, albeit by a process of reasoning with which I respectfully disagree. For the sake of completeness, I will examine the contention that Dunnachie says something of relevance to the issue in this case. Miss Wilkinson submits that it does; Mr Elesinnla submits that it does not.
63. Dunnachie was concerned with the question of whether a compensatory award under section 123 of the ERA 1996 can include anything for injury to feelings. In Norton Tool, Sir John Donaldson had said that it could not. That was not seriously doubted until Lord Hoffman suggested in Johnson v Unisys Ltd [2003] 1 AC 518 that Norton Tool might be wrong on that issue. In Dunnachie the House of Lords held that Norton Tool had been right; the word 'loss' in section 123 was limited to pecuniary loss.
64. Lord Steyn's speech in Dunnachie must be read in the context of the question in issue. However, the speech does contain some observations on the effect of the words 'just and equitable' in section 123, which are of general application. These observations were made because, in the Court of Appeal, Sedley LJ expressed the view that the governing concept of section 123 was the requirement that the tribunal should make an award that was just and equitable. That gave the tribunal a wide measure of discretion. A lesser requirement was that the award should 'have regard to the loss the claimant has sustained as a consequence of the dismissal'. Therefore he held that an award could include injury to feelings. Evans-Lombe J agreed with Sedley LJ in the result although for different reasons. Brooke LJ disagreed, saying that Sedley LJ's construction of the section would lead to 'palm-tree justice'.
65. Lord Steyn held that Sedley LJ was wrong and that the words just and equitable were intended only to allow tribunals a measure of flexibility in calculating the loss; they were not intended to permit 'palm-tree justice'. In effect, Lord Steyn was affirming the principle that a compensatory award must compensate for the (economic) loss attributable to the dismissal. By implication, he was saying that it must do no more. By implication, the decision affirms that there must be no bonuses.
66. I accept Miss Wilkinson's submission that the passages in Dunnachie which deal with the role of the words `just and equitable' are of some relevance to the present case. They impliedly support the principle that she contends for, that any attempt to extend the narrow principle in Norton Tool must not be allowed if that would lead to the award of a bonus. Those passages may, at some future time, be support for her second proposition that even the narrow principle in Norton Tool offends section 123 because it can and often does lead to the award of a bonus. However, that issue must await another case and another day because it does not arise on the facts of the instant appeal. In the meantime, the narrow principle in Norton Tool survives and should be applied by tribunals unless and until a further decision which is directly in point.

The Result

67. For the reasons I have given, I would dismiss this appeal.

Lord Justice Leveson :

68. I have had the opportunity to read both judgments in draft and I agree with both.

Lord Justice Mummery :

69. I agree that this appeal should be dismissed for the reasons given by Smith LJ.
70. The ET did not err in law in calculating the compensation for Ms Burlo's unfair dismissal. The EAT rightly dismissed Ms Burlo's cross appeal.
71. Over 30 years ago the National Industrial Relations Court (Sir John Donaldson presiding) in Norton Tool Co Ltd v. Tewson [1973] 1 WLR 45 (Norton Tool) settled two basic points of law on the calculation of compensation for the infringement of the new statutory right not to be unfairly dismissed. First, compensation could not be awarded for injury to feelings. Secondly, an employee was entitled to wages in lieu of notice without any deduction for wages which were earned, or could have been earned, with an alternative employer during the notice period.
72. On the first point Norton Tool was expressly approved by the House of Lords in Dunnachie v. Kingston upon Hull City Council [2005] 1 AC 226; [2004] UKHL 36 (Dunnachie). A dictum of Lord Hoffmann in Johnson v. Unisys Ltd [2003] 1 AC 518 at 544, which some read as casting doubt on the well established principle that compensation is unavailable for injury to feelings, was not approved. The House of Lords confirmed the correctness of Norton Tool on this point.
73. In Babcock F.A.T.A. Ltd v. Addison [1987] ICR 805 (Babcock) Mr David Pannick, who appeared as counsel for the employers, unsuccessfully challenged Norton Tool on the wages in lieu of notice point. He did so in the Court of Appeal (Sir John Donaldson MR presiding). Mr Pannick's submissions on the general principles governing the calculation of compensation for unfair dismissal were that-

"Under section 74 of the Employment Protection (Consolidation) Act 1978, the industrial tribunal may not award an employee more than the loss he has suffered by reason of the unfair dismissal. The tribunal's task is to award what is just and equitable up to the level of the loss: see especially section 74(1) and (4). The tribunal cannot decline to give the employer credit for the fact that he has already made payment of wages in lieu of notice to the employee. ….

If the purpose of section 74 is to compensate for loss, it would be wrong to ignore the fact that sums have already been paid by the employer. If one looks at the matter on the basis that the employer has a statutory (under section 49 of the Employment Protection (Consolidation) Act 1974) or contractual obligation to pay sums in lieu of notice, the employer has met this obligation. If one asks what is just and equitable, it cannot be fair to require the employer to pay twice in respect of the same sum. Indeed such a conclusion would lead to adverse consequences for employees. Good industrial practice is not a legal basis for requiring the employer to pay the same sum twice, nor does good industrial practice require double recovery. The object of the legislation is to compensate the employee, not to give him a bonus; and, to the extent that it suggest otherwise, Norton Tool …is wrong.

Sums earned by the employee from a new employer during the notice period should also be taken into account under section 74. Otherwise the employee receives more than his loss. Section 49 does not create an absolute duty on the employer to give notice or to pay the salary in lieu of notice."

