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United Kingdom Employment Appeal Tribunal
You are here: BAILII >> Databases >> United Kingdom Employment Appeal Tribunal >> Secretary Of State For Employment v Mann & Ors [1995] UKEAT 930_94_2804 (28 April 1995)
URL: http://www.bailii.org/uk/cases/UKEAT/1995/930_94_2804.html
Cite as: [1995] UKEAT 930_94_2804
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At the Tribunal
Judgment delivered on 19 October 1995
THE HONOURABLE MR JUSTICE MUMMERY (PRESIDENT)
MR P DAWSON OBE
MR K M HACK JP
JUDGMENT
Revised
APPEARANCES
For the Appellant ELEANOR SHARPSTON
(of Counsel)
Treasury Solicitor
Queen Anne's Chambers
28 Broadway
LONDON SW1H 7JS
For the Respondents (lst) MR P ELIAS QC
(of Counsel)
Messrs Rowley Ashworth
247 The Broadway
Wimbledon
LONDON SW19 1SE
2nd -7th Respondents
MR J HAND QC
MR P MEAD
(of Counsel)
Messrs Brian Thompson & Partners
Percy House
Percy Street
Newcastle-upon-Tyne
NE1 4QW
MR JUSTICE MUMMERY (PRESIDENT) The principal points of law on this appeal are -
(1) Does the Industrial Tribunal have jurisdiction to hear and determine claims against the State for damages for loss suffered as a result of the State's default in transposing the provisions of the European Community Directive 80/987/EEC - the Insolvency Directive) into domestic law. It is possible to make such a claim on the authority of the decision of the European Court of Justice in Frankovitch v. Italy [1991] ECR 1-5357. The Industrial Tribunal held at Newcastle held that it did have jurisdiction to entertain the claim. The Secretary of State for Employment appeals against that decision.
(2) Can certain provisions in S.122 of the Employment Protection (Consolidation) Act 1978 ("the 1978 Act") and S.189 and S.190 of the Trade Union and Labour Relations (Consolidation) Act 1992 ("the 1992 Act") be construed so as to be compatible with Community law, as contained in the Insolvency Directive and in the Directive on Collective Redundancies (75/129/EEC).
(3) If the provisions of domestic law cannot be construed to be compatible with Community law, should they be disapplied as against the Secretary of State in order to give effect to the provisions of Community law enjoying primacy?
(4) Are certain provisions in Article 4 of the Insolvency Directive themselves incompatible with fundamental principles of Community law? It is common ground that, if there is uncertainty as to the validity of the provisions of the Insolvency Directive, a reference of an appropriate question must be made by this Tribunal to the European Court of Justice.
In relation to these questions it is agreed that the appeal should proceed on the basis that
(a) The Tribunal held that certain relevant provisions of domestic law cannot be construed to be compatible with Community law; and
(b) No reference to the European Court was made by the Tribunal. The reason for this agreement is that, as will appear later in this judgment, there is uncertainty as to the precise basis on which the Tribunal reached the decisions from which the Secretary of State appeals.
The factual background
The Industrial Tribunal found the following facts:-
(1) The Applicants, who are members of various recognised Trade Unions, were all employed in one capacity or another by Swan Hunter Shipbuilding and Engineering Group Ltd ("the Company").
(2) On 13th May 1993 administrative receivers were appointed over the Company. On 28th May 1993 408 employees were summarily dismissed for redundancy.
(3) On 20th September 1993 the Industrial Tribunal, on the application of the relevant Unions at a hearing on 8th September, made protective awards in favour of the Appellants for the maximum 90 day period, from 28th May to 25th August 1993. The awards were made under S.189 of the 1992 Act.
(4) As the Company was insolvent and unable to pay the protective awards, applications for the payment of the protective awards were made to the Secretary of State for Employment.
