Ipsofactoj.com: International Cases [2005] Part 8 Case 13 [HL]


HOUSE OF LORDS

Coram

Eastwood

- vs -

Magnox Electric Plc

LORD NICHOLLS OF BIRKENHEAD

LORD STEYN

LORD HOFFMANN

LORD RODGER OF EARLSFERRYY

LORD BROWN OF EATON-UNDER-HEYWOOD

15 JULY 2004


Judgment

Lord Nicholls of Birkenhead

My Lords,

  1. In October 1905 Mr. Addis was abruptly and ignominiously dismissed as manager of the business of Gramophone Co Ltd in Calcutta. He sued his employer for wrongful dismissal, in proceedings which have cast a long shadow over the common law. Mr. Addis was entitled to six months' notice. Your Lordships' House held that his damages were confined to loss of salary and commission for six months. He was not entitled to recover damages in respect of the 'manner of his dismissal' in the phrase of Lord Loreburn LC. The way Mr. Addis was sacked may have imported obloquy and permanent loss in the commercial community of Calcutta, but in respect of these matters he had no cause of action: Addis v Gramophone Co Ltd [1909] AC 488.

  2. This was still settled law when the Royal Commission on Trade Unions and Employers' Associations, under the chairmanship of Lord Donovan, reported in 1968. Protection at common law against 'wrongful' dismissal was strictly limited. The employer, as much as the employee, was entitled to end the contract of employment without cause. The employer could act unreasonably or capriciously. He was not bound to hear the employee before dismissing him: see the oft-quoted words of Lord Reid in Malloch v Aberdeen Corporation [1971] 1 WLR 1578, 1581. In its report (Cmnd 3623) the Donovan Commission recommended the law should be changed by 'early legislation'. Statute should establish machinery to safeguard employees against unfair dismissal: paragraph 1057.

  3. Parliament gave effect to this recommendation in the Industrial Relations Act 1971. The relevant provisions are now contained in Part X of the Employment Rights Act 1996. An employee has the right not to be unfairly dismissed by his employer: section 94. The remedies for unfair dismissal are set out in Chapter II of Part X. A complaint may be made to an employment tribunal. If the tribunal upholds the complaint the tribunal may make an order for reinstatement or re-engagement or an award of compensation for unfair dismissal calculated as provided in the Act.

    THE 'TRUST AND CONFIDENCE' IMPLIED TERM

  4. These provisions in the Industrial Relations Act 1971 prompted a development in the common law. The statutory remedy of unfair dismissal was available only if an employee was dismissed. If an employer behaved in a way no employee could be expected to tolerate, and the employee then resigned in the face of such behaviour, the employee had no remedy. He had not actually been dismissed by his employer. In order to claim he had been constructively dismissed the employee had to be able to point to a breach of contract by his employer which he was entitled to treat as a repudiation of the contract of employment: Western Excavating (ECC) Ltd v Sharp [1978] ICR 221. Showing that the employer had behaved unreasonably was not sufficient.

  5. The Employment Appeal Tribunal led the way in finding a means to bring such cases within the reach of the unfair dismissal legislation. It is a well established principle that a servant owes a duty of loyalty and faithfulness to his master. Thus, in a modern context an employee will be in breach of contract if he 'works to rule' in such a way as to frustrate the commercial objective of his contract of employment: Secretary of State for Employment v ASLEF (No 2)[1972] 2 QB 455. From here it was a short step to recognise that both parties to an employment contract owe a duty to conduct themselves in a way which will enable the contract to be performed. The developed formulation of this duty became, so far as the employer is concerned, that an employer will not, without reasonable and proper cause, conduct himself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. This formulation of a wide-ranging 'trust and confidence' implied term emerged in the late 1970s and the 1980s in cases such as Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666, affirmed [1982] ICR 693.

  6. This term, implied as a legal incident of employment contracts, provides the means by which an employee who resigns in response to outrageous conduct by an employer may obtain redress. Such conduct is a breach of a fundamental term of the contract of employment, and an employee who accepts this breach as a repudiation of the contract by the employer is 'constructively' dismissed by the employer. The employee can, accordingly, make a complaint of unfair dismissal to an employment tribunal.

    MAHMUD'S CASE

  7. The principal application of this trust and confidence implied term in legal proceedings has been for this purpose, that is, as an adjunct in unfair dismissal cases. In Mahmud v Bank of Credit and Commerce International SA [1998] AC 20 the House considered the application of this implied term in a different type of case. In Mahmud's case breach of this term was not relied upon as a foundation for a claim for constructive dismissal. A former employee first learned of breach of this implied term after his employment had ended. He claimed damages at common law for breach of this term. The House held that this claim was well-founded as a matter of law. Damages for breach of the trust and confidence implied term should be assessed in accordance with ordinary contractual principles.

