United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants	MR D RICHARDSON (Of Counsel) Mr N Bains Law Department Digital Equipment Co Ltd Digital Park Imperial Way Reading RG2 OTE
For the Respondent	MR D CHRISTIE (Of Counsel) Mr J M Styles Woodville Cottage New Inn Lane Gawcott Bucks MK18 4HP


 


MR JUSTICE MORISON (PRESIDENT): This case raises an important point relating to the calculation of compensation under Section 74 of the Employment Protection (Consolidation) Act 1978, as amended. Its importance stems from the fact that the interpretation of the section has led to conflicting decisions in Industrial Tribunals and the Employment Appeal Tribunal. A variety of different circumstances may cause problems in interpretation and we are aware of the difficulties which Industrial Tribunals face, especially when confronted by differing decisions of the EAT by which they are bound. Unlike many other cases, to which we shall refer, we have had the benefit of full argument from Counsel on both sides. We have acceded to their suggestion that we use this opportunity to indicate, for the benefit of Industrial Tribunals, how, in our judgment, the different compensation issues should be approached. We understand that the Court of Appeal has before it two appeals which raise some of the same issues, but that these appeals are not scheduled to be heard until the summer of 1997. It goes without saying, that that Court's judgment will take precedence over what we have to say. Nonetheless, whilst recognising the dangers that come from saying more in a judgment than what is strictly necessary to dispose of the instant case, the President, supported by his two lay colleagues, considers that it would be unfair to leave matters in doubt for such a long period. Employers and Trade Unions have a right to know where they stand, as far as may be, when making decisions affecting individual employment rights: industrial harmony is of great value. They also have a right to expect consistency from Industrial Tribunals, who in turn have a right to expect it from the EAT. In our judgment we should endeavour to bring clarity to a topic which regularly engages the attention of Industrial Tribunals. In this field, in particular, uncertainty is the enemy of justice and good industrial relations.

The circumstances in which the particular appeal comes before us is unusual. Mr Clements was awarded by an Industrial Tribunal £11,000 compensation for unfair dismissal. The employers appealed, and the matter was heard by a panel of the Employment Appeal Tribunal, presided over by the former distinguished President. The appeal was allowed and the employee's compensation was reduced to below £1,000. Shortly thereafter, the employee applied for a review of the judgment on the basis that, first, it was given in ignorance of a conflicting decision made by a different panel of the EAT a month before, and, second, attention had not been drawn to a relevant decision of the Court of Appeal. The former President granted that application, and the matter came before us accordingly.

As sometimes happens in this area of the law, especially when one party is unrepresented, the Court, on reflection, becomes concerned that its decision may have been per incuriam. We think this is such a case. Had the former President had the opportunity, we consider that he would, in the light of the two previous decisions to which the Court's attention was not drawn, have wished to have the appeal re-argued. Our own researches show that this Court only has a limited opportunity to review its own decisions: Blockleys Plc v Miller [1992] ICR 749. The Court has no power to hear an appeal against its own decision, and should not purport to do so. We are sure that, when ordering the review, the former President would have had such limitation well in mind. Having had his attention drawn to the two decisions, the former President must, we think, have wished to have further argument on the point on which it had just ruled. Where a decision can be said to have been reached per in curiam, then it might be appropriate to review it rather than require the parties to proceed by way of an appeal to the Court of Appeal. Because the former President is no longer available to re-open the case himself, and because the points in this case are of general application, both parties expressly invited us to re-hear all the arguments. Jurisdiction cannot be conferred by consent and had we been faced with any submissions as to the extent of our jurisdiction, we would have had to give close attention to the question. As it is, we would not wish this case to be taken as any kind of authority on the jurisdiction issue: that point was not argued; on the contrary both parties invited us to do what we have tried to do in this judgment.

We start with the facts relating to the present appeal. Mr Stephen Clements commenced his employment with Digital Equipment Co Limited ["Digital"] in September 1987. He was dismissed by reason of redundancy on 31 March 1994. At that date he was one of nine Project Managers. Due to a reduction in Digital's business, their requirements for Project Managers diminished from nine to seven, and Mr Clements was one of the two selected for redundancy. The Industrial Tribunal concluded in their Decision, as recorded in their Extended Reasons, which was sent to the parties on 27 April 1995, that the dismissal was procedurally unfair; that had a fair selection procedure been followed there was:

"a 50% chance that Mr Clements would have been retained and not selected for redundancy and the award of compensation should reflect that accordingly".