The proceedings
These proceedings, instituted under S.124 of the 1978 Act by Originating Applications presented on 12th December 1993, arose out of the decision of the Secretary of State to make deductions from the protective awards before payment and to apply statutory ceilings and limitations to the awards. The principal claim against the Secretary of State was for payment without deduction and without the application of ceilings and limitations. That claim was made on the basis of the interpretation of the statutory provisions in the light of the Insolvency Directive and on the direct effect of certain provisions in that Directive. As an alternative to that claim, it was also alleged that the Secretary of State is liable in damages to the Applicants for failure to transpose the Insolvency Directive into UK domestic law. The Industrial Tribunal decided the claims in two stages:-
(1) By agreement the preliminary issue on jurisdiction to determine the damages claim against the Secretary of State was decided first. The Full Reasons for the decision on that point were notified on 18th August 1994, following a hearing on 2nd, 3rd and 4th August. The Secretary of State appealed by Notice of Appeal served on 20th September 1994.
(2) The Full Reasons for the second decision on the question of the construction and effect of the Directives were notified to the parties on 28th November 1994. The Secretary of State served a notice of appeal on 8th January 1995.
The relevant domestic legislation
The provisions of the 1978 Act and the 1992 Act are the starting point of the arguments on these appeals.
A. The 1978 Act
Section 122 of the 1978 Act is concerned with an employee's rights on the insolvency of his employer. In the specified circumstances the Secretary of State pays to the employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of the debt which the employee was entitled to be paid at "the relevant date". It is common ground in this case that the relevant date is the date on which the Company became insolvent.
The debts to which the section applies include
"(3)(a) Any arrears of pay in respect of one or more (but not more than 8) weeks ..."
They also include any amount which the employer is liable to pay the employee for the statutory period of notice: S.122(3)(b).
For the purposes of the section "Arrears of Pay" are treated as including
"(4)(d) Remuneration under a protective award made under S.189 of [the 1992 Act]."
A ceiling is placed on the total amount payable by S.122(5) which provides -
"The total amount payable to an employee in respect of any debt mentioned in subsection (3) where the amount of that debt is referable to a period of time, shall not exceed [£205] in respect of any one week ..."
The limit specified in subsection (5) has been varied from time to time by Orders made by the Secretary of State under S.122(6).
B. The 1992 Act
Protective awards, as referred to in S.122(4)(d) of the 1978 Act, are made under the 1992 Act.
Section 189 provides for the making of an award for failure of the employer to comply with redundancy consultation requirements.
"(1) Where an employer has dismissed as redundant, or is proposing to dismiss as redundant, one or more employees of a description in respect of which an independent Trade Union is recognised by him, and has not complied with the requirements of S.188 [Duty of employer to consult trade union representatives], the Union may present a complaint to an Industrial Tribunal on that ground."
If the Tribunal finds the complaint well founded it shall make a declaration to that effect and may also make a protective award: S.189(2).
The provisions in S.190 govern entitlement under the protective award.
"(1) Where an Industrial Tribunal has made a protective award, every employee of a description to which the award relates is entitled ... to be paid remuneration by his employer for the protected period."
Section 190(3), which has been repealed as from 30th August 1993, applies to this case as it predates repeal. The subsection provides:-
"(3) Any payment made to an employee by an employer in respect of a period falling within a protected period:-
(a) under the employee's contract of employment
(b) ...
shall go towards discharging the employer's liability to pay remuneration under the protective award in respect of the first mentioned period."
The questions of construction
The questions of construction which arise on these provisions are -
(1) Is the Secretary of State entitled to set off against the protective award sums paid by him in lieu of statutory notice periods? (the notice set-off point)
(2) Is the Secretary of State entitled to set off against the protective award payment of wages by the Company for work on 28th May 1993? (The wages set-off point)
(3) Is the ceiling of £205 per week contained in S.122(5) in accordance with the provisions of the Insolvency Directive? (The ceiling point)
(4) Is the 8 week limitation period contained in S.122(3)(a) in accordance with the provisions of the Insolvency Directive? (The limitation point).
As already indicated, the appeal proceeds on the basis that the Tribunal ruled against the Secretary of State on all four questions of construction, though it appears from parts of the full reasons for the decision that the Industrial Tribunal was minded to refer the ceiling and limitation point to the European Court of Justice under Article 177. In fact, it made no reference and the Secretary of State is opposed to any reference on those points, though, for reasons which will appear, he is in favour of a reference on the two set off points which have both been treated on this appeal as raising the same point.