    JOHNSON'S CASE

  8. The ramifications of this decision came under scrutiny in Johnson v Unisys Ltd [2003] 1 AC 518. In Johnson's case the plaintiff sought to extend the Mahmud principle further. He sought to rely on breach of the trust and confidence implied term, not as a foundation for a statutory claim for unfair dismissal or as a foundation for a claim for damages unrelated to dismissal, but as a foundation for a claim at common law for unfair dismissal.

  9. Mr. Johnson's grievance concerned the way he had been summarily dismissed: the way the dismissal decision had been reached. He made a complaint of unfair dismissal to an industrial tribunal. The tribunal upheld his complaint. Unisys had not given Mr. Johnson a fair opportunity to defend himself nor had it complied with its disciplinary procedures. The tribunal awarded him 11,000, the maximum amount it could award. Mr. Johnson then brought proceedings in the County Court, claiming that the way he had been dismissed was in breach of the 'trust and confidence' term and other implied terms in his contract of employment. He also put forward a claim in negligence. Unisys knew or should have known he was 'psychologically vulnerable' and would suffer injury if treated as he was by Unisys. He claimed damages in excess of 400,000. His court proceedings were summarily struck out by the judge.

  10. The judge's decision was upheld by the Court of Appeal and by a majority decision of your Lordships' House. Mr. Johnson's claim was founded on the fact that he had been dismissed, and the trust and confidence implied term cannot be applied to dismissal itself. Further, the grounds on which it would be wrong to impose an implied contractual duty regarding exercise of the power of dismissal make it equally wrong to achieve the same result by imposing a duty of care. All the matters of which Mr. Johnson complained in his court proceedings were within the statutory jurisdiction of an employment tribunal.

  11. Mr. Johnson's claim was not without attraction. The trust and confidence implied term means, in short, that an employer must treat his employees fairly. In his conduct of his business, and in his treatment of his employees, an employer must act responsibly and in good faith. In principle, this obligation should apply as much when an employer exercises his right to dismiss as it does to his exercise of other powers of his which affect a subsisting employment relationship. It makes little sense, for instance, that the implied obligation to act fairly should apply when an employer is considering whether to suspend an employee but not when the employer is proposing to take the more drastic step of dismissing him. Considerations of this nature suggest that the natural, continuing development of this aspect of the common law should be that the implied obligation to act fairly applies to dismissal decisions. This would mean that if an employee were treated today in the same shameful way as Mr. Addis he would have a remedy at common law for breach of contract.

  12. This development of the common law, however desirable it may be, faces one over-riding difficulty. Further development of the common law along these lines cannot co-exist satisfactorily with the statutory code regarding unfair dismissal. A common law obligation having the effect that an employer will not dismiss an employee in an unfair way would be much more than a major development of the common law of this country. Crucially, it would cover the same ground as the statutory right not to be dismissed unfairly, and it would do so in a manner inconsistent with the statutory provisions. In the statutory code Parliament has addressed the highly sensitive and controversial issue of what compensation should be paid to employees who are dismissed unfairly. This code is now an established and central part of this country's employment law. The code has limited the amount payable as compensation. In 1971 the limit was 4,160. Reflecting inflation, this limit was raised periodically up to 12,000 in 1998. In the following year the statutory maximum was raised in one bound to 50,000. From there it has risen to the present figure of 55,000.

  13. In fixing these limits on the amount of compensatory awards Parliament has expressed its view on how the interests of employers and employees, and the social and economic interests of the country as a whole, are best balanced in cases of unfair dismissal. It is not for the courts to extend further a common law implied term when this would depart significantly from the balance set by the legislature. To treat the statutory code as prescribing a floor and not a ceiling would do just that. A common law action for breach of an implied term not to be dismissed unfairly would be inconsistent with the purpose Parliament sought to achieve by imposing limits on the amount of compensatory awards payable in respect of unfair dismissal. It would also be inconsistent with the statutory exclusion of the statutory right where an employee had not been employed for a qualifying period or had reached normal retiring age or the age of 65 and further, with the parliamentary intention that questions of unfair dismissal should be dealt with by specialised tribunals and not the ordinary courts of law.

  14. I recognise that, by establishing a statutory code for unfair dismissal, Parliament did not evince an intention to circumscribe an employee's rights in respect of wrongful dismissal. But Parliament has occupied the field relating to unfair dismissal. It is not for the courts now to expand a common law principle into the same field and produce an inconsistent outcome. To do so would, incidentally, have the ironic consequence that an implied term fashioned by the courts to enable employees to obtain redress under the statutory code would end up supplanting part of that code.

