Western Excavating (ECC) Ltd v Sharp [1977] EWCA Civ 2

An employee resigned after his employer refused to advance holiday pay or a loan following a disciplinary suspension. The Court of Appeal held there was no constructive dismissal, establishing that the contract test, not unreasonableness, governs whether an employee has been constructively dismissed.

Facts

Mr Sharp was employed by Western Excavating (ECC) Ltd (a china-clay company) from 9 July 1974. One term of his employment was that extra time worked could be taken off in lieu. In February 1976, he took three hours off, against his foreman’s instruction, to play in a card game. He was dismissed the next day for failing to carry out a reasonable order. On appeal to an internal disciplinary panel, his dismissal was substituted with five working days’ suspension without pay, which he did not dispute.

The loss of five days’ pay left him in financial difficulty. He asked the Company for an advance on his accrued holiday pay (£117.17) but was told that company policy prohibited this unless the holiday was actually taken. He then asked for a loan of £40, but the welfare officer indicated the Company could not lend that amount and suggested a further discussion. Mr Sharp instead resigned on 11 March 1976 to obtain his accrued holiday pay, and claimed unfair dismissal before the Industrial Tribunal.

The Industrial Tribunal, by a majority of 2 to 1, found in his favour and awarded £658. The Employment Appeal Tribunal dismissed the Company’s appeal, although all three members indicated they would themselves have decided in favour of the employer.

Issues

The central issue was the proper construction of paragraph 5(2)(c) of Schedule 1 to the Trade Union and Labour Relations Act 1974, which defines when an employee is to be taken as dismissed where he terminates his contract “with or without notice, in circumstances such that he is entitled to terminate it without notice by reason of the employer’s conduct”. Specifically, the Court had to decide between two competing tests for constructive dismissal:

The contract test

Whether the employer’s conduct must amount to a significant breach going to the root of the contract, or show an intention no longer to be bound by an essential term, entitling the employee to treat himself as discharged.

The unreasonableness test

Whether it sufficed that the employer conducted himself so unreasonably that the employee could not fairly be expected to put up with it any longer.

Arguments

The employer argued that paragraph 5(2)(c) uses the language of contract, particularly the words “entitled” and “without notice”, which connote a legal right to terminate. Counsel observed that if sub-paragraph (c) did not bring the contract to an end on contractual principles, the absurd position would arise where the employee could terminate but the employer could nonetheless sue him for damages for terminating without notice.

The employee’s position, reflected in the majority of the Industrial Tribunal, was that the Company “ought to have leant over backwards to help him” and that its refusal to advance holiday pay or grant a loan justified his resignation.

Judgment

The Court of Appeal unanimously allowed the appeal. Lord Denning MR held that the contract test was the correct test, giving several reasons:

• The statute itself distinguishes between “dismissal” in paragraph 5(2)(c) and “unfairness” in paragraph 6(8); had Parliament intended the same test to apply, it would have said so.
• The definition of “dismissal” traces back to the Redundancy Payments Act 1965 and should not be coloured by the fairness provisions first introduced in 1971.
• Paragraph 5(2)(c) uses words of legal connotation, particularly “entitled” and “without notice”. If a non-legal meaning had been intended, Parliament could have used words such as “justified in leaving at once”.
• Sub-paragraphs (a) and (c) address different situations: (a) where the employer dismisses; (c) where the employee terminates by reason of the employer’s conduct.
• The “unreasonable conduct” test is too indefinite, has caused sharp divisions in tribunals, and has led to findings of constructive dismissal on “whimsical grounds”.
• The contract test is more certain and can be understood by intelligent laymen under the direction of a legal chairman.
• The test of reasonableness gives no effect to the words “without notice”.

Lord Denning set out the contract test as follows: the employer must be guilty of conduct amounting to a significant breach going to the root of the contract, or show that he no longer intends to be bound by one or more of the essential terms. The employee may then leave without notice, or give notice; but the conduct must in either case be sufficiently serious. The employee must also make up his mind soon, or risk being treated as having affirmed the contract.

Applying that test, the employers were not in breach at all, nor had they repudiated the contract. Mr Sharp left of his own accord without anything wrong being done by the employers, and his claim should have been rejected.

Lawton LJ agreed, emphasising that the word “entitled” in paragraph 5(2)(c) “connoted the existence of a right” arising in law, and that contracts can only be brought to an end in ways known to the law. He observed that the employer had not been in breach: Mr Sharp had been guilty of misconduct, his appeal had resulted in a substituted suspension without pay, and he had no right to any money other than what he had earned. The majority’s reasoning that the Company should have “leant over backwards” was, in his view, a perverse decision based on “whimsy or sentimentality” rather than justice.

Eveleigh LJ agreed with both judgments.

Implications

This decision established the contract test as the definitive approach to constructive dismissal under what is now found, in materially similar form, in subsequent employment legislation. To establish constructive dismissal, an employee must show:

• A significant breach by the employer going to the root of the contract, or conduct showing that the employer no longer intends to be bound by one or more essential terms;
• That the employee left in response to the breach; and
• That the employee did not delay too long, lest he be treated as having affirmed the contract.

The judgment is significant for displacing the broader and more discretionary “unreasonableness” test that had developed in some Industrial Tribunal and Employment Appeal Tribunal decisions. It tied the statutory concept of constructive dismissal back to settled principles of contract law, providing greater certainty for employers and employees alike.

For practitioners, the decision matters because it confines tribunals to a contractual analysis rather than a free-ranging assessment of whether the employer behaved reasonably. The Court did, however, leave open the precise principles of contract law which would apply to bring an employment contract to an end by reason of an employer’s conduct, with Lawton LJ expressly declining to define them, suggesting that borderline cases would require contractual analysis but most cases could be resolved by commonsense identification of the employer’s conduct.

The case remains a foundational authority on constructive dismissal in English employment law, drawing a clear boundary between the question of whether there has been a dismissal at all (a contractual question) and whether any such dismissal was unfair (the separate statutory fairness assessment).

Verdict: Appeal allowed with costs. The award of compensation for unfair dismissal made by the Industrial Tribunal was set aside, the interim payment of £300 was to be repaid, and leave to appeal to the House of Lords was refused. The Court of Appeal held that, applying the contract test, there had been no dismissal, constructive or otherwise, by the employers.

Source: Western Excavating (ECC) Ltd v Sharp [1977] EWCA Civ 2