United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR STUART BRITTENDEN (of Counsel) Instructed by: Messrs Morgan Cole Solicitors Bradley Court 11 Park Place Cardiff Glamorgan CF10 3DP
For the Respondent	MS HILARY WINSTONE (of Counsel) Instructed by: Messrs Thompsons Solicitors 18 Lawford Street Old Market Bristol BS2 ODZ


 


SUMMARY

CONTRACT OF EMPLOYMENT

Implied term/variation/construction of term

Construction of bonus payment term of contract of employment, made in writing.

Applying the reasonable observer test explained by Lord Hoffmann in ICS Ltd v West Bromwich Building Society this EAT rejected the construction placed on the term by the Employment Tribunal and reversed their decision.


 


HIS HONOUR JUDGE PETER CLARK

1. This appeal concerns a short point of construction of a written term of a contract of employment relating to bonus payments and the bonus term. The parties to these proceedings in the relevant contract are Mr Dennis Benjamin and Spectrum Agencies, respectively the Claimant and Respondent before the Exeter Employment Tribunal.
2. By his claim form the Claimant was employed by the Respondent from 17 February 2007 until his resignation in February 2008. He complained of constructive unfair dismissal and unlawful deductions from wages in respect of his bonus payment for the calendar year 2000.
3. The claims were resisted and an Employment Tribunal, chaired by Employment Judge Mulvaney, sitting on 30 March 2009 at Exeter, heard and determined a preliminary issue as to the proper construction of the bonus term by a Judgment with Reasons promulgated on 7 April 2009, finding in favour of the construction advanced by and on behalf of the Claimant. Against that judgment the Respondent appeals. The matter comes before us for full hearing on the direction of Cox J on the paper sift.

The Facts

4. These we take from the Tribunal's findings of primary fact. Since 2002 the Respondent has been the sole agent in the UK for the sale of footwear produced by an American company Crocs Inc. Crocs are manufactured in Holland. In December 2006 the Respondent advertised for six sales representatives whose task was to generate sales to retail outlets in their area.
5. The system of payment to the Respondent was as follows: orders from retailers would be submitted to Crocs Inc, Crocs would invoice the retailer and the retailer then paid Crocs' invoice. Crocs would pay commission to the Respondent once the invoice had been paid by the customer. Invoices provided for 90 days credit. Thus the Respondent was dependant for payment of its commission on the retailer first paying Crocs' invoice. It was at that point, Mr Brittenden told us, that the money was treated as received. The Respondent had no control over when that invoice was paid. The Tribunal record, at paragraph 10, that it was not disputed that the Claimant's bonus would only be calculated on paid invoices.
6. The Claimant was one of those recruited as a sales representative. He commenced his employment on 17 February 2007 under the terms of a one-year written contract. His basic salary was £22,000 per annum plus bonus payments.
7. The bonus terms were as follows (dividing the relevant term numerically):

"1. The Target Turnover for your area is £2,000,000  per annum. After this has been reached, you will then be eligible for our Bonus Scheme.

2. For every £100,000 of invoiced and paid business on top of the £2,000,000 you will be entitled to £1,000 on top of your salary.

3. There is also an opportunity to earn a further £5,000 per annum if your Area Turnover reaches £4,000,000. If you exceed £4,000,000  then you will carry on getting £1,000 for every £100,000 of business. If your turnover reaches £5,000,000  you will get another £5,000 bonus and again, for every £100,000 over this you will get £1,000.

4. The first bonus will be paid six months after your Target Turnover has been reached and then six monthly thereafter.

5. In addition, there is a Bonus Scheme in place for opening new accounts. A

For all new accounts opened you will get a £25 bonus when they place a repeat order.

Again, this will be paid at six monthly intervals and only on orders that are invoiced and paid by the customer."

8. The Tribunal also found as fact:

(a) That the annual period for the purposes of calculating turnover for the purposes of triggering bonus payments under the bonus term was a calendar year, for present purposes, 1 January to 31 December 2007 (see paragraph 11 of their reasons).

(b) From the outset the turnover figures provided to the sales representative included sums paid in 2007 against invoices raised in 2006 (paragraph 12)."

Legal Principles

9. The Tribunal was referred to the principles of construction helpfully summarised in the speech of Lord Hoffman in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896. We have been provided with a copy of the report taken from a website and that copy is deficient; it does not include the pagination and lettering of the law report.
10. At page 10 of 13 of that report Lord Hoffman said:

"The principles may be summarised as follows:

1. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

2. The background was famously referred to by Lord Wilberforce as the "matrix of fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

3. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

4. The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investments Co. Ltd  v Eagle Star Life Assurance Co. Ltd [1997] AC 7495.

5. The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compañía Neviera S.A. v Salen Rederierna A.B. 19851 AC 191, 201:

'If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense'."