  15. As was to be expected, the decision in Johnson has given rise to demarcation and other problems. These were bound to arise. Dismissal is normally the culmination of a process. Events leading up to a dismissal decision take place during the subsistence of an employment relationship. If an implied term to act fairly, or a term to that effect, applies to events leading up to dismissal but not to dismissal itself unsatisfactory results become inevitable.

  16. The two cases now before the House are stark illustrations of these problems. In each case an employee or employees complained of unfair dismissal to an employment tribunal. In each case the employees subsequently brought court proceedings which were summarily dismissed at first instance on the basis that, having regard to the decision in Johnson, the proceedings were bound to fail. In neither case, therefore, has there been a trial. Appeals to the Court of Appeal and to your Lordships' House have proceeded on the footing that if trials take place the plaintiffs may be able to establish the truth of their allegations. The defendants are not to be taken to admit the truth of these allegations.

    THE EASTWOOD CASE

  17. The case of Eastwood v Magnox Electric Plc concerns two employees, George Eastwood and John Williams, of Magnox Electric Plc. They were long serving employees who worked in the security section of the Magnox power station at Wylfa, Anglesey. In summary, the assumed facts are that Mr. Eastwood's immediate superior had a longstanding grudge against him. In May 1996 there was a disagreement between them. Mr. Eastwood's superior reported this to Mr. Eastwood's manager Mr. Allen. Mr. Eastwood refused to admit matters alleged against him. From then on there followed a series of events whose purpose was to secure evidence as a foundation for disciplinary proceedings against Mr. Eastwood. Individuals were counselled to provide false statements. In June 1996 Mr. Allen found Mr. Eastwood guilty of misconduct and gave him a final written warning for what was a trivial incident. Mr. Eastwood appealed in accordance with the firm's disciplinary code. Mr. Allen regarded this as a further attempt to challenge his authority and made it known he wanted any information which could be used to destroy Mr. Eastwood's appeal. Mr. Williams was summoned to Mr. Allen's office and asked to provide a false statement against Mr. Eastwood. When he refused he was threatened with possible investigation into his own conduct. There were no grounds for making any such investigation. In July 1996 Mr. Eastwood's appeal succeeded to the extent that his final written warning was reduced to a warning to remain on his file for six months.

  18. An enquiry was then conducted into employee relationships in the security section. Its real purpose was to seek information adverse to Mr. Eastwood and Mr. Williams. A past dispute between Mr. Eastwood and Mrs. Roberts, also a member of the security staff, came to light. Mr. Allen and other members of management encouraged Mrs. Roberts to formulate a series of complaints against Mr. Eastwood and Mr. Williams. On 31 July 1996 Mrs. Roberts lodged a formal complaint, and Mr. Eastwood and Mr. Williams were ordered to leave the site. They were told that serious allegations of sexual harassment had been made against them, but they were not given any details or the name of the complainant. A week later, on 7 August, both men were very publicly suspended from work. Those responsible for investigating the complaint on behalf of management then encouraged individuals to provide statements with the promise they would not be asked to attend any hearing. Members of management asked Mrs. Roberts to 'beef up' her allegations and assisted her to do this.

  19. The disciplinary hearing in respect of Mr. Williams took place on 30 September 1996. Facts were assumed against him even though no witnesses were called to support them and even though witnesses attending on behalf of Mr. Williams withdrew what they had previously said. On 4 October Mr. Williams was dismissed. By the time of the disciplinary hearing, after four months of a campaign to demoralise and undermine him, Mr. Williams had symptoms of anxiety and fear, later diagnosed as a depressive illness. Mr. Eastwood's disciplinary hearing was postponed until April 1997 because he was suffering from a depressive illness. He too was dismissed.

  20. Both men pursued claims for unfair dismissal. Mr. Williams' complaint resulted in a finding of unfair dismissal. Before a remedies hearing took place on Mr. Williams' claim, and before any hearing on Mr. Eastwood's claim, a compromise agreement was reached. Both men received financial payments. The agreement reserved the men's right to pursue a claim at common law for any claims they might have in respect of personal injuries arising out of their employment.

  21. Mr. Eastwood and Mr. Williams then commenced proceedings in the County Court in July 1999 for negligence and breach of contract. They alleged they suffered personal injuries in the form of psychiatric illnesses caused by a deliberate course of conduct by certain individuals using the machinery of the disciplinary process. Judge Elystan Morgan dismissed both claims on the basis that, as a matter of law, they had no reasonable prospect of success. Johnson's case showed that the development of the common law implied terms, of trust and confidence and the like, cannot proceed further 'in so far as they come up against the buffers, as it were, of the unfair dismissal legislation'. Those terms are excluded from the area within the purview of an employment tribunal, and that area includes acts done from the time the disciplinary machinery starts running.