The Decision of the Industrial Tribunal
The Full Reasons for the two decisions set out at substantial length the rival submissions of the parties. It is unnecessary to attempt to state or summarise the submissions at this stage. It is sufficient to summarise the decision as follows.
A. Full Reasons 18th August 1994 Appeal EAT/930/94 (the Frankovitch point)
(1) The absence of an express provision granting jurisdiction to an Industrial Tribunal to determine claims for damages pursuant to the decision in Frankovitch did not exclude jurisdiction in respect of Community law claims. The Industrial Tribunal has determined claims under S.119 of the Treaty of Rome. The claim under Frankovitch arises directly from the European law. The Tribunal is able to make a reference to the European Court of Justice if any difficult or doubtful question arises on the interpretation of Community law.
(2) The Secretary of State for Employment, not the Attorney General, is the correct respondent to a Frankovitch damages claim. He is the guarantee institution under the Directive against whom the directly effective provisions might be pleaded. He is the designated Minister for the purposes of S.2(2) of the European Communities Act 1972. He is an authorised department for the purposes of the Crown Proceedings Act 1947. The expression of a contrary view by Lord Keith in R v. Secretary of State for Employment ex parte Equal Opportunities Commission [1995] AC 1 is not binding on the Industrial Tribunal, as the view was expressed on a matter which was not a substantive part of that case. Further, Order 77 of the Rules of the Supreme Court and S.17 of the Crown Proceedings Act 1947 indicate that it is the Secretary of State who is the proper party.
B. Full Reasons 28th November 1994 EAT/54/95 (The construction questions)
(1) The Secretary of State is not entitled to set off against the protective award wages paid for work done by employees on 28th May 1993 or sums paid by him in lieu of the statutory notice period. It is possible to construe S.122 to conform to Community law which does not permit the set off to be allowed to an employer under S.190(3).
(2) The ceiling of £205 is not in accordance with Community law. The limit applied to 179 Swan Hunter employees. In the body of the decision the Industrial Tribunal said that they were not persuaded that it was in accordance with Community law, though they did add that they were not prepared to rule that it was unlawful and that there was a sufficient doubt to justify referring questions to the European Court of Justice. They did not, however, do that. The decision did not spell out the consequences of the domestic legislation failing to accord with Community law, though it appears to have been appreciated that the position might give rise to Frankovitch claims if the provisions of the Directive were not directly effective against the State. The decision on this and other points is lacking in reasoning. The Chairman, Mr D H Emmott, unfortunately died between the conclusion of the hearing and the notification of the full reasons and it may be that, although he left a document to be signed by the members, it did not reflect the full reasoning for the decision.
(3) The 8 week limitation period is not in accordance with Community law though, in the full reasons (paragraph 82), the Industrial Tribunal said that it was minded to refer the matter to the European Court of Justice
"We think that there is sufficient uncertainty and doubt to justify a referral and that, on the alleged invalidity of the Insolvency Directive, the matter must be referred to the ECJ."
No such reference was made.
The Frankovitch point
In our judgment, the appeal should be allowed against the decision of the Industrial Tribunal that it had jurisdiction to hear the claim for damages under the Frankovitch decision. That ruling was made in error of law. An Industrial Tribunal has no jurisdiction to determine such claims either against the Secretary of State or against the Attorney General, if he were joined. We accept the submissions of Miss Sharpston on behalf of the Secretary of State. In our view, the legal position on jurisdiction is as follows:-
(1) Industrial Tribunals were established by Regulations made by the Secretary of State "to exercise the jurisdiction conferred on them" by or under the 1978 Act or "any other Act, whether passed, before or after this Act." The jurisdiction of Industrial Tribunals is therefore defined by statute. An Industrial Tribunal has no inherent, general or residual jurisdiction. There is no United Kingdom Act or regulations made under primary legislation which confer on the Industrial Tribunal jurisdiction to hear and determine damages claims against a non-employer State for default in the performance of an obligation under Community law to transpose provisions of Community law (eg, a Directive) into UK domestic law.
