Appeal No.EAT/1026/01 SM

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 7 November 2002

Before
HIS HONOUR JUDGE J ALTMAN
MRS R A VICKERS
MR N D WILLIS

MR M COLEN & OTHER	APPELLANT

CEBRIAN (UK) LIMITED	RESPONDENT

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellant	MS J EADY
(of Counsel)
Instructed by:
Messrs Knight & Sons Solicitors
The Brampton
Newcastle-under-Tyne
Staffordshire ST5 0QW	
For the Respondent	MR R F ASHTON
(Solicitor)
Instructed by:
Messrs Hacking Ashton Solicitors
Berkeley Court
Borough Road
Newcastle-under-Tyne
Staffordshire ST5 1T	

HIS HONOUR JUDGE J ALTMAN

1	This is an appeal from the Employment Tribunal sitting at Shrewsbury on 26 & 27 June 2001 when the Tribunal determined that they had no jurisdiction to entertain a remedies hearing for payment of wages on the ground that it was an illegal contract of employment in relation to both Applicants who appeal.

2	The claim before the Tribunal included a claim by Mrs Colen in respect of an alleged entitlement to commission.  Commission had been paid but the Tribunal found that such payment and any arrangements relating to the payment of commission to Mrs Colen had an unlawful purpose, namely the evasion of income tax.  At the end of paragraph 24 of the Decision they held:

“Mr Colen was entitled to the total commission and Mrs Colen had no claim on that sum.”

3	The Appellant argues that, on the basis of the facts as found by the Employment Tribunal, the Tribunal came to a conclusion which no reasonable Tribunal properly directing itself as to the law and the facts as found by them, could have come and that the decision was, in the technical meaning of the word “perverse”.  Also, the Employment Tribunal asserted that that finding was a finding of fact.

4	However, the task that confronted the Tribunal was to determine whether Mrs Colen had a lawful contractual entitlement to be paid commission.  In essence, the question was whether such commission as was arranged for her to receive and which she did receive was consideration or part consideration for the services she rendered the Respondents, or whether it was simply received by her so as to give the appearance of lessening the income of Mr Colen to effect the maximum tax advantage resulting from the differing tax bands which applied to both Applicants.

5	It seems to us, and indeed the matter has not really been argued to the contrary, that in reality the task facing the Tribunal was to construe the terms as to remuneration in the contract of employment of Mrs Colen, and indeed Mr Colen.  On the basis of the primary facts as found by the Tribunal, the Employment Tribunal construed the contract, which was a mixed issue of fact and law.

6	This matter has been going on for a long time.  It appears that in the 1980s the Applicants had negotiations with the Respondents with a view to setting up on behalf of the Respondents in this country a business selling the Respondents’ goods, their proprietors being based in Spain.

7	Much reliance has been placed upon the fact that when in due course the relationships between the parties floundered there were High Court proceedings.  It appears that the Applicants worked in tandem with a Mr & Mrs Percival to set up businesses, and roughly associated businesses, in this country.  They occupied, therefore, in relation to the Respondents, threefold roles of being shareholders, directors and employees and as so often happens in this case the boundaries between those roles were not always clear.

8	In due course, because of essential disputes as to the shareholdings, and following the falling out of the parties, this matter came before the High Court and we have had the opportunity, as had the Employment Tribunal, of considering the judgment in that case where certain facts were found.  We have also had the opportunity of seeing the witness statements of the witnesses upon whose evidence the judgment was based.
9	Page 3 of the judgment provided some of history in relation to the organisation of the business and the financial arrangements and it is helpful to quote it simply as background.

“Sometime in about 1981 the Respondents asked Mr Colen to conduct market research in this country.  They then asked Mr Colen if he would move to England and start a business in partnership with them to break into the UK market.  He spoke to his wife and in-laws, the Percivals and the couples decided in 1982 to take up the challenge.  Two companies were incorporated, one in the North and one in the South of England; the Applicants being interested in the company in the South; with the Percivals in the North and the Respondents being the majority shareholder in each company.
The Colens and the Percivals explained to the Cebrians that these companies would take time to establish themselves, and it was agreed that the Colens and Percivals would be remunerated by a small salary and by a 10% commission on sales.”

10	On behalf of the Respondents it is accepted that that is some evidential support for the proposition that at that time the contractual arrangements properly so defined gave Mrs Colen an entitlement to commission.  Later, by about mid-1984, as the Judge held:

“The commission was changed so that the Colens and Percivals each received 5% of all sales.”

In other words, the sales across both companies were put together and the commission was then shared.