  22. The Court of Appeal, comprising Peter Gibson and Mantell LJJ and Sir Swinton Thomas, upheld the judge's decision: [2002] IRLR 447. Peter Gibson LJ delivered the only reasoned judgment. Having referred to Johnson's case, he said at paragraph 23:

    The implied term of trust and confidence cannot be used in connection with the way the employer/employee relationship is terminated. There may be cases where the particular manner in which an employee is dismissed or the circumstances attending dismissal is or are confined to events occurring at the same time or immediately before the dismissal. In other cases that manner and those circumstances may include a pattern of events stretching back over a period. It is a question of fact for the trial judge to determine in each case.

  23. Peter Gibson LJ then concluded, in short, that the circumstances attending Mr. Williams' dismissal began in May 1996. All these circumstances were considered by the employment tribunal. The compensation recoverable in the employment tribunal covers the substance of what Mr. Williams is claiming in his court proceedings. There can be no justification for allowing Mr. Williams a second bite of the cherry. In Mr. Eastwood's case there has been no hearing in the employment tribunal. But on analysis his position is no different from that of Mr. Williams.

    THE McCABE CASE

  24. The second case concerns Robert McCabe. He was employed by Cornwall County Council as a teacher at Mounts Bay School, Heamoor, in Cornwall from September 1991 until dismissed in March 1994. In May 1993 allegations were made that he had behaved inappropriately towards certain female pupils, and he was suspended from his employment. At a disciplinary hearing held by the school governors in November 1993 Mr. McCabe was given a final written warning. He appealed. At a hearing by an appeal panel in March 1994 the governors decided to dismiss him. He was then dismissed. Mr. McCabe appealed again. A hearing took place over several days in July and August 1996, but his appeal was unsuccessful. He lodged a complaint with an industrial tribunal. In November 1996 the tribunal found he had been unfairly dismissed. The dismissal was in breach of the relevant disciplinary procedures, as the allegations had not been investigated at the time by a senior member of staff and the complainant girls had not signed their statements. He was awarded 11,504, being a basic award of 504 and the maximum compensatory award of 11,000. The tribunal stated, however, that Mr. McCabe had contributed 20% to the dismissal as his conduct had merited reproof and warning. In February 1998 the Employment Appeal Tribunal upheld the industrial tribunal's finding on liability but overturned the tribunal's finding of 20% contributory fault.

  25. Meanwhile in March 1997 Mr. McCabe instituted proceedings in the High Court against the council and the school governors claiming damages for breach of contract, negligence and breach of statutory duty. His primary complaint in his statement of claim as originally served was that by reason of the council's failure to investigate the allegations properly and to conduct the disciplinary hearings properly and his dismissal he had sustained psychiatric illness. He claimed special damages approaching 200,000. Later, in response to the decision in Johnson's case Mr. McCabe sought to amend his statement of claim by limiting the focus of his complaint to the period before his dismissal, that is, to the period of his suspension and to the failure to carry out a proper investigation. On 27 May 2002 Judge Overend, sitting as a judge of the High Court, refused permission to amend the statement of claim and struck out the original statement of claim as disclosing no cause of action. In doing so he followed the approach of the Court of Appeal in the Eastwood case. The conduct of which Mr. McCabe complained was all part and parcel of the events which led up to his dismissal and as such it is 'caught by the Eastwood extension of the Johnson principle': [2002] EWHC 3055 (QB), para 41.

  26. The Court of Appeal, comprising Auld, Brooke and Sedley LJJ, allowed an appeal by Mr. McCabe on 19 December 2002: [2002] EWCA Civ 1887, [2003] ICR 501. Auld LJ identified the essential question as one of determining where on the facts of any particular case the line should be drawn between dismissal, caught by the unfair dismissal legislation, and conduct prior to that causing injury compensatable in damages at common law: paragraph 27. The case should be permitted to go to trial to enable the underlying facts to be ascertained. Brooke LJ, agreeing, said he was 'very uneasy' about aspects of the present state of the law: paragraph 33. It would be odd if the law were to permit a claim by an employee known to be psychologically vulnerable when dismissal was not in prospect at the time of the triggering event but disallow such a claim if the disciplinary process intended to lead to dismissal was the triggering event: paragraph 43. Sedley LJ, also agreeing, said the action should proceed in order to decide whether the act of suspension was 'part of the process of dismissal': paragraph 49. It will have to be decided whether, if the pleaded facts are proved, they are subsumed in the dismissal for which Mr. McCabe has already recovered such compensation as statute allows, or whether they constitute a 'separate and antecedent wrong': paragraph 52.