The Industrial Tribunal fixed the period of loss, for which they considered compensation to be appropriate, as from the third week in June 1994, the effective date of termination, [the date when Mr Clements ceased to be paid by Digital] to the end of October 1995 [nine months after the date of their hearing, which was in January 1995]. The parties could not agree the way Mr Clements' compensation should be calculated, and the matter came before a differently constituted Industrial Tribunal on 7 June, whose Decision was sent to the parties on 16 June 1995. By that Decision, Mr Clements was awarded the maximum compensatory award then within the Tribunal's jurisdiction, namely £11,000. Initially, and wrongly, as they accepted at a subsequent review hearing, the second Tribunal had used a different loss period: namely 50 weeks from the effective date of termination to the date of the compensation hearing, and a further period for future loss of twenty-six weeks. Following their review hearing the Industrial Tribunal determined the following figures for compensation [for the sake of clarity, we have rounded them up or down]:

"Mr Clements' gross loss for the whole period, past and future, was calculated as £43,000. At the date of termination of his employment, Mr Clements received from Digital a contractual termination payment which exceeded his statutory redundancy payment by £20,500."

The issue before the Industrial Tribunal was whether Mr Clements' compensatory award should be:

[£43,000 - £20,500] x 50% = £11,250 ['the larger award'], or

[£43,000 x 50%] - £20,500 = £1,000 ['the smaller award']

The Industrial Tribunal concluded that the larger award was, in principle, correct and, therefore, awarded Mr Clements the maximum sum within their power, namely £11,000.

Digital appealed both on the question of liability and quantum. However, the only point of law which the EAT, presided over by Lord Justice Mummery, considered on 3 May 1996 [Judgment handed down on 4 June 1996] related to compensation. By its Decision, which is reported at [1996] IRLR 513, this Court allowed Digital's appeal and substituted the smaller for the larger award.

Against that background, the appeal, by way of a review of that decision, comes before a differently constituted panel of the EAT. Neither of the lay members hearing this appeal has previously been involved in Mr Clements' case.

We start with what we believe to be the general principle, that compensation, whether at common law or by statute, is designed to put the injured party into the same position as he would have been in, so far as money can achieve it, had the wrong not been done to him. The question must be asked and answered: what is the net loss which the injured party has suffered as a result of the identified wrongdoing? In principle, he is to be compensated for all those of his losses which he has sustained which were reasonably foreseeable when the wrong was committed. No questions of foreseeability or remoteness arise in these cases and need not be considered further.

As a result of a wrong, the injured party may receive benefits, which he otherwise would not have done but for the wrong, which must be offset against his losses caused by the wrong, so that the net loss can be calculated: Parry v Cleaver [1970] AC 1 at 13 B:

"First what did the Plaintiff lose as a result of the accident? What are the sums which he would have received but for the accident but which by reason of the accident he can no longer get? And secondly, what are the sums which he did in fact receive as a result of the accident, but which he would not have received if there had been no accident? And then the question arises whether the latter sums must be deducted from the former in assessing damages."

The House of Lords, in that case, decided that some benefits are to be ignored [such as insurance monies]. It was common ground that the payment which Mr Clements received from Digital by reason of the termination of his employment with them must be offset against the pecuniary losses [such as loss of earnings, contractual benefits and pension] he sustained as a result of his dismissal. We have not considered whether, in principle, following the decision of the Court of Appeal in Babcock FATA Ltd v Addison [1987] IRLR 173, to which we were not referred by Counsel, it was correct to make any offset bearing in mind that Mr Clements was contractually entitled to the payment and would have received it even if he had been fairly dismissed in a redundancy situation. On our approach, it is unnecessary to consider that point further.

The statutory scheme for compensation for unfair dismissal is contained in Section 74 of the Employment Protection (Consolidation) Act 1978, as amended. The scheme provides a complete code for the assessment of compensation, and limits the amount which an injured party may recover. But, in principle, as we shall show, the statute closely follows the general principles referred to above. This section was in force at the date of the Industrial Tribunal's determination, although it has now been repealed and replaced by Section 123 of the Employment Rights Act 1996. The 1996 Act is solely designed to collect together into one item of legislation, by way of consolidation, statutory provisions relating to individual employment rights which were widely scattered among various different Acts. The Act of consolidation effectively came into force on 22 August 1996. The draftsman has not used exactly the same grammar or language as had been used in the other Acts. Broadly, any differences are purely matters of form not substance, but in one respect, to which we shall hereafter refer, we consider that the new Act makes more clear that which was less clear before. We are, therefore, content in this judgment to set out the relevant provisions of the 1978 Act, as they were in force at the date of the Industrial Tribunal's decision, but would wish to emphasise to Industrial Tribunals that we are satisfied that the conclusions we have reached would have been exactly the same if we had been considering the comparable provisions of the 1996 Act:

"72(1) Where a tribunal makes an award of compensation for unfair dismissal under section 68(2) or 71(2)(a) the award shall consist of__

(a) a basic award calculated in accordance with section 73, and

(b) a compensatory award calculated in accordance with section 74

73(9) The amount of the basic award shall be reduced or, as the case may be, be further reduced, by the amount of any redundancy payment awarded by the tribunal under Part VI in respect of the same dismissal or of any payment made by the employer to the employee on the ground that the dismissal was by reason of redundancy, whether in pursuance of Part VI or otherwise."

74. Calculation of compensatory award.

(1) Subject to subsection (8) and section 76, 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 said loss 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) The said loss, in respect of any loss of any entitlement or potential entitlement to, or expectation of, a payment on account of dismissal by reason of redundancy, whether in pursuance of Part VI or otherwise, shall include only the loss referable to the amount, if any, by which the amount of that payment would have exceeded the amount of a basic award (apart from any reduction under [section 73(7A) to 9(1)]) in respect of the same dismissal.

(4) In ascertaining the said loss 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 of Scotland, as the case may be.

(5) In determining, for the purposes of subsection (1), how far any loss sustained by the complainant was attributable to action taken by the employer no account shall be taken of any pressure which, by calling, organising, procuring or financing a strike or other industrial action, or threatening to do so, was exercised on the employer to dismiss the employee, and that question shall be determined as if no such pressure had been exercised.

(6) Where the tribunal finds that the dismissal was to any extent caused or contributed to by any action of the complainant it shall reduce the amount of the compensatory award by such proportion as it considers just and equitable having regard to that finding.

(7) If the amount of any payment made by the employer to the employee on the ground that the dismissal was by reason of redundancy, whether in pursuance of Part VI or otherwise, exceeds the amount of the basic award which would be payable but for section 73(9) that excess shall go to reduce the amount of the compensatory award.

(8) Subsection (1) is subject also to section 75 except that, in the case of an award of compensation under section 71(2)(a) where an additional award falls to be made, the limit imposed by section 75 may be exceeded to the extent necessary to enable the award fully to reflect the amount specified as payable under section 69(2)(a) or (4)(d), as the case may be, if that limit would otherwise reduce the amount of the compensatory award when added to the additional award."

The first task of the Industrial Tribunal which is considering a compensatory award is to ascertain the "loss" which the complainant sustained "in consequence of the dismissal in so far as that loss is attributable to action taken by the employer." We would emphasise that the "loss" which is referred to is what we will call in this judgment the 'net loss', because the complainant's loss will represent the balance struck after the losses and gains have been reckoned. The loss must flow from the dismissal ["in consequence of the dismissal"]; in other words the loss must be caused by the dismissal and must be "attributable to action taken by the employer". If, for example, it could be shown that part of the loss could not be attributed to the action taken by the employer, then to that extent that part of the loss is not recoverable.

What loss did Mr Clements sustain? If one left out of account any question of percentage reduction, as a result of his unfair dismissal his loss was £43,000 less the amount of compensation he received, namely £20,500. If he had not been dismissed he would neither have suffered the loss of earnings nor received the termination payment. Therefore, but for the finding in relation to 50%, his net loss would have been £22,500. The statutory limit on compensation was, at the relevant time, £11,000. That limit would be applied so as to reduce Mr Clements' award to £11,000, although his actual loss remained at £22,500.