(2) There is no provision of Community law which confers jurisdiction to determine Community law claims on Industrial Tribunals or requires such claims to be determined by an Industrial Tribunal. Community law only requires that such claims are capable of being entertained before an appropriate court of a Member State. The general principle of Community law is that, provided that an effective remedy is granted, Member States are permitted to specify the courts and procedures whereby Community law claims are to be enforced: See Rewe GMBH v. Landswirtschaftskammer [1976] ECR 1989; Amministrazione delle Finanze dello Stato v. San Giorgio SPA [1983] ECR 3595.
(3) An effective remedy for damages under Frankovitch is available in the High Court which is well equipped to deal with complex questions of State liability, causation and quantum liable to arise in these claims. The County Court also has jurisdiction in civil proceedings against the Crown and could entertain a claim within its statutory limits: S.13 and S.15 of the Crown Proceedings Act 1947; RSC Order 77, Rule 13. There is provision in S.20(1) of the 1947 Act to remove such proceedings to the High Court from the County Court. There is no similar provision for removing proceedings from the Industrial Tribunal to the County Court or to the High Court.
(4) We are also of the view that the correct respondent in such a claim is the Attorney general, not the Secretary of State for Employment. Although the observations of Lord Keith in the EOC (supra) were obiter, they are of high authority and, with respect, accord with Crown practice.
In order to avoid any misunderstanding, we should add that nothing that we have said casts any doubt on the jurisdiction of an Industrial Tribunal to hear claims within the limits of its statutory jurisdiction in the course of which arguments are based on Community law relevant to the construction and the validity of the provisions of domestic law. Thus, there is no doubt that the Industrial Tribunal had jurisdiction in the present case to hear and determine the questions arising on the construction of the provisions of the 1978 Act and the 1992 Act in the light of the provisions of the Directives and also on the invalidity of domestic law provisions should they fail to accord with the directly effective provisions in the Directives.
The Applicant's submissions on the Frankovitch point
On behalf of the Applicants Mr John Hand QC advanced as his principal argument the proposition that the rights derived from Community law are capable of enforcement through the mechanism of Industrial Tribunals and that Industrial Tribunals have jurisdiction to hear the complaints, even though there is no remedy under domestic law. For example, claims based on Article 119 of the Treaty or on directly effective provisions of the Directives, such as EC/76/207, are not prescribed in the primary legislation or Regulations as falling within the jurisdiction of the Industrial Tribunal; yet jurisdiction has been exercised in such cases; Pickstone v. Freeman [1987] ICR 867; Secretary of State for Scotland and Greater Glasgow Health v. Wright and Hannah [1981] IRLR 187 at 193, paragraphs 29, 34 and 35. He also referred to a recent decision of the EAT Brown v. Secretary of State for Employment (26th September 1994 EAT.62/94).
The decision in Frankovitch recognised a liability which involved the same considerations as those which gave rise to the doctrine of direct effect and the doctrine of supremacy of Community law. In accordance with those doctrines directly effective provisions of Community law were applied in Industrial Tribunals. There is no qualitative distinction in seeking to apply the doctrine in Frankovitch.
A claim based on Frankovitch is not of a different nature and does not raise entirely different issues from a claim under S.124 of the 1978 Act. Claims under S.124 involve an appreciation of the application of domestic law in the light of the two Directives: the Insolvency Directive and the Collective Redundancies Directive. In deciding that question alone the Industrial Tribunal is all but deciding liability under Frankovitch. If there is no claim under Community law, the claims will fail in any event. If, however, Community law is relevant, but it is not possible to interpret domestic law in accordance with Community law and there is no remedy by way of direct effect, the decision of the Industrial Tribunal will include the question of the applicability of Community law and the lack of remedy for it for the individual applicant. If the only remedy is then against the State in accordance with the Frankovitch doctrine, domestic law will fail to provide an adequate and effective remedy if it insists that an individual must go back to the starting post and institute separate proceedings in another court for a different cause of action. Applicants are entitled to an effective remedy and the immediate application of Community law without the necessity to litigating two separate courts. Mr Hand cited the decision in Simmenthal [1978] ECR 629, paragraph 19.