    THE BOUNDARY LINE

  27. Identifying the boundary of the 'Johnson exclusion area', as it has been called, is comparatively straightforward. The statutory code provides remedies for infringement of the statutory right not to be dismissed unfairly. An employee's remedy for unfair dismissal, whether actual or constructive, is the remedy provided by statute. If before his dismissal, whether actual or constructive, an employee has acquired a cause of action at law, for breach of contract or otherwise, that cause of action remains unimpaired by his subsequent unfair dismissal and the statutory rights flowing therefrom. By definition, in law such a cause of action exists independently of the dismissal.

  28. In the ordinary course, suspension apart, an employer's failure to act fairly in the steps leading to dismissal does not of itself cause the employee financial loss. The loss arises when the employee is dismissed and it arises by reason of his dismissal. Then the resultant claim for loss falls squarely within the Johnson exclusion area.

  29. Exceptionally this is not so. Exceptionally, financial loss may flow directly from the employer's failure to act fairly when taking steps leading to dismissal. Financial loss flowing from suspension is an instance. Another instance is cases such as those now before the House, when an employee suffers financial loss from psychiatric or other illness caused by his pre-dismissal unfair treatment. In such cases the employee has a common law cause of action which precedes, and is independent of, his subsequent dismissal. In respect of his subsequent dismissal he may of course present a claim to an employment tribunal. If he brings proceedings both in court and before a tribunal he cannot recover any overlapping heads of loss twice over.

  30. If identifying the boundary between the common law rights and remedies and the statutory rights and remedies is comparatively straightforward, the same cannot be said of the practical consequences of this unusual boundary. Particularly in cases concerning financial loss flowing from psychiatric illnesses, some of the practical consequences are far from straightforward or desirable. The first and most obvious drawback is that in such cases the division of remedial jurisdiction between the court and an employment tribunal will lead to duplication of proceedings. In practice there will be cases where the employment tribunal and the court each traverse much of the same ground in deciding the factual issues before them, with attendant waste of resources and costs.

  31. Second, the existence of this boundary line means that in some cases a continuing course of conduct, typically a disciplinary process followed by dismissal, may have to be chopped artificially into separate pieces. In cases of constructive dismissal a distinction will have to be drawn between loss flowing from antecedent breaches of the trust and confidence term and loss flowing from the employee's acceptance of these breaches as a repudiation of the contract. The loss flowing from the impugned conduct taking place before actual or constructive dismissal lies outside the Johnson exclusion area, the loss flowing from the dismissal itself is within that area. In some cases this legalistic distinction may give rise to difficult questions of causation in cases such as those now before the House, where financial loss is claimed as the consequence of psychiatric illness said to have been brought on by the employer's conduct before the employee was dismissed. Judges and tribunals, faced perhaps with conflicting medical evidence, may have to decide whether the fact of dismissal was really the last straw which proved too much for the employee, or whether the onset of the illness occurred even before he was dismissed.

  32. The existence of this boundary line produces other strange results. An employer may be better off dismissing an employee than suspending him. A statutory claim for unfair dismissal would be subject to the statutory cap, a common law claim for unfair suspension would not. The decision of the Court of Appeal in Gogay v Hertfordshire County Council [2000] IRLR 703 is an example of the latter. Likewise, the decision in Johnson's case means that an employee who is psychologically vulnerable is owed no duty of care in respect of his dismissal although, depending on the circumstances, he may be owed a duty of care in respect of his suspension.

  33. It goes without saying that an inter-relation between the common law and statute having these awkward and unfortunate consequences is not satisfactory. The difficulties arise principally because of the cap on the amount of compensatory awards for unfair dismissal. Although the cap was raised substantially in 1998, at times tribunals are still precluded from awarding full compensation for a dismissed employee's financial loss. So, understandably, employees and their legal advisers are seeking to side-step the statutory limit by identifying elements in the events preceding dismissal, but leading up to dismissal, which can be used as pegs on which to hang a common law claim for breach of an employer's implied contractual obligation to act fairly. This situation merits urgent attention by the government and the legislature.

    THE PRESENT CASES

  34. It follows from what is set out above that I would dismiss the appeal in Mr. McCabe's case and allow the appeals of Mr. Eastwood and Mr. Williams. In the case of all three men the assumed facts constitute causes of action which accrued before the dismissals. They disclose reasonable causes of action which should proceed to trial.