Following the decision of the House of Lords in Polkey v A E Dayton Services Ltd [1988] ICR 142, and their approval of dicta of Mr Justice Browne Wilkinson in Sillifant v Powell Duffryn Timber Ltd [1983] IRLR 91, at 97, Industrial Tribunals will, where appropriate, ask themselves what would have happened had the employer followed a fair procedure, or otherwise acted fairly. By this task they are asking themselves what proportion of the loss which the complainant has suffered is attributable to the wrongful action of the employer. Unless it is clear either that the complainant would have been dismissed even if the employers had acted fairly, or, conversely, that the complainant would not have been dismissed in such circumstances, the Industrial Tribunal will wish to determine, in percentage terms, as best they can, the chances of one or other of those extremes occurring. In this case, the Industrial Tribunal put that percentage at 50%: they estimated that there was a 50% chance that he would have suffered no loss at all, or, to put it another way, there was a 50% chance that, had Digital acted fairly, he would still have been dismissed in circumstances in which he would have had no claim for compensation. Accordingly, that was the appropriate proportion of the complainant's loss for which he was entitled to be compensated. If Mr Clements had been dismissed, but dismissed fairly, he would still have had the same period out of work, and still have received the compensation package from his employer. In other words, his financial position would have been exactly the same [that is, a net loss of £22,500 compared to the position he would have been in had he not been dismissed], but he would have had no right to claim that sum from his employers. To reflect the fact that his net loss of £22,500 was not inevitably going to be Digital's liability, but that there was only a 50% chance that it would have been recoverable from Digital, it seems to us, that as a matter of general principle, in the absence of any authority or statutory provision which would compel a different result, Mr Clements' recoverable loss is 50% of £22,500. In other words, he is only entitled to recover a proportion [50%] of his 'net loss'. Such an award would accurately reflect the chance that Mr Clements' loss would not have been recoverable from Digital, and would accurately reflect Digital's culpability.

Subject to a separate argument based upon the language of Section 74(7), to which we will return in due course, the alleged justification for the lower award is that the loss which Mr Clements sustained is £43,000 and it is to that figure that the 50% reduction should be applied. Otherwise, it is said, the employer would not receive full credit for the compensation he paid the complainant, but only for a proportionate part of it. Therefore, it is argued, employers would have no incentive to make such payments unless they were fully taken into account. From Digital's point of view, if Mr Clements had been paid nothing, their maximum liability under the Act would have been £11,000; by deducting the payment they made before applying the percentage reduction their liability has been substantially increased. This last argument is less persuasive in a case such as this, where the payment made to Mr Clements was one which the employers were bound to make, and to which Mr Clements was entitled as a result of his years of service with them. Supposing that the payment of £20,500 was made ex gratia, then the argument could be seen to have more merit. In principle, it is said, the argument does not turn on whether the payment was contractual or ex gratia.

It seems to us that the fallacy in this argument is to misuse the word "loss". Mr Clements' loss is not £43,000 but £22,500. In calculating his loss [or net loss] full credit is given for the contractual payment which was made. The employers are not being given credit for just a proportionate share of that payment: they are given full credit for it. It is the proportionate part of the loss [net loss] which is the subject matter of the reduction, and not just one element in the calculation of the loss. Indeed, support for the view that the proportion is applied to the net loss rather than to an element within it, is to be found in the passage in Sillifant which was expressly approved by the House of Lords in Polkey:

"There is no need for an all or nothing decision. If the industrial tribunal thinks that there is doubt whether or not the employee would have been dismissed, this element can be reflected by reducing the normal amount of compensation by a percentage representing the chance that the employee would still have lost his employment."

The words "normal amount of compensation" can only mean 'the compensation which would otherwise have been awarded', and in this case that means £22,500 [subject to the 'cap' on compensation for unfair dismissal]. We recognise the force of the theoretical point that employers may be less willing to make ex gratia payments to their employees if the payment is treated in this way. We have to say that we do not place much weight on it. The services of ACAS are available to those employers who wish to buy out their dismissed employees' rights to claim unfair dismissal compensation, and who are considering an ex gratia payment. If employers wish to make a payment in consideration of the employee abandoning his rights to pursue a complaint for unfair dismissal, then, with ACAS' approval, they can do so. Further, they may enter into a compromise agreement which, if it fulfils the stipulated statutory conditions, will oblige the employee to refrain from bringing or continuing unfair dismissal proceedings [see Section 203 of the Employment Rights Act 1996]. In principle, as Mr Clements was contractually entitled to receive the payment, it is unlikely, we think, that either he or ACAS would have been willing to approve a settlement whereby he received a few hundred pounds more for the loss of valuable employment.

The process by which the percentage proportion is calculated in a case such as the present is often called "a Polkey deduction": see, for example, Cox v London Borough of Camden [1996] IRLR 389 [one of the cases referred to by Mr Clements when asking for a review of the previous decision of this Court]. For our part, we think that it is dangerous to attach labels in this way. The word "deduction" is not apposite. Having asked what would have happened had a fair procedure been followed, the percentage figure arrived at represents that proportion of the award which would otherwise have been made which was not attributable to the employers' wrongdoing. It is a proportion, and has the effect of reducing the recoverable [net] loss. It is not so much a 'deduction' as 'a proportionate reduction'. This may seem like splitting hairs, but Tribunals should keep well in mind the difference between a proportionate reduction of an award, on the one hand, and a deduction, or set-off, to be taken into account when calculating the net loss, on the other. A deduction in this latter sense takes place before the potential award can be calculated, and before such an award can be proportionately reduced.