74. Although Mr Pannick won the appeal on the particular facts in Babcock, the Court of Appeal was unanimous in not accepting his contention that Norton Tool was wrong in holding that the employee should not have to give credit for the wages that he had received from alternative employment during the period of notice. (I observe that all members of the court in Babcock had considerable experience of employment law.)
75. The question then arises whether the narrow Norton Tool principle, which, as explained by Smith LJ, has been applied by employment tribunals for over 30 years, has been undermined by the House of Lords in Dunnachie. In her excellent submissions Ms Wilkinson contended that the limited principle is no longer good law.
76. Although it is unnecessary for this court to decide this point on this appeal, I recognise that continuing uncertainty about the validity of the narrow Norton Tool principle creates problems for employment tribunals, as well as for those advising parties in litigation or in negotiating settlements of employment disputes.
77. I agree that it is necessary to re-examine the Norton Tool principle in the light of the rulings in Dunnachie on the construction of section 123 of the Employment Rights Act 1996. As we have heard full argument on the point, we should express an opinion about it.
78. I am unable to agree with the decision of the majority in the EAT that the narrow Norton Tool principle no longer applies. First, it is absolutely clear that Dunnachie did not expressly overrule Norton Tool. Secondly, it has not been clearly demonstrated that Dunnachie impliedly overruled Norton Tool.
79. I would respectfully make the following comments on the impact of Dunnachie.
80. Having cleared up the uncertainty about compensation for unfair dismissal arising from a dictum in one of its own decisions, it is improbable that the House of Lords contemplated stirring up fresh uncertainty about compensation, especially when the narrow principle laid down in Norton Tool had been accepted and applied for over 30 years and has not been shown to have worked unfairly. In my judgment, these factors alone are pragmatic reasons for leaving the narrow principle alone.
81. I understand the legal basis on which Ms Wilkinson submits that after Dunnachie, "all is not well" with the narrow Norton Tool principle. It may well turn out that she is right on this point, but doubts about the state of the law reflecting good employment practice need to be settled by the House of Lords, as was done in the case of doubts about compensation for injury to feelings, rather than by this court or the EAT.
82. Dunnachie decided that section 123(1) of the 1996 Act was "a composite formula" for assessing compensation for unfair dismissal; that the concept of "loss" in section 123 did not cover non-pecuniary loss; and that the section could not be used to award compensation in the guise of "such amount as the tribunal considers just and equitable in all the circumstances." The broad approach of the majority of the Court of Appeal (Sedley LJ and Evans-Lombe J) to the "just and equitable" formulation was firmly rejected.
83. The rejection did not of itself, however, de-stabilise the narrow Norton Tool principle. As was explained in Babcock, the narrow principle is based less on a broad "just and equitable" approach ("palm tree justice") to the calculation of compensation than on the recognition of good employment practice as a relevant factor in the calculation of compensation for unfair dismissal.
84. In his speech, with which all the other members of the Appellate Committee concurred, Lord Steyn discussed the decision in Norton Tool without casting any doubt on any part of it. It is true that, as the focus in Dunnachie was only on that part of Norton Tool concerned with non-recovery for injury to feelings, it was unnecessary for the House of Lords to consider the correctness of Norton Tool on the wages in lieu notice point. In my view, the limited nature of the issue in Dunnachie supports a cautious approach to the proposition that it has undermined the authority of the narrow principle in Norton Tool, which is rooted in judicial recognition of good employment practice. This point simply did not feature in the legal submissions or in the speeches.
85. I agree with Lord Steyn (see paragraphs 16 and 26) that full account should be taken of the context in which section 123 fell to be construed in Dunnachie. The context was a claim for injury to feelings. The sole question was whether such injury could be compensated under section 123. It was held that it could not. The claim in this case is purely for pecuniary loss. The question is how the ET should calculate the loss. The context is different from Dunnachie, even though the construction of section 123(1) is relevant to both points.
86. In my judgment, Dunnachie is clear authority for the proposition that section 123(1) is "a composite formula", which does not permit recovery of compensation for non-pecuniary loss in cases of unfair dismissal (paragraph 28). It only permits recovery of compensation for economic loss. Further, the criterion of "loss" is not relegated to a subordinate role by the "just and equitable" formulation of the power of the tribunal to award compensation.
87. I do not think that Dunnachie is express or implied authority for the proposition that the ET, in calculating compensation under section 123 for unfair dismissal, must, contrary to a long standing good employment practice, require the employee to give credit for wages that were, or could have been, earned by the employee during the notice period. This point was not up for argument, consideration or decision by the House of Lords.
88. For these reasons, as well as for all the reasons given by Smith LJ, I would dismiss Ms Burlo's appeal. Unless and until the House of Lords decides otherwise, I would confirm the continuing application by the ET, the EAT and this court of the narrow Norton Tool principle in calculating compensation for wages in lieu of notice in unfair dismissal cases.
89. I appreciate that uncertainty about an everyday legal point like this is not satisfactory for tribunals, practitioners, employers or employees. The sooner that the House of Lords can settle the law one way or the other the better, dealing also, if possible, with a related controversy on the duty to mitigate under section 123(4), another point which has not arisen for decision in this case: (see, for example, the decisions of the EAT in Hardy v. Polk (Leeds) Ltd [2005] ICR 557 and Morgans v. Alpha Plus Security Ltd [2005] ICR 525; cf Voith Turbo v. Stowe [2005] ICR 453)