11	The business prospered, so it appears, and the finding was that:

“In 1988 the commission system was changed again with Mr Colen and Mr Percival each taking 10% on their own sales.  The purpose was to increase their own motivation.”

12	This was a finding relied upon by the Tribunal as evidence of the commission entitlement of Mrs Colen.  It seems to us, however, on the face of it, that the learned Judge was not considering the actual contractual position of the parties, nor was he asked to do, nor was it relevant to his decision.  He was not considering who actually ended up getting the commission, he was simply dealing with the way in which commission was divided in the overall history of this business in which the Colens and the Percivals had different operations but the commissions tended to change as between the families.

13	We have seen the statement of Mr Colen, that was before the judge, in which he does say, in the first person singular, that he would be earning commission on the sales.  He proposed that he should work with a small salary to cover basic living expenses and 10% commission on sales.  But elsewhere in his statement he describes how he and his wife received in the region of £5000 by way of annual salary.  He describes how the four members of the two families attended a spring fair and how they divided the shareholdings between them.  He describes how it is asserted in 1988, possibly wrongly, that the two men changed the systems of commission and that led to the 5%, again referring to the fact that he would earn 10% commissions.  Later on he says

“Ann had also been working extremely hard”

He refers to the fact that Mr Cebrian told him that the company was paying Mr Percival and him too much money but he also refers to questions as to whether he and his wife were going to retain their jobs.

14	In those circumstances it seems to us that the clear inference to be drawn is that as to the actual contractual arrangements of the two individuals, Mr & Mrs Colen, the judgment did not actually address the contractual relationships and certainly, whilst it shows that the way in which the commission was to be calculated was to be based on Mr Colen taking 10% of his own sales to increase his motivation, the way in which the contracts of employment were to operate were not directly addressed, although of course one could envisage a consistent arrangement as to the contracts.

15	When the matter came before the Employment Tribunal the Employment Tribunal took two issues by agreement between the parties as a preliminary matter which they described as follows:

3	(3)	“what has been colloquially been referred to as the “split” in respect of the commission, i.e. whether the commission was due to both Mr Colen or Mrs Colen or both;
	(5)	one of illegality, and whether the contract was tainted with illegality as being a fraud on the Revenue.”

16	They find, in paragraph 4:

4	“We have to make findings of fact as to who was entitled to the commission before we can decide whether there is an illegality such as to deprive Mr and Mrs Colen of their rights.”

17	In paragraph 6 the Employment Tribunal dealt with the basis upon which they make their findings of fact and indeed they assert that those facts are substantially based upon the Applicants’ own evidence and their own pleaded cases, pointing out the need to look at some of the original documents.

18	The Employment Tribunal began with the Originating Application and they found that Mrs Colen’s Originating Application was as follows:

7	“The following were express terms of the contract of employment relating to remuneration and benefits…
(b)	an ad hoc share in the commission of 10% of total sales of the Respondent which was payable to the Applicant’s husband.”

19	That found its echo in the contract of Mr Colen:

8	“The following were express terms of the contract of employment relating to remuneration and benefits…
(b)	commission of 10% of total sales of the Respondents (to be shared on an ad hoc basis with the Applicant’s wife).”

The Employment Tribunal, in due course, placed considerable reliance upon that application.  In paragraph 19 they were to find:

19	“The Tribunal found particularly compelling the way in which the Applicants pleaded their case in their Originating Applications and also the evidence that they gave on their own behalf.”

20	The evidence they gave on their own behalf is set out in their witness statements.  Mr Colen, in paragraph 7, described what happened in 1982 in negotiations and said:

7	“I propose that Peter, Ann and I should each work with a small salary to cover basic living expenses and 10% commission on sales.  This way the cost to the company would be smaller and when sales start to increase we will be able to enjoy a good income.”

21	Pausing there for a moment, we are unable to see in that statement anything other than the inclusion of Mrs Colen, who is referred to as Ann, as, in effect, joining in the proposal to have commission.

22	Mr Cohen said:

10	“Ann and I received in the region of £5000 between us by way of annual salary.  We also received commission of 10% on all sales we generated.
14	Our basic salaries increased but we always retained a low basic salary with commission of 10% being paid on all sales…
All four of us worked in the business…
19	We shared the commission in the most tax efficient way as advised to us and some parts of the commission were used to pay for private health insurance.”

23	That was consistent with the evidence of Mrs Colen in the statements in which she said:

6	“When I was dismissed my basic salary was £4680 per annum to go with a share of the commission due on the sales generated in the southern part of the country.”