The Tribunal's Reasoning

11. Having accepted that turnover during the relevant year meant, for the purposes of the initial target figure of £2 million, invoices paid in that year, even if rendered in the preceding year, 2006, the Tribunal rejected the Respondent's contention that in these circumstances money received counted only in the year in which it was received and accepted the Claimant's construction of the contract, namely, that whilst he could count in 2007 monies paid on invoices rendered in 2006, as well as in 2007, having built up his target figure of £2 million in 2007 he could, nevertheless, count in payments made in 2008 on invoices rendered in 2007 so as to increase his bonus entitlement for 2007.
12. Pausing there, we are told that in addition to his basic salary of £22,000 he received commission for 2007 in the sum of £49,000, or thereabouts. Following the hearing at which Judgment was given the Claimant's solicitors wrote to say that the figure was £26,000. It matters not for our purposes. His claim based on the construction of the bonus term advanced on his behalf is for commission of a further £35,000. He left the employment, as we have said, in February 2008.
13. The Tribunal's findings in arriving at this conclusion included the following:

(a) The Claimant in evidence said that this had never been explained to him and his understanding was that the allocation of payments from the previous year's invoices to his and his colleagues' turnover figures was to provide them with a kick start towards achieving their target turnover and obtaining a bonus and did not reflect a construction of the bonus terms going forwards (see paragraph 12).

(b) They found as a fact that the inclusion of payments against 2006 invoices in his turnover figures was not sufficient to alert him to the fact that payments made in 2008 against invoices raised in 2007 would not be allocated to his 2007 turnover and bonus allocation (see paragraph 13).

14. Their conclusion at paragraph 17 is expressed in this way:

"It was our unanimous conclusion that the proper construction of the contractual terms relating to bonus was that bonus is calculated against payments received for invoices raised in the calendar year, regardless of when the payment is made."

15. In explaining their conclusion the Tribunal reasoned:

(a) That the wording of the bonus term was loose and capable of more than one construction. There was no qualifying word to the phrase 'invoiced and paid business' (paragraph 2) to support a construction that the term related to the calendar year. They rejected the Respondent's case since 'turnover was linked to the calendar year'. The same limitation applied to the expression 'invoiced and paid business'.

They somehow found an inconsistency in the Respondent saying that the Claimant benefited from invoices paid in 2007 but rendered in 2006 when the Claimant was not employed. The Tribunal concluded that turnover and invoiced business should be construed in the same way, that is, be linked to the same relevant calendar year. A reasonable person with the relevant background knowledge would conclude, they held, that the word "paid" as in "invoiced and paid business" was unlimited in time:

(b) The Tribunal also found it relevant that the initial contract was expressed to be for one year. That meant if it was not renewed that the Claimant would not benefit from invoices rendered in 2007 but not paid until 2008.

(c) The Respondent drafted the contract and should have made the wording unambiguous.

(d) Finally, the Tribunal acknowledged (paragraph 23) that on their construction the Claimant had no contractual entitlement to benefit from payments against 2006 invoices but there was nothing to prevent the Respondent from allocating those payments as a good will gesture.

Discussion

16. Having had the advantage of reading detailed submissions by Counsel, both of whom appeared below, and augmented by oral argument before us, we have no hesitation in concluding that the construction advanced by Mr Brittenden on behalf of the Respondent is plainly and unarguably correct and it must follow that advanced by Mrs Winston and accepted by the Employment Tribunal is plainly and unarguably wrong.
17. The scheme of the bonus provisions is, we think, pellucidly clear. In each calendar year on the Tribunal's findings there is a target turnover figure of £2 million, representing invoices paid in that year. That is wholly consistent with the provision at paragraph 2 for a bonus of £1,000 to be paid for every further £100,000 turnover, that is, business invoiced and paid in that year.
18. Since a sales representative starting in February 2007 benefits from invoices rendered in 2006 and before the employment started in achieving the minimum target of £2 million, it is entirely consistent for there to be no entitlement to further bonus payments based on invoices rendered in 2007 but paid in 2008. Apart from anything else, are payments received in 2008 against invoices rendered in 2007 to count twice for a commission purpose, i.e. the payments count towards the 2008 target figure as well as producing an increased bonus for 2007?
19. Mrs Winston contends they cannot be counted against the 2008 target; that makes no sense at all to us. We are not concerned as a matter of law with a subjective view of either party, which is where we think the Employment Tribunal went wrong, but the interpretation of the bonus term by Lord Hoffman's "reasonable observer". It cannot be right that the temporal limitation on the initial £2 million turnover does not apply to additional turnover on which, the threshold having been passed, the bonus scheme applies. The Claimant cannot have the benefit both of business invoiced before he joined and payments on invoices after the end of the bonus year, that is, the calendar year. It is not for the Employment Tribunal to decide what it views as being reasonable remuneration by way of bonus, which is again what we think happened below.
20. In short, reading the bonus term as a whole in the context of the surrounding factual circumstances as found by the Tribunal, it is plain to us that the bonus system operated on the basis of money in during the bonus year. Once that simple proposition is clear the operation of the bonus scheme is plain and wholly internally consistent.

Disposal

21. No further findings of primary fact being required and, based on our construction of the bonus term, applying the approach of Lord Templeman in Davies v Presbyterian Church of Wales [1986] ICR 280, 288, G-H, we are able to allow this appeal, reverse the judgment in the Employment Tribunal and dismiss the claim for unlawful deductions from wages.
22. The further claim of constructive unfair dismissal will be returned to a fresh Employment Tribunal for determination.