It seems to us that, absent any authority to the contrary, the language of Section 74(1) makes it clear that in a case such as this, Mr Clements is entitled to the larger award. We shall start by considering the relevant authorities.

The Authorities

An analogous argument to that advanced by the employers to us, was advanced by the Ministry of Defence, in the context of the calculation of compensation for those female members of the armed services who were unlawfully required to retire from the services when pregnant.

We take, as an illustration of the point, the hypothetical example before this Court in the case of Ministry of Defence v Hunt & Others [1996] IRLR 139, at page 143:

"(a) A woman who earned £500.00 per week serving in the army is unlawfully discharged because of pregnancy;

(b) After her discharge, she earns (or could earn, acting reasonably to mitigate her loss) £250.00;

(c) The Industrial Tribunal finds that, had she not been discharged, there was a 40% chance of her remaining in the army

How then is her weekly loss to be calculated?

The submission on behalf of the women is that the correct approach is to subtract £250.00 (actual earnings) from £500.00 (potential earnings in the army) and take 40% of the result. This would produce a weekly loss of £100.00.

The submission on behalf of the Ministry of Defence is that the correct approach is to take 40% of £500.00, viz £200.00 and then to subtract from that the actual earnings of £250.00. This produces a negative weekly loss of -£50.00."

The MOD's argument was supported by a decision of a panel of the EAT presided over by Mr Justice Tucker in Ministry of Defence v Bristow. There the judge said this:

"In our opinion, the point at which discount should be applied is before the deduction is made for failure to mitigate which should be made in full and without a discount. We agree with the [Ministry's] submissions that mitigation is not a question of loss of a chance, but one of fact. The figure is definite where there has been mitigation in fact and can certainly be calculated where there has not been but should have been mitigation.

We take the view that the position here is analogous to the situation which the Employment Appeal Tribunal had to consider in Derwent Coachworks v Kirby [1994] IRLR 639.

We have no doubt that this is the position so far as the deduction for failure to mitigate is concerned. We leave open the question of whether the same applies to deductions of childcare costs."

In Hunt, the EAT, presided over by Mr Justice Maurice Kay, having recited the arguments addressed to them, concluded as follows:

"Although we are not bound by previous decisions of this appeal tribunal, we would not depart from one except after the most careful consideration. With due respect to the constitution of this Tribunal in Bristow we are satisfied that we have received far fuller submissions on this matter than our colleagues did in that case. ...In our judgment, its approach to the issue is potentially productive of injustice. We are also mindful of the fact that in Marshall v Southampton & South West Hampshire Area Health Authority (Teaching) (No.2) [1993] IRLR at 449 [paragraph] 26, the European Court of Justice specifically stated of compensation for a discriminatory dismissal that:

'It must be adequate, in that it must enable the loss and damage actually sustained as a result of the discriminatory dismissal to be made good in full in accordance with applicable national rules.'

It seems to us that if the law were as submitted on behalf of the Ministry of Defence on this issue it would fall short of providing 'full compensation'. Accordingly, in our judgment the percentage should be applied after and not before the subtraction of the mitigation of earnings."

It seems to us that no sensible distinction in principle can be drawn between the treatment, for compensation purposes, of what a complainant received from another employer, on the one hand, and what he received from his previous employer, on the other. Accordingly, we are required to choose between Bristow and Hunt. Whilst it can be said that in sex discrimination cases the complainant is entitled to receive full compensation for her losses, equally, absent any contributory fault which will be taken into account, a complainant who has been unfairly dismissed is, in principle, entitled to full compensation, save for the statutory cap. In fact, a panel of the EAT, presided over by Mr Justice Morison, when faced with other MOD appeals on compensation, in an unreported decision delivered on 24 June 1996 [EAT No. 533/95 & Others], expressed its approval of the decision in Hunt and its disapproval of the decisions in Bristow and Derwent Coaches, [another decision of a panel of the EAT presided over by Mr Justice Tucker].

