Wrongful Dismissal Damages

June 29th, 2017

It is established law that (1) the doctrine of mitigation of loss by way of avoided loss applies to claims for damages for breach of contract by way of wrongful dismissal from employment, (2) this means that there must be deducted amounts that the employee earned or should have earned in substituted alternative employment, and (3) such amounts are capable of encompassing benefits in kind, but (4) this is subject to the important qualification that the benefit must not be too remote. Lavarack v Woods of Colchester [1967] 1 QB 278 is an illustration of these propositions.  Mr Lavarack was wrongly dismissed by Woods.  He was therefore released from his duties under his contract with Woods, including his obligation not to be interested in other businesses.  He took employment with another company (“company X”).  He did so at a modest salary, that would, over the notice period with Woods, have to be taken into account. He also purchased half of company X’s share capital.  The first question was whether the estimated enhanced value of that shareholding had to be taken into account as well.  In addition, he made a substantial investment in another company (“company Y”). The second question was whether that had to be taken into account.  The value of the shares in both the companies had increased.  The Court of Appeal answered the first question “Yes” and the second question “No”. The profit from Mr Lavarack’s shareholding in company X was regarded as concealed remuneration. The investment in company Y was not a direct result of the dismissal. It was an entirely collateral benefit. It was not by way of mitigation of loss.

Lavarack v Woods has been considered in the proceedings culminating in the Supreme Court in Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U.,  a case about the measure of damages for loss of earnings for hire early redelivery under a time charterparty when the charter still had two years to run.  The owners sold the vessel shortly afterwards. If they had done so only when the charter came to an end there would have been a fall in the capital value, consequent upon a collapse in the market.  The question was whether that difference constituted a benefit which, on principles of mitigation and avoidance of loss, should be brought into account in the owners’ claim for the charterers’ accepted repudiatory breach of contract by making an early redelivery. The Arbitrator held that it should be.  Popplewell J held that it should not be.  The Court of Appeal (Longmore, Christopher Clarke and Sales LJ) held that it should be.

The Supreme Court, (2017) UKSC 43, has now held that it should not be. Lord Clarke, with whom Lords Neuberger, Mance, Sumption and Hodge agreed, said, at paragraph 30, that:-

  1. In order to be taken into account a benefit does not have to be of the same kind as the loss caused by the wrongdoer: “difference in kind is too vague and potentially too arbitrary a test”;
  2. The essential question is whether there is a “sufficiently close link” between the two (and not whether they are similar in nature);
  3. The benefit to be brought into account must have been caused either by the breach of contract or by a successful act of mitigation.

The test is therefore reaffirmed as being one of causation and remoteness.

Where repudiation of a contract results in a prospective loss of income for a period, a capital transaction will not be an act of mitigation, because it is incapable of mitigating the loss of the income stream: paragraph 34.

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