Many contracts contain a clause allowing the employer to make a payment in lieu of notice (PILON). But can a PILON be withheld if it is subsequently discovered that the employee committed gross misconduct while employed? Does the equivalent of the principle established in Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339 (CA), apply, i.e. that an employer can justify a summary dismissal for gross misconduct on the basis of facts not known at the time of dismissal, but discovered subsequently?
Cavenagh had a service agreement which provided for six months’ notice of termination and expressly gave the employer power to terminate the agreement summarily by making a payment in lieu of notice. The company made Cavenagh redundant, but before it paid the PILON, the company discovered that Cavenagh had been guilty of gross misconduct prior to his dismissal by procuring a payment into his pension from company funds. It withheld the PILON. Cavenagh brought a claim for pay in lieu as a debt due to him. A County Court judge held that the Boston Deep Sea Fishing doctrine provided the employer with a defence to Cavenagh’s claim because of his prior repudiatory breach.
The Court of Appeal upheld Cavenagh’s appeal. The facts were clear. The company decided to exercise its contractual power to terminate the service agreement without notice, but with pay in lieu, and the company agreed to pay it. A debt by the company to Cavenagh therefore accrued and, having chosen to terminate the contract in that way, the company was not entitled to jump back from the contractual consequences by relying on an earlier act of misconduct, of which it was unaware when the contract was terminated, as repudiating the contract. Boston Deep Sea Fishing could be distinguished on the facts. That case did not go as far as to say that after-discovered misconduct provided an employer with a defence to an action for payment of an accrued debt.
From a contract drafting standpoint, the clear implication of this case is that if an employer wants to deny an employee a right to payment in lieu, if the employer subsequently discovers that the employee had committed an act of gross misconduct,while employed, then an express term must be included in the relevant contractual clause to that effect.
Cavenagh v William Evans Ltd  IRLR 679
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