In Derwent Coaches, the complainant had received a payment in lieu of notice. He was adjudged to be unfairly dismissed, but the Tribunal concluded that he was 50% to blame. The EAT said that:

"It would not be just and equitable to an employer if the value of any payment he had made were to be reduced, not because of his conduct but by reason of the employee's conduct. The general principle is that the purpose of the exercise should be to award full compensation but not to award a bonus. So if an approach has the effect of awarding a bonus, that must be inconsistent with the general principle. ... In our opinion the principle is, or ought to be, that full credit should be given for payment made by employers."

On that basis, the complainant's award was as Digital contended it should be in this case, and, if Derwent Coaches were correctly decided, Mr Clements should receive the smaller award, because otherwise it would be 'a bonus' to apply the 50% factor [whether through causation or through deduction for contributory fault] to the net loss. We can see no good reason in principle to distinguish between contributory fault on the one hand and a proportionate reduction of the award through the application of the Polkey principle on the other.

Prior to the decision in Derwent Coaches, there were two previous decisions of the EAT in the late 1970s which decided the point the other way: UBAF Bank Ltd v Davis [1978] IRLR 442, a panel presided over by Mr Justice Arnold; and Parker & Farr Ltd v Shelvey [1979] IRLR 434, a panel presided over by Mr Justice Bristow. There was one decision of the EAT in favour of the Derwent Coaches conclusion, namely Clement-Clarke International Ltd v Manley [1979] ICR 74, a decision of a panel presided over by Mr Justice Kilner Brown. It is to be noted that this case was decided after UBAF, but the court was not referred to it. As far as we are aware, prior to the Derwent Coaches case, Industrial Tribunals were following the UBAF line of authority. In the Derwent Coaches case, the EAT were referred to these three previous decisions but decided, as it was entitled to do, to follow Clement Clarke.

We turn to the Decision which we have been asked to review. We should make it clear that, at this stage, we are not considering whether the words of the statute compel us to arrive at a conclusion which differs from that which we believe to be correct in principle.

At paragraph 23 of the IRLR report, page 515, the EAT said:

"In such cases the tribunal is entitled to reduce the normal amount of compensation awarded by a percentage representing the chance that the employee would still have lost his employment. That is part of the process of determining what loss has been sustained by the employee and the extent to which that loss is attributable to the actions of the employer. It is true that Mr Clements has sustained the loss of a job, but in circumstances where there was a 50% chance that he would still have lost his job, even if there had been no procedural unfairness in the manner of dismissing him.

We agree with Mr Richardson that the industrial tribunal's method of calculation is not consistent with the tribunal's finding that Mr Clements had only a 50% chance of retaining his employment if Digital had followed a fair procedure and only gives credit to Digital for half of the payment for severance received by Mr Clements in connection with his redundancy. That result is not in accordance with the structure and scheme of s.74 of the 1978 Act. Nor is it in accordance with justice, equity, logic or principle. The object of s.74 is to provide compensation for loss, not to penalise an employer for fault on his part in failing to follow a fair procedure for dismissal.

The only authority against the argument proposed by Mr Richardson is in the unreported appeal tribunal case K Egerton and others v Hewitt Refractories Ltd (23 June 1994) EAT/326/92. In that appeal the appellants appeared in person. The respondents did not appear and were not represented. The appeal tribunal approved a method of calculating compensation which was adopted by the industrial tribunal in this case. That appeal tribunal did not, however, have the benefit of the legal arguments and citation which we have received.

The most recent case on contributory fault also adopts the method which we approve for this case: see Derwent, supra. We should add, however, that Mr Richardson made it clear that, although he was using on this appeal the same arguments as had been accepted by the appeal tribunal in Derwent, this was not a case of contributory fault and that his reasoning is correct for this case, even if it is found by a higher court that the appeal tribunal in Derwent had not adopted the correct approach. We believe that Mr Richardson had in mind the criticisms made in some quarters of the Derwent case: see, for example, Harvey on Industrial Relations and Employment Law, Vol I, D2651-2662 and the earlier decisions of the appeal tribunal not followed in Derwent. We make it clear that nothing we say in this judgment is to be taken as casting doubt on the correctness of Derwent, in which it was held that the reduction for contributory fault should be made before taking account of payments made by the employer to the employee."

We should make it clear that the EAT did not have the benefit of contrary legal argument to that advanced by Mr Richardson on Digital's behalf. It will be clear from the passages cited that the argument advanced to us that, by adopting the approach favoured by the Industrial Tribunal, the employer was somehow being penalised and that his contractual payment was being unfairly reduced, found favour. The EAT appeared to accept that the Derwent Coaches case had been rightly decided despite the criticism of it in Harvey on Industrial Relations and Employment Law. Indeed, we cannot think that the EAT could have reached the same conclusion had they considered Derwent Coaches to have been wrongly decided.

