Mr Cavenagh was the company's managing director before being made redundant. His contract provided for six months' pay in lieu of notice. Before the company paid up, it discovered that Mr Cavenagh had been guilty of gross misconduct – there had been an unauthorised company payment of £10,000 into his pension fund. In light of its discovery, the company refused to pay him the notice, arguing that Mr Cavenagh's conduct had repudiated the contract and the company had accepted that repudiation.
The question was could the company escape liability for the 6 months' pay based on facts that weren't known to it at the time of dismissal? The court held that it could and dismissed Mr Cavenagh's claim.
He won on appeal. The Court of Appeal held that, in line with contractual obligations and the employer's decision to dispense with the notice period, a payment in lieu was due. Had dismissal been for misconduct then the situation would have been very different; the company would have been liable to pay salary and other benefits accrued to the date of dismissal, and no payment in lieu.
The court went on to say that where an employer chooses to terminate a contract on notice and offers payment in lieu, it is looking for a clean break and accepts the risk of discovering something which could have justified a summary dismissal. There was nothing in Mr Cavenagh's contract entitling the company to withhold payment if misconduct later came to its attention. The payment in lieu was a debt properly due.
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