Practice and Procedure


PUBLISHED November 20, 2003

The employment tribunal erred in concluding that a husband and wife's employment contracts were tainted by illegality because the husband evaded tax by giving commission to which he alone was contractually entitled to his wife.Appeal from the decision of the Employment Appeal Tribunal ('EAT') reversing the decision of the Employment Tribunal ('ET') that the respondents' contracts of employment were tainted with illegality so that they had no remedy to enforce an alleged entitlement to commission nor for unfair or wrongful dismissal. The respondent husband and wife owned 24 per cent of the shares in the appellant company ('C'). The relationship between the shareholders in C broke down and the respondents were dismissed in June 1995. They brought proceedings under s.459 Companies Act 1985 and associated proceedings. The judge in those proceedings found that there was an arrangement between the shareholders that a low basic salary would be paid to the participators together with a ten per cent commission on sales. The respondents' s.459 petition succeeded and the majority shareholders were ordered to buy the respondents' shares. Following the conclusion of the s.459 proceedings C admitted liability in proceedings before the ET for unfair dismissal, damages for breach of contract and certain Wages Act 1986 claims. A week before the ET hearing on damages C took the point that the employment contracts were tainted with illegality because of the way commission was paid "in the most tax efficient way". The ET held that the contracts were a fraud on the Inland Revenue because the wife was not in fact entitled to any commission and received it so that the husband could avoid paying tax. The respondents appealed to the EAT arguing that it was clear that the entitlement to commission on C's sales was joint. The EAT allowed the appeal on the basis that there was a clear distinction to be drawn between the method of calculating commission which was to be ten per cent on the husband's sales and the ultimate destination of such commission. C appealed. C argued that the contract for the payment of commission was with the husband alone and that the payment of commission to the wife involved performance of the contract in an illegal way.HELD: (1) The ET decision was flawed. It did not reflect the fact that there was a period during which the respondents' entitlement to commission was joint. In concluding that the contract so far as it related to commission was with the husband alone the ET misdirected itself. (2) The ET was also wrong to place the burden of proof on the respondents where illegality was alleged. The burden was on C to show the respondents were party to a contract intended to defraud the Revenue or performed in that way. Not every act of illegality in the performance of a contract rendered it unenforceable. If the person seeking to enforce the contract had to rely on his own illegal action to succeed the court would not assist him. (3) There was nothing to show that although tax considerations were taken into account the result was receipt by either husband or wife of commission which did not reflect their efforts in the business; if there was such receipt it was not sufficient to turn the contract into an illegal contract; and there was no question of the respondents having to rely on any illegal conduct in order to succeed on their claim. (4) The case would be remitted to the ET to assess the respondents' entitlement to commission in accordance with the judgment. The order of the EAT would be varied to provide that the contracts of employment were not tainted by illegality and provided for commission to be paid to the respondents jointly.Appeal dismissed.

[2003] EWCA Civ 1676