Whichever way we decide this case, as the authorities now stand, we must conclude that a number of previous decisions of this court have been wrongly made.

Before reaching our decision we shall return to the statute. A sustained argument was addressed to us based upon the wording of Section 74(7):

"If the amount of any payment made by the employer to the employee on the ground that the dismissal was by reason of redundancy, whether in pursuance of Part VI or otherwise, exceeds the amount of the basic award which would be payable but for section 73(9) that excess shall go to reduce the amount of the compensatory award."

The argument is that, as with subsection (6), which refers to a reduction in the "amount of the compensatory award" where there is contributory fault, an excess redundancy payment must be applied to reduce that which would otherwise have been awarded. That means that the employers' payment can only be taken into account once; accordingly, on the facts of this case, Mr Clements would receive the lower award.

In support of this contention, reliance was placed upon a decision of a panel of the EAT, presided over by HH Judge Altman, in Cox v London Borough of Camden [1996] IRLR page 389. In that case the Industrial Tribunal had followed the route of reducing the gross loss by the appropriate percentage proportion following Polkey, and then deducting the employer's termination payment. In other words, they favoured the Derwent Coaches approach. The EAT in Cox distinguished Derwent Coaches on the basis that it was concerned with the treatment of a payment made in lieu of notice and a deduction for contributory fault. They also concluded that Derwent Coaches might need to be reconsidered in the light of the judgment of the Court of Appeal in Rao v Civil Aviation Authority [1994] IRLR 240. But for the provisions of subsection (7) they concluded that every termination payment made by an employer should be taken into account when a loss was being calculated under Section 74(1).

However, they regarded subsection (7) as providing a ring-fence which accorded an excess redundancy payment a special status. They were of the view that where such a payment was made, the loss must be calculated without taking it into account, and, thereafter, the proportionate reduction should be made and then the excess payment taken into account.

If this decision is correct, then any termination payment made where an employee was dismissed by reason of redundancy would be ring-fenced. It is the experience of this court that termination payments frequently reflect a number of items, such as holiday pay, notice pay, a special termination payment and, where appropriate, a redundancy payment. There is nothing in subsection (7) which would allow such a payment to be split between its different component parts. The statute applies to any payment made on the ground that the dismissal was by reason of redundancy, whether or not the payment was made pursuant to a statutory obligation. There are cases where an employer believes that a redundancy situation existed and made a payment on that ground, but on analysis there was no true redundancy. Presumably such a payment would fall within the ring-fence, if there were one. Further, whilst the ostensible reason for the dismissal might be redundancy, the true reason might be found to be something else. If the employer made the payment on the basis of the ostensible reason, that too, presumably, would fall within the ring-fence.

It is not apparent to us that the concept of a ring-fence, which distinguishes one type of termination payment from all others, has any justification as a matter of policy. No justification for such a policy was advanced to us in argument. It is, for the reasons we have given, going to produce differences in compensation on a somewhat random basis. We would be reluctant to accept that a payment made on one ground following a dismissal should have the effect of depriving the complainant of compensation which he otherwise would have recovered had the same payment been made on another ground.

But, in any event, it does not seem to us that the language of the subsection necessitates the construction of a ring-fence. The reduction of the amount of a compensatory award may be achieved either by taking the payment into account when the loss is being calculated or, as suggested in argument, at some later stage. There is no indication given that it is to be done one way or the other. We are not persuaded that any help is to be derived from the previous subsection which requires the Tribunal to "reduce the amount of the compensatory award by such proportion as it considers just and equitable". The word "proportion" clearly indicates that the reduction is to be a proportion of what could only be another amount. The amount is the amount of the loss which has been calculated under Section 74(1) which would have formed the basis of the award. In subsection (7) there is no reference to a "proportion"; rather there is to be a reduction in an "amount". In the 1996 Act, it is of interest to note that the equivalent to Section 74(1) [Section 123] is expressly made "subject to the provisions of this section". It seems to us that this is quite consistent with an excess payment made on the grounds of redundancy being netted off against the losses the complainant sustained following the dismissal when the loss, and hence the amount of the compensatory award, is being calculated under Section 74(1).