Pausing there, the finding at paragraph 19 of the Tribunal was that the Tribunal found that evidence, coupled with the Originating Applications, compelling.
24	In addition, they had before them, and took into account, the oral evidence of Mr Colen, which they quote in paragraph 11, relating particularly to the sort of work that Mrs Colen did.  In the first two years Mrs Colen did go round on sales trips, not least because at that time Mr Colen’s English was not very good, but from then on her main duties were “administrative and clerical”.  She did in fact deal with mail order and telephone sales.  She worked at home for four years and went to the office from time to time.  It was also Mr Colen’s evidence that the commission split would vary from time to time depending on the advice they received and instances of 7 to3 or a 6 to 4 split were referred to.

25	The Tribunal also referred to the fact that neither of the Applicants could give evidence as to the exact amount to which Mrs Colen would be entitled in the application before the Tribunal and contrasted that to the proposition that

“It was very clear indeed that Mr Colen was entitled to 10% commission on his sales”.

Further, the Employment Tribunal referred to the evidence of contemporary documents put forward by Mr Bladen, a chartered accountant who was not the accountant, we are told, at the time.

26	The extent to which contemporaneous documents were relevant is not, on the face of it, clear from the decision of the Employment Tribunal but we have been assisted by Ms Eady and in paragraph 14 the Tribunal describe the documents as referring

“to the commission due to Mr Colen, and made no mention of Mrs Colen”.

We are told that there was documentation before the Employment Tribunal with references to actual payment of commission to Mrs Colen and indeed the Tribunal went on to make a finding of fact that the Respondents did pay commission to Mrs Colen over many years.

27	Such contemporary documentation as there was, we are told, was confined to references to either Mr Colen or Mr Percival, providing calculations which related to the 10% on the relevant sales obtained by either or both of those men, but, it is pointed out, that is unsurprising because Mrs Colen did not, so far as we know, apart possibly from telephone sales, obtain sales which attracted commission.

28	The situation appears on the contemporaneous documents, so far as we know, to be really no different, as Ms Eady says, to the situation where an office-based manager or administrator receives a share of commission earned from the sales transactions clinched in the field by the sales representative.

29	The Tribunal then set out the submissions on behalf of the parties and referred in some detail to the submissions of Mr Ashton, which we have examined with care because they were adopted in their entirety and incorporated by reference in the reasoning of the Tribunal.

30	Mr Ashton pointed out that

“Mr Colen had decided to divest some of his rightful income and give it to his wife in order to evade paying tax.”

There was reference to some other way of saving tax, which we did not really understand but which is not relevant, and Mr Ashton’s submission that Mr Colen did not have the power to direct that income due to him was to be given to Mrs Colen in order that he should pay less tax.
31	Again, Mr Ashton pointed to the wording of the Originating Applications and to the Applicants’ own evidence and the judgment of the High Court and the contemporaneous documents to which we have referred.  The Tribunal said, in paragraph 19, that they adopt that reasoning and found particularly compelling, as we have already said, the Originating Applications and the Applicants’ evidence.

32	The Employment Tribunal make a finding in paragraph 20 that the Applicants had failed to discharge the burden upon them that they were legally and contractually entitled to commission and the Tribunal found that:

20	“…we are satisfied, on the balance of probabilities, that it was more likely than not that Mrs Colen was not legally or contractually entitled to commission as claimed.”

They refer again to the effect of the contemporaneous documents indicating commission due to Mr Colen.

33	In paragraph 22 the Employment Tribunal give a sort of analogy, acknowledging the right of citizens to organise their tax affairs in the most tax-efficient way, but they point out that a wage earner cannot ask his employers to pay a proportion of his salary to someone else in order that he should pay less tax to the Inland Revenue.  The decision states:

22	“Where does such matters end?  Would it be right for a wage earner to direct the top slice of his income to his wife, his daughter, his cousin, his friends?  Clearly, not.”

34	It is to be pointed out, it seems to us, that the crucial phrase within that example is the phrase “in order that”, suggesting that the purpose of the arrangement, if it is to avoid tax, makes the arrangement unlawful and leads to its being an evasion.

35	In addition, in paragraph 23, the Employment Tribunal go on to say that

23	“Also fatal to the Applicants’ claims is the inability of the Applicants to identify a particular amount or particular proportion of the commission to which Mr Colen is allegedly entitled.”

They conclude, in paragraph 24, that they have found that Mrs Colen had no claim on the commission.