    Lord Steyn

    My Lords,

  35. On the assumed facts Mr. Eastwood, Mr. Williams and Mr. McCabe arguably have causes of action which accrued before and independently of their dismissals. In all three cases there are reasonable causes of action which should be allowed to proceed to trial. They are unaffected by the restrictive effect of the decision of the House of Lords in Johnson v Unisys Ltd [2003] 1 AC 518. In my view the Court of Appeal in Eastwood v Magnox Electric plc [2002] IRLR 447 erred in extending the principle in Johnson to wiping out accrued rights. The decision of the Court of Appeal in McCabe v Cornwall County Council [2003] IRLR 87 avoided this pitfall. I therefore agree that the appeal in Mr. McCabe's case should be dismissed and that the appeals of Mr. Eastwood and Mr. Williams should be allowed.

  36. There is however a wider perspective to be mentioned. It may be necessary to reconsider the decision in Johnson in a future case. Having disagreed with the main thrust of the majority decision in Johnson, I make this suggestion with considerable diffidence. Moreover, although the printed cases lodged on behalf of the employees invited the House to depart from Johnson if necessary, the House did not in the event hear oral argument from counsel for the employees calling in question the correctness of Johnson. My observations must, therefore, be read subject to this caveat. On the other hand, the subject is of enormous importance: the personal contract of employment affects almost all individuals and families at some time. And, as I shall attempt to show, there are grounds for thinking that Johnson has left employment law in an unsatisfactory state. I will only be able to touch on a few aspects. But my remarks may provide some focus for a future re-examination of the position.

  37. The ground upon which Johnson was decided is summarised in the headnote of the Appeal Cases report. It reads as follows (para 518H-519A):

    .... under Part X of the Employment Rights Act 1996 Parliament had provided the employee with a limited remedy for the conduct of which he complained; that, although it was possible to conceive of an implied term which the common law could develop to allow an employee to recover damages for loss arising from the manner of his dismissal, it would be an improper exercise of the judicial function for the House to take such a step in the light of the evident intention of Parliament that such claims should be heard by specialist tribunals and the remedy restricted in application and extent;

    In other words, the majority held that the statutory regime of unfair dismissal precludes a common law development in respect of wrongful dismissal despite the different meanings of those concepts.

  38. This is the context in which Lord Hoffmann, who gave the leading opinion in Johnson, observed (para 55 (at p 544)) about section 116(1) of the Industrial Relations Act 1971 (the ultimate precursor of the current section 123(1) of the Employment Rights Act 1996):

    .... I know that in the early days of the National Industrial Relations Court it was laid down that only financial loss could be compensated: see Norton Tool Company Ltd v Tewson [1973] 1 WLR 45; Wellman Alloys Ltd v Russell [1973] ICR 616. It was said that the word 'loss' can only mean financial loss. But I think that is too narrow a construction. The emphasis is upon the tribunal awarding such compensation as it thinks just and equitable. So I see no reason why in an appropriate case it should not include compensation for distress, humiliation, damage to reputation in the community or to family life.

    This observation was relevant to Lord Hoffmann's reasoning that the development of a general common law remedy as contended for by the employee would have involved a complete or virtually complete overlap with the statutory remedy. Lord Hoffmann's assumption was shared by the other Law Lords hearing the case. In Dunnachie v Kingston upon Hull City Council [2004] UKHL 36 the House has now unanimously held that section 123(1) of the 1996 Act does not permit the recovery of non-pecuniary loss. While Lord Hoffmann's observation was in terms of precedent only an obiter dictum it did lend support to his reasoning. That support of the reasoning in Johnson has now disappeared. It does not necessarily follow that, if the true position had been appreciated, Johnson would have been decided differently. But it raises some doubt about the reasoning in Johnson.

  39. A second matter not considered in Johnson was the type of demarcation disputes which would be generated. Johnson laid down the proposition that cases of dismissal may only be brought in the employment tribunal. On the other hand if before dismissal, whether actual or constructive, an employee has acquired a cause of action at law, for breach of contract or otherwise, that cause of action survives his subsequent unfair dismissal: see the lucid analysis of Lady Smith in King v University Court of the University of St Andrews [2002] IRLR 252 (Ct Sess). This dichotomy will often give rise to questions whether earlier events do or do not form part of the dismissal process. After all, such problems in relationships between an employer and an employee will often arise because of a continuing course of conduct. In practice this will inevitably lead to curious distinctions and artificial results. It will involve case by case decision making rather than principled adjudication. The outcome of litigation will be very unpredictable. This policy aspect of the consequences of the reasoning of the majority in Johnson was not considered by the House in that case. But the present appeals illustrated the type of difficulties and uncertainties inherent in the legalism which prevailed in Johnson. This is relevant because the way in which a rule or principle operates in the real world is one of the surest tests of its soundness.