Although we understand the clearly expressed, and, if we may say so with respect, the clearly reasoned decision in Cox, we do not consider that the concept of a "ring-fence" is sustainable in law. It would produce haphazard results for dismissed employees and we can see no justification for it either in the language of the statute or as a matter of policy.

The EAT in the present case appear to have taken a somewhat similar view, although Cox was not cited to them. Having referred, inter alia, to Section 74(7) the Court continued:

"The important points to note on these provisions are that:

(a) the amount of the compensatory award for the loss sustained by the employee must be determined before the redundancy payment is deducted; ..."

But, as it seems to us, the amount of the compensatory award may be reduced as well by reducing the amount of the loss before the application of a proportional reduction, as after. In that sense, whilst we have recognised the force of the point, and having the benefit of fuller argument, we do not accept that the statute says anything about how, or when, the reduction is to be made.

In Rao, the Court of Appeal accepted that a net loss could be reduced both as a result of a Polkey- defined proportion and for contributory fault. We do not find this case of assistance on the points with which we are concerned, although the Court approved the approach of the Industrial Tribunal, which applied the proportionate reduction to the net loss. But it does not seem to us that the correctness of their doing so was in issue. The case appears to be concerned only with the issue as to whether it is possible to have two reductions, to which the answer was yes. It is to be noted that the employee represented himself before the Court of Appeal, which did not, therefore, have the benefit of full legal argument.

We can, therefore, summarise the position as we see it. There are conflicting decisions of the Employment Appeal Tribunal as to how payments received by an employee are to be treated whenever there is to be a proportionate reduction in the award. Further, there is a conflict as to the way the chances of an employee suffering a loss is to be applied. Third, there is uncertainty as to whether excess redundancy type payments are to be treated differently from other deductible sums which the employee receives by reason of the dismissal. It is, we think, regrettable, that this first tier appellate tribunal should have allowed, possibly even encouraged, such a rich diversity of differing views. The burden on Industrial Tribunals in resolving factual issues, often of great complexity, has unquestionably been made more difficult by these differences. Faced with this position we must, it seems, now state what we believe to be the law, and in doing so, identify previous decisions of this Court with which we do not agree. We do this with due respect for the other panels.

We can state our conclusions quite shortly:

1. It seems to us clear that neither Derwent Coaches nor Clement-Clarke International can be accepted as good law, and should not be followed. Industrial Tribunals should follow the approach established as long ago as 1978 in UBAF and followed in Parker. There is no question of an employer not being given full credit for what he has paid, if the correct method is adopted, although it is true that after some payments have been made, the employer may find himself liable to make a further compensatory payment. The employer's argument only has any force because of the application of the cap, which is an artificial impediment to an employee being fully compensated for his losses [subject to any lawful reductions in the award]. Where there is contributory fault, or a proportionate Polkey reduction, it is simply not logical or correct to say that it is unfair to reduce the employer's payment; what is being reduced is the loss [net loss] which would have given rise to the compensatory award.

2. It also seems to us quite clear that Hunt was correctly decided on the point to which we have referred in this judgment: a decision which should not be regarded as confined to the calculation of loss in sex discrimination cases, but of general application to the calculation of losses for unfair dismissal. The chance of an employee not suffering the loss which has been calculated is not a percentage factor to be applied to just one part of the compensation equation. Therefore, we conclude that Bristow was wrongly decided and should not be followed.

3. We are also of the view that an excess redundancy payment should be taken into account as any other payment which the employee receives after and as a result of his dismissal, such as monies in lieu of notice, earnings from other employment, or contractual or ex gratia payments made by the employer, whether the payments were made on the grounds of redundancy or not. In our view, there is no ring-fence as stated in Cox which we consider should not be followed on this point.

4. Accordingly, with due respect, we do not consider that the original appeal in this matter was correctly decided. We consider that the employee was entitled to the higher award. We draw comfort from the fact that our former distinguished President did not have the benefit of full argument, and that he must have felt uneasy about the decision and hence decided that his decision should be reviewed. Although we have been faced with a heavy, and somewhat invidious, task in carrying out that review, we are grateful to him for the chance it has given us to try and clarify the law, as best we may.

Accordingly we review the decision and conclude that Digital's appeal be dismissed and the order of the Industrial Tribunal be affirmed.

We do not in any way wish to imply any criticism of Mr Richardson, Digital's Counsel, to whom we express our gratitude, in the way he presented the appeal on the first occasion. There was no reason for him to have been aware of the decision in Cox and we do not consider that the decision in Rao was such that it became his duty to refer it to the Court.