"... every national court must, in a case within its jurisdiction, apply Community law in its entirety and protect rights which the latter confers on individuals and must accordingly set aside any provision of national law which may conflict with it, whether prior or subsequent to the Community rule".
The principle of effectiveness is not observed if the Industrial Tribunal cannot determine the Frankovitch claim, as well as the claims under S.124. Where two different courts have to consider the same or similar facts in relation to an application of Community law and the principles underlying the Frankovitch doctrine, there might be divergent findings of fact and/or law; different appreciations of Community law might give rise to the necessity to make different references to the European Court of Justice on similar issues from each court or tribunal. The principle of effectiveness require that all the parties relevant to the dispute should appear in the same court at the same time and that courts or tribunals should have the power to deal with all the issues before them, without the necessity for an artificial distinction of a separate cause of action against the Secretary of State, justiciable only in a different court. The failure of the United Kingdom to implement the Directive and put in place appropriate procedures to deal with Frankovitch claims, with resulting uncertainty as to the jurisdiction and remedies, should not be held against these individual applicants.
Finally, it was argued that the Secretary of State was the correct Respondent as he was the designated Minister for the purposes of S.2(2) of the European Communities Act 1972. RSC Order 77 and S.17 of the Crown Proceedings Act 1947 made provision for the possibility of the Secretary of State to be a party to proceedings under the Act instead of the Attorney General.
These arguments, though lucidly and attractively presented, have not ultimately persuaded us to uphold the Industrial Tribunal's decision. The arguments do not answer the fundamental point that, under Community law, questions of jurisdiction, procedure and remedy are, in general, for the Member State to determine, subject only to the principles that the domestic law procedures and remedies should provide an effective remedy and not be discriminatory as between similar claims under domestic law and Community law. In our view, the statutory provisions which define and limit the jurisdiction of powers of Industrial Tribunals are not in themselves contrary to or incompatible with Community law and do not violate these principles.
An Industrial Tribunal has no jurisdiction to determine a claim against the State or an officer of the State for failure to perform a public legal duty. That is usually a matter for the High Court in judicial review proceedings. The same applies to a claim under Community law. The effectiveness of such a claim is not impaired by allocation of the power to determine such claims to the High Court. As already mentioned, the Attorney General is the proper respondent. Liability under the Frankovitch doctrine is that of the State, not of any particular department of the State.
The set-off points - Notice set off and Wages set off
Under this heading it has been agreed that the notice set-off point and the wages set-off point do not raise any different arguments. In our view, there was no error of law on the part of the Industrial Tribunal. We dismiss the Secretary of State's appeal.
Both points raise common questions namely, is the Secretary of State entitled to rely on S.190(3) of the 1992 Act to set off the sum due by way of payment in lieu of notice and wages from 28th May 1993? Is there a provision of Community law which prevents the Secretary of State from relying on S.190(3) and requires him, when making payment under S. 122(3)(a) and (b) of the 1978 Act, to make full payment of a protective award as arrears of pay.
There is no dispute as to which provisions of the Community law are potentially relevant. They are contained in the Insolvency Directive.
Article 3 provides -
"(1) Member States shall take the measures necessary to ensure that guarantee institutions guarantee, subject to Article 4, payment of employees' outstanding claims resulting from contracts of employment or employment relationships and relating to pay for the period prior to a given date.
(2) At the choice of the Member States, the date referred to in paragraph (1) shall be:-
- either that of the onset of the employer's insolvency;
- or that of the notice of dismissal issued to the employee concerned on account of the employer's insolvency;
- or that of the onset of the employer's insolvency or that on which the contract of employment or the employment relationship with the employee concerned was discontinued on account of the employer's insolvency."
The relevant part of Article 2 provides:-
"2. This Directive is without prejudice to national law as regards the definition of the terms "employee", "employer", "pay", "right conferring immediate entitlement" and "right conferring prospective entitlement".
Article 4 provides:-
"1. Member States shall have the option to limit the liability of guarantee institutions, referred to in Article 3.