  40. A third perspective is raised by the decision of the Court of Appeal in Gogay v Hertfordshire County Council [2000] IRLR 703. This case was decided after the Court of Appeal decision in Johnson ([1999] ICR 809) and before the House of Lords' decision in Johnson. Gogay was referred to in the argument of counsel in the House but not mentioned in any of the opinions of the majority. It concerned a claim brought in respect of psychiatric injury caused by the manner in which an employer operated a disciplinary procedure. Giving the leading judgment Hale LJ observed (para 68-69)

    The case before us can be distinguished from Johnson [in the Court of Appeal]. The complaint here relates to a suspension, which manifestly contemplates the continuation of the employment relationship. The clear import of Malik is that the ambit of Addis should be confined. There are in this case two differences from Addis: first, this was not a dismissal, and secondly, this was psychiatric illness rather than hurt feelings. In my judgment, therefore, the judge was right to award damages for both the financial loss and the non-pecuniary damage resulting from the claimant's illness.

    I recognise that this produces the strange result that, according to Johnson, the defendant authority would have done better had they dismissed rather than suspended the claimant. That simply reinforces my view that the sooner these matters are comprehensively resolved by higher authority or by Parliament, the better.

    Unfortunately, as Hale LJ implicitly pointed out, Johnson will tend to encourage precipitate and unfair decisions by employers to dismiss employees. The decision of the Court of Appeal in Gogay sits uneasily with Johnson. How in policy terms the disharmony should be reconciled is not clear. The majority's reasoning in Johnson also means that, although the exercise of the power to suspend must be exercised with due regard to trust and confidence (or fairness), the more drastic power of dismissal may be exercised free of any equivalent constraint. An employee confronted with a repudiatory breach of contract by an employer who elects to treat the contract as continuing may still have a claim for breach of contract. But in practice an employee may often not have much choice but to accept the repudiation. If the employee accepts the repudiation, the claim becomes one of unfair dismissal and the Johnson exclusion zone comes into play. In constructive dismissal cases the employee's response to the employer's breach will dictate whether there can be common law liability. The more outrageous the breach the less likely it is that the employee can affirm the contract: Lizzie Barmes, The Continuing Conceptual Crisis in the Common Law of the Contract of Employment, (2004) 67 (3) MLR 435, at 451. Contractual analysis arguably suggests a more even-handed solution as between employer and employee. These negative policy factors were not explicitly considered in Johnson.

  41. A fourth troublesome feature of the reasoning of the majority in Johnson is that it was assumed that an employer's conduct causing psychiatric illness to an employee resulting in financial loss may be compensated under section 123(1). But for this assumption Lord Nicholls of Birkenhead could not have described the common law remedy in question as "covering the same ground as the statutory right". Lord Hoffmann observed (para 55):

    In my opinion, all the matters of which Mr. Johnson complains in these proceedings were within the jurisdiction of the industrial tribunal. His most substantial complaint is of financial loss flowing from his psychiatric injury which he says was a consequence of the unfair manner of his dismissal. Such loss is a consequence of the dismissal which may form the subject matter of a compensatory award.

    These observations were critical to the decision in Johnson.

  42. Was the assumption that in an unfair dismissal case an employment tribunal may award compensation for financial loss flowing from psychiatric injury correct? The jurisdiction of an employment tribunal does not extend to the awarding of compensation "in respect of personal injuries": see The Employment Tribunals Extension of Jurisdiction (England and Wales) Order 1994, SI No. 1623, 12 July 1994, para 3, as amended by the Employment Rights (Dispute Resolution) Act 1998, section 1(2)(a); and section 3(3) of the Employment Tribunals Act 1996. A claim in contract or tort for damages for psychiatric injury is a claim in respect of personal injuries: Page v Smith [1996] 1 AC 155, at 188E-F, 190C-E, per Lord Lloyd of Berwick; compare Limitation Act 1980, section 38(1), s.v. "personal injuries". There is no reason to give to the words "in respect of personal injuries" in the statutory regime governing employment tribunals any different meaning. On the plain meaning of those words claims for financial loss caused by psychiatric injury are excluded from the jurisdiction of employment tribunals. Subject to a novel judicial interpretation to bring such claims under the statutory regime, there are cogent grounds for thinking that in Johnson the majority proceeded on a fundamentally wrong assumption. The unfair dismissal scheme is less comprehensive than it was thought to be. The symmetry between the statutory regime and the proposed common law development visualised by the majority probably did not exist. If this is the case, the core reasoning of the majority in Johnson is flawed.