36	In order to assess that case we have been helpfully referred to a number of decided cases, the first of which, in the bundle before us, is Lightfoot v D & J Sporting Ltd [1996] IRLR 64, a decision of the Employment Appeal Tribunal.  In that case an arrangement was made by a head gamekeeper with his employers that part of his wage would be paid to his wife, reducing the amount deducted by way of income tax and national insurance and an amount of £240 a month was paid to Mrs Lightfoot in that was.  It was found, however, that the gamekeeper’s wife had in fact worked to help with her husband’s duties and had in the past received no money.

37	The head note shows that:

“A scheme is not necessarily unlawful because its only purpose is to reduce the amount of lawful deductions that ought to be paid to the Inland Revenue or the Department of Social Security.  That is the purpose of all legitimate tax avoidance schemes.  If the scheme was entered into in good faith and was a proper method of reducing tax open and above board which either had been or would be disclosed to the Revenue, there is nothing unlawful about it.”

38	The Employment Tribunal distinguished that case because they found there was a legitimate arrangement for Mrs Lightfoot to be paid a fair income for the work that she did and they distinguished that from the case before them because they had found that Mr Colen was entitled to the total commission.  It seems, on the face of it, that decision of the Employment Tribunal was that the payment of commission was outside the contract of employment of the two parties.

39	Returning to my quotation of the words “in order that” in paragraph 22 of the Employment Tribunal, what is useful for us to draw from the Lightfoot case is that the purpose or motive for entering into a particular term of a contract of employment may be to construct the most favourable tax arrangement for employees, if two of them are married or for any other purpose.  This is provided, of course, that the contractual term itself is a lawful term; in other words, is it consideration for the services rendered?  The point of the Lightfoot case, it seems to us, is that it was such consideration.  The arrangement was, effectively, to start paying the wife for the work she had been doing and to take advantage of the tax savings that followed.

40	The Employment Tribunal referred to Hall v Woolston Hall Leisure Ltd [1998] ICR 651, a decision of the Court of Appeal, in which Peter Gibson LJ analysed the history and the principles in relation to illegal contracts and said this:

“In cases where the contract of employment is neither entered into for an illegal purpose nor prohibited by statute, the illegal performance of the contract will not render the contract unenforceable unless in addition to knowledge of the facts which make the performance illegal the employee actively participates in the illegal performance.  It is a question of fact in each case whether there has been a sufficient degree of participation by the employee.”

41	The Employment Tribunal refer to the case of Salvesen v Simons [1994] ICR 409, a decision again of the Employment Appeal Tribunal, in which it appears to have been held, according to the head note that:

“Where an employee agrees to be paid according to a scheme which is devised to avoid or at least to postpone the proper payment of income tax, the contract of employment is an illegal one which the courts will not enforce.  Ignorance of the illegal character of the agreement does not prevent the application of the ex turpi causa rule.”

42	Based, as the construction of the contract was by the Tribunal, on facts which they have clearly stated, we have looked at those facts to see if they can support the finding made by the Tribunal.

43	Dealing first with the Originating Application it provides, it seems to us quite clearly, for an arrangement (which incidentally was confirmed by the Respondents in their Notice of Appearance) for a variable share in commission of 10% of total sales, payable to Mr Colen.  There was a corresponding qualification on the gross commission payable to Mr Colen in that in effect it was charged, as it were, with his wife’s share.

44	The Tribunal draw attention to the fact that it was unascertainable because it required an assessment of tax liability after the year end.  But it seems to us that that was clearly what was provided for in a shorthand way by the words “ad hoc”.  It seems common ground, and in fact implicit in the decision of the Tribunal, that what “ad hoc” meant was such sum as should be advised by the accountant after examination of the 10% of volume of sales after the year ended.  It was clearly ascertainable in the sense that the parties’ income, other than that commissioned, would have been a matter of record, and the amount of commission itself would have been a matter of record, and a matter of simple mathematics therefore to provide the necessary divide.

45	We can see no difference in the uncertainty for tax reasons, from the point of view of calculation, from the ordinary uncertainty that comes from remuneration based on a percentage commission entitlement, because inherent in that statement is the formula that would have to be applied.  Far from undermining the proposition that it was a proper term of the contract, it seems to us that it was in fact a clear term of the contract of employment set out between the parties about which there was no dispute.

46	Then reference is made to the witness statements which again make clear, it seems to us on the face of it, the contractual entitlement.  Fundamental, however, it seems to us, is whether that was properly regarded in contractual terms as consideration for services rendered, or whether, in the sort of illustration set out in paragraph 22 of the decision, it was simply for the purpose of avoiding tax.  But in their findings the Tribunal make it clear that Mrs Colen was an employee of the Respondents throughout, not selling at the “sharp end”, but doing administrative work.