2. When member States exercise the option referred to in paragraph 1, they shall:
- in the case referred to in Article 3(2), first indent, ensure the payment of outstanding claims relating to pay for the last three months of the contract of employment or employment relationship occurring within a period of 6 months preceding the date of the onset of the employer's insolvency;
- in the case referred to in Article 3(2), second indent, ensure the payment of outstanding claims relating to pay for the last three months of the contract of employment or employment relationship preceding the date of the notice of dismissal issued to the employee on account of the employer's insolvency;
- in the case referred to in Article 3(2), third indent, ensure the payment of outstanding claims relating to pay for the last 18 months of the contract of employment or employment relationship preceding the date of the onset of the employer's insolvency or the date on which the contract of employment or the employment relationship with the employee was discontinued on account of the employer's insolvency. In this case, that the State may limit the liability to pay corresponding to a period of 8 weeks or to several shorter periods totalling 8 weeks.
3. However, in order to avoid the payment of sums going beyond the social objective of this Directive, Member States may set a ceiling to the liability for employees' outstanding claims.
When Member States exercise this option, they should inform the Commission of the methods used to set the ceiling."
(It was not argued that the options contained in Article 4 included the power to set off one element of pay against another).
As further background to the arguments on Community law, we were referred to the decision of the European Court of Justice on 8th June 1994 in the Commission v. The United Kingdom (C-383/92) in which the European Court of Justice ruled that, by permitting an employer to set off payments due under the contract of employment against a protective award or vice versa, as provided by S.190(3) of the 1992 Act, the United Kingdom acted in breach of Article 5 of the Treaty, because the availability of set off meant that the sanctions imposed on the employer for failing to consult, as required by the Collective Redundancies Directive, were not effective, proportionate or dissuasive.
Submissions of the Secretary of State
The submissions of the Secretary of State on the set-off point were that the Industrial Tribunal had erred in law in accepting the argument that set-off against the protective award was not permissible.
Ms Sharpston argued as follows:-
(1) A protective award is not "pay" within Article 3 of the Insolvency Directive. Article 2.2 leaves the definition of "pay" to national law. National law is thus permitted to limit its scope by setting it off against other payments. A protective award is more akin to damages for breach of an obligation to consult than to consideration for work done covered by Article 3. It is a mechanism designed to enforce the consultation requirements of the Collective Redundancies Directive and to provide a sanction for non-compliance.
(2) The right to the protective award does not arise from "an outstanding claim resulting from contracts of employment or employment relationships." It arises from the choice by the United Kingdom of the protective award mechanism as the sanction for non-consultation.
(3) If a protective award is "pay", it is not "pay for the period prior to a given date" within Article 3 of the Insolvency Directive. The given date selected by the United Kingdom under Article 3 is the date on which the contract of employment was discontinued. A protective award relates to the period after the dismissal of the employee concerned. It is more akin to notice pay or a redundancy payment.
(4) There is no obligation to include a protective award made in compliance with the Collective Redundancies Directive as "pay" for the purposes of the Insolvency Directive. It would not have breached the Insolvency Directive to remove protective awards altogether from the scope of S.122(4). There has been no breach of the Insolvency Directive by allowing a set-off. The basic guarantee of the employees' rights is unimpaired. If there is any doubt on the matter of the interpretation of the Insolvency Directive this Tribunal should make a reference of the question to the European Court of Justice.
Conclusion on set-off point
We see no need to make a reference to the European Court of Justice under Article 177. In our judgment, the construction of the relevant provisions of the 1978 Act and the 1992 Act, in the light of the Insolvency Directive, is clear. We accept the submissions of Mr Patrick Elias QC on this point. The legal position is as follows:- (1) A protective award is "pay" within the meaning of the Insolvency Directive. Article 2.2 of the Insolvency Directive permits pay to be defined by the relevant national law, in this case UK law. UK law has chosen (though under no obligation to do so) to treat a protective award as pay and to subject the payment to the principles of Community Law. Under S.189(3) of the 1992 Act it takes the form of an order that the employer pays remuneration for the protective period. It is calculated as pay under S.190(5). It is therefore pay within the meaning of the Directive and is protected by it.
(2) The Insolvency Directive does not confer power for the guarantee institution to set off one element of pay against another element of pay.
(3) Indeed, the power of set-off is not compatible with Community law. It was held in the case of The Commission v. The United Kingdom (supra) that it was not compatible with Community law (in that case the Collective Redundancies Directive and Article 5 of the Treaty of Rome) to permit an employer to operate set-off against the protective award. It would not be compatible with Community law for the Secretary of State to set off where the employer could not do so, because his obligation under the Insolvency Directive is to "guarantee" payment of employees outstanding claims resulting from contracts of employment or employment relationships and relating to pay.
(4) If set-off is not permissible under Community law, the provisions of S.122 must be construed, if it possible to do so on the language of the section, so as to be compatible with Community law and to deny the Secretary of State the right to apply the set-off. Looking first at the construction at S.122, the question is: on the relevant date was the employee "entitled" to be paid the whole of the protective award (S.122(1)(b)? If that section is construed so as to be compatible with Community law the answer must be that he was "entitled" to be paid the whole amount of that award. It is a debt. The remuneration under the award made under S.189 is treated as arrears of pay within the meaning of S.122(3)(a), (see S.122(4)(d)).
(5) The set-off provision is not contained in the section which makes the Secretary of State liable for the amount to which the employee is entitled. The set-off provision is in S.190(3). That only applies to payment made "to an employee by an employer" in respect of a period falling within a protected period. It does not in terms apply to payments made to an employee by the Secretary of State. The section should be construed so far as possible to conform to the Community law position that set-off does not apply. In our view, the section can and ought properly to be so construed. Otherwise the Secretary of State will be allowed to limit his liability by taking advantage of his failure to transpose the Directive into domestic law.
(6) It is not correct to assert that the protective award relates to a period after the contract of employment was discontinued and therefore falls outside the Directive. The protective award often relates to periods of actual employment.
The ceiling point
On this point the Secretary of State argues that the Industrial Tribunal erred in law in apparently concluding that the ceiling of £205 per week was not in accordance with Community law or that there was a sufficient doubt on the point to justify a reference under Article 177. On this point we accept the argument of the Secretary of State that the £205 ceiling imposed by S.122(5) of the 1978 Act is, on its true construction, compatible with Community law. The argument rests on Article 4.3 of the Insolvency Directive, cited above. Ms Sharpston argued that, on the basis of that provision, the United Kingdom had an option to set a ceiling on liability. A ceiling connotes a pre-set upper limit. The United Kingdom has exercised the option to set such a limit. The limit set is not a derisory one. It represents a legitimate choice within the terms of the option. The limit is reviewed regularly in accordance with criteria contained in S.148(2) of the 1978 Act.
Opposing submissions of Applicants
The starting point of the argument against this position is that the provisions of the Directive are sufficiently precise and unconditional to entitle individual employees to rely upon them as having direct effect, so that the State is not entitled to rely on its own default in implementing the provisions fully into domestic UK law. It is submitted that the Secretary of State is only permitted to limit the amount of the payment due to an employee in accordance with the provisions of Article 4.3 and has to justify any derogation from Article 3.1. The limit set by Article 4.3 may only be set "to avoid the payment of sums going beyond the social objective of this Directive." The social objective of the Directive is the guarantee of the payment of outstanding pay claims to employees. This appears from the preamble to the Directive and from Article 117 of the Treaty of Rome.
The preamble states:
"Whereas it is necessary to provide for the protection of employees in the event of the insolvency of their employer, in particular in order to guarantee payment of their outstanding claims, while taking account of the need for the balanced economic and social development of the Community."
Article 117 of the Treaty states:
"Member States agree upon the need to promote improved working conditions and an improved standard of living for workers, so as to make possible their harmonisation while the improvement is being maintained."
The purpose of the Directive is to guarantee payments. It is not a social security benefit scheme or a scheme for paying a proportion of the total claim. The objective of the Directive, as applied to all employees, is impaired if there is a limit on the payment of claims to all or the majority of workers. The evidence showed that the majority of the Applicants in this case earned more than £205 per week. The application of the criteria in S.148 of the 1978 Act had substantially reduced the protection available to average employees. There was an increasing disparity between the level of earnings and the level of protection guaranteed under S.122. The limit was outside the scope of Article 4.3, as it failed to take into account the social objective of the Directive. In those circumstances the Applicants were entitled to rely on the direct effect of Article 3.1 and claim payment of the outstanding claims in full.