47	Furthermore, it seems to us, that the judgment of the High Court does not deal with the contracts of employment and that the judge had other matters entirely different in mind.  It is difficult to go behind a judgment, and the status of such a judgment as evidence before an Employment Tribunal in any event, particularly when the issues are quite different.  It is bound, it seems to us, to be somewhat uncertain.

48	In addition Ms Eady has prayed in aid the fact that commission was paid without protest for many years as being good evidence of contractual terms and she has pointed out that the Inland Revenue did not make any enquiry.  Those two matters we do not consider, on the facts of this case, are to be treated and were not treated by the Tribunal as indicators of a contractual term.  There was far too much power in this case, on the part of those in the capacity of employee, to fulfil the role at the same time as employer and to contrive arrangements so that it would be wrong simply to draw inferences from what took place.

49	In those circumstances it seems to us that an examination of those facts would inevitably have driven a reasonable Tribunal to exactly the opposite conclusion to which this Tribunal was driven; which was that there was a clear contractual term for the entitlement that was argued for by the parties.  A distinction is to be drawn, it seems to us, between the method of calculating commission which was to be 10% on Mr Colen’s sales and the ultimate destination of such commission.

50	There is no difficulty, it seems to us, in an employee A being entitled to gross commission subject to a deduction in favour of employee B so as to leave him with only a net figure of commission.  That seems to us to be the only interpretation there can be placed upon the evidence that was before the Employment Tribunal.

51	The matter which the Tribunal appear to have overlooked is this.  Once they have determined that the motivation behind this particular financial arrangement was to provide a saving in tax they did not, it seems to us, go on to examine whether it was in fact a proper contractual term, even though that was the motive for it.  It seems to us that in failing to ask themselves that question they erred in law.

52	Furthermore, in accordance with the case of Hall v Woolston Hall Leisure Ltd, it does not seem to us that the Employment Tribunal examined the state of mind of the Applicants, as required by that and other cases.  In other words, what was their state of mind and indeed their degree of participation in the arrangement that had been made?

53	We are driven to the conclusion that the facts as found by the Tribunal inevitably should have led the Tribunal to conclude that this commission arrangement was proper consideration for services with the ultimate purpose of being the most tax-efficient one.

54	We find that a Tribunal properly directing itself on the facts they found would inevitably have come to that conclusion.  Furthermore we find that the construction of the contract of employment is a matter of law and in its application of the facts as found to the construction of the law the Employment Tribunal erred.

55	We are invited, by Mr Ashton, to remit this matter to another Tribunal to reconsider the question of illegality.  To some extent we were attracted by that proposition as there are areas, for instance in the evidence in the High Court proceedings, of some ambiguity.  However, in the event, it seems to us, that the primary factors were clearly established by the Employment Tribunal in this case and those are findings from which there is no real appeal or complaint.

56	It seems to us inevitable from our judgment that an examination of the wording of the contract, as set out in the Originating Application as endorsed by the Notice of Appearance, coupled with the evidence before the Tribunal of the Applicants, so far as we know it, coupled with the fact of the work done by Mrs Colen for all of the Respondents, inevitably lead us to construe the contract of employment as a matter of law.  It seems to us that once this has been done and in a way that any reasonable Tribunal would have been bound to do by this Employment Appeal Tribunal there is nothing to be gained by remitting it for exactly the same purpose to another Tribunal.

57	Accordingly, we allow this appeal and substitute in its place a finding that the contract of employment of Mr & Mrs Colen was not tainted by illegality, but rather provided for a share of commission in accordance with the terms of the contract as set out in the Originating Applications of the Applicants.  We remit this matter for the calculation of remedy, to be dealt with by this or another Tribunal, whichever can be arranged most quickly.

58	The Respondents apply for leave to appeal on the ground, the first, some importance which should be considered at a higher level.  There are a plethora of cases on illegal contracts.  The principles are reasonably well-established and each case has different facts.  We do not discern any principal in this particular case.

59	The second ground refers to the extent to which, in spite of the case of Uboa we are prepared to substitute a finding on the basis of findings of fact by the Tribunal.  One must not forget that in Uboa that is exactly what the Court of Appeal approved of in that particular case, in spite of the general principles which they enumerated.  Construction of a contract is a matter of mixed law and fact.  Further, we have found that a Tribunal would have been driven to reach the same conclusion.  Accordingly, we do not consider that this ground gives rise to a reasonable prospect of success.