In our view, these arguments do not answer the point that the Directive expressly permits a ceiling. The ceiling must be consistent with the social objective of the Directive, but that objective is not an absolute guarantee of payments. Article 4 provides that Member States have an option to limit the liability of guarantee institutions. The social objective is the protection of employees. The guarantee of payment provided by Article 3 is subject to the provisions of Article 4. The ceiling in this case can be justified as avoiding the payment of sums going beyond the protection aimed at by the Directive.
The 8 weeks period point
Ms Sharpston, on behalf of the Secretary of State, argued that the Industrial Tribunal erred in law in holding that the 8 week limitation period contained in S.122(3)(a) is incompatible with Community law and that it was minded to refer the question to the European Court of Justice, along with the issue whether or not the Insolvency Directive, by permitting such a limitation, was itself invalid under Community law. We accept Ms Sharpston's submissions to the following effect.
(1) The 8 week limitation period is compatible with Community law;
(2) There is no need to make a reference to the European Court of Justice;
(3) There is no serious question as to the validity of the Insolvency Directive such as require a reference in accordance with Foto Frost [1987] ECR 4199.
The argument on this question has centred on the provisions of Article 3.2 and 4.2 of the Insolvency Directive cited above. Under Article 3.2 Member States have a choice as to the given date in Article 3.1. There are three possible dates. The date chosen by the United Kingdom was
"that of the onset of the employer's insolvency or that on which the contract of employment or the employment relationship with the employee concerned was discontinued on account of the employer's insolvency". (the "third indent")
Under 4.1 Member States have an option to limit the liability of the guarantee institution. That option has been exercised. In that event Article 4.2 provides that, in the event of the choice of the given date in Article 3.2 in fact chosen by the United Kingdom,
"Member States may limit liability to make payment to pay corresponding to a period of 8 weeks or to several shorter periods totalling 8 weeks (the third indent)".
Under this option the scope of the guarantee extends further back in time "to outstanding claims relating to pay for the last 18 months of the contract of employment or employment relationship", in which case they can limit liability to a total of 8 weeks' pay.
In our view, this limitation accords with the express terms of the Directive.
The Applicants, through Mr Hand QC, attack the limitation of 8 weeks on the basis that the provisions of the Directive are themselves in breach of the fundamental principle of equality in Community law. That principle is breached by treating identical circumstances differently. The question of the validity of the provisions of the Directive ought to be referred to the European Court of Justice. (Foto Frost [1987] ECR 4199)
The basis of the argument is that the Directive makes differing provision for identical circumstances and equal provision for differing circumstances. In identical circumstances employees will have different guarantees. Member States are able to rely on the provision in Article 3.2 (third indent) and Article 4.3 (third indent) to limit the guarantee to 8 weeks in circumstances where equally the provisions of the first indent would apply. It was argued that there was no obvious reason why employees might be better off with a longer period in which the guarantee may be invoked. The likelihood is that employers on the brink of insolvency will fail to pay. The longer period during which the guarantee may be invoked cannot be objective justification for the employee's guarantee being one month shorter than would have been the case under the same circumstances, if the Member State had adopted the first indent. The net result is that the employee has a smaller guarantee.
On this point we are persuaded by the arguments of Ms Sharpston that there is no serious question of invalidity of the provisions of the Directive. The United Kingdom has exercised an option which it was entitled to exercise within the terms of the Directive. In those circumstances we find that the Tribunal erred in law in holding that the provision as to the 8 week limitation was contrary to Community law.
In the result we make the following order:
(1) We allow the appeal on the Frankovitch point.
(2) We dismiss the appeal on the set-off point.
(3) We allow the appeal on the ceiling point.
(4) We allow the appeal on the limitation point.
On none of these points (including the Frankovitch point) do we find it necessary to make a reference to the European Court of Justice.