  43. A fifth matter is the reception of Johnson. Since Johnson was decided more than two years ago, there has been a great deal of comment on this decision by academic and practising labour lawyers: see

    • Professor Deakin & Professor Morris, Labour Law, 3rd ed, 2001, 410-411, 418-419;

    • Professor Freedland, The Personal Employment Contract, 2003, 162-167, 303-305, 342-345, 362-364;

    • Professor Freedland, 2001, 30 ILJ 309;

    • Professor Collins, Claim for Unfair Dismissal, 2001, 30 ILJ 305;

    • Professor Bob Hepple QC and Gillian Morris, The Employment Act 2002 and the Crisis of Individual Employment Rights, 2002, 31 ILJ 245, 253;

    • Douglas Brodie, Legal Coherence and the Employment Revolution, 2001, 117 LQR 604, 624-625;

    • Lizzie Barmes, The Continuing Conceptual Crisis in the Common Law of the Contract of Employment, (2004) 67(3) MLR 435.

    Making due allowance for differences in emphasis between the writers on the subject, there is apparently no support for the analysis adopted in Johnson.

  44. The thrust of much of the comment on the central question is summarised by Deakin & Morris (Labour Law, para 5.3, at p 419):

    More generally, the argument that legislative intervention somehow equates to Parliament 'occupying the field' at the expense of the future development of the common law would, if more generally applied, have already prevented the application of the implied term of mutual trust and confidence to many other aspects of the employment relationship. It may be argued that just as employment legislation normally acts as a 'floor of rights' in relation to the contract of employment, implicitly encouraging the parties to improve on the basic standards supplied by statute, so the court should be willing, in appropriate cases, to use the enactment of protective legislation as a basis for extending, rather than limiting, recognition of the legitimate common law interests of the employee.

    A footnote to the first quoted sentence observes:

    Thus there has been extensive statutory intervention in the areas of health and safety at work, grievance procedures, and the exercise of employer discretion in relation to occupational pension schemes, all of which have been the subject of judicial innovation in respect of the duty of mutual trust and confidence and which were accepted as legitimate in both Malik and Johnson ....

    Hepple QC & Morris (31 ILJ 245, at 253) put the point as follows:

    .... in Johnson v Unisys Ltd, the House of Lords, by a 4:1 majority, stopped the common law developing to 'reflect modern perceptions of how employees should be treated fairly and with dignity' in the context of dismissal. The reasoning of the majority has disturbing implications for employment rights in general. Although prepared to contemplate a term that a contractual power to dismiss without cause would be exercised fairly and in good faith, they regarded the introduction of the statutory remedy of unfair dismissal as fatal to the implication of such a contractual duty (and to the imposition of a duty of care).

    ....

    The argument that Parliament had intended to freeze out the development of the common law by creating a statutory remedy for unfair dismissal is contentious; the absence of any reference to the common law in the legislation may have occurred because Parliament was content to let the courts develop it in the usual way. Indeed, it would be open to the courts to reason by analogy that a requirement for employers to follow a fair procedure is not regarded by Parliament as unduly onerous. The majority's reasoning means that although the exercise of the power to suspend must be exercised with due regard to trust and confidence, the more drastic power of dismissal is free from any equivalent constraint.

    ....

    In viewing statutory rights as a ceiling rather than a floor, Johnson creates the anomalous situation that employees may be better protected by implied terms in areas in which Parliament has failed or chosen not to legislate than in those in which it has.

    Freedland (The Personal Employment Contract, at 304 and 342) described the principal reasoning in Johnson, founded as it was on an account of the intention of Parliament, as "more than slightly artificial" and "rather contrived". He stated (at 342-343):

    It must be said that none of these various grounds of decision seems at all compelling in and of itself. In particular, the reasons advanced by the majority of the Law Lords seem rather contrived, and to be in the nature of rationalisations of a prior decision that it would be undesirable as a matter of policy for a claim of this nature to be allowed to succeed. Thus, if the obligation of mutual trust and confidence is a genuine reading of the implied intentions of the parties to the contract of employment, there seems no special reason why it should be regarded as stopping short of controlling the termination of the contract. If, on the other hand, the adjudication is a genuine attempt to comply with the design of the unfair dismissal legislation, it is rather surprising to have regarded Parliament, when it introduced a set of statutory protections for workers with regard to dismissal, as intending, indeed as enjoining, that the common law should not, in the future, develop parallel protections as part of the implied content of their personal work or employment contracts.

    These are quotations from the writings of distinguished and experienced specialists in the field.

  45. The decision of the majority in Johnson could be justified if, and only if, it could be shown that the co-existence of the statutory scheme and the development of a common law remedy would be unworkable. The majority in Johnson did not put their decision on the basis that this test is satisfied. Nothing in the opinions in the present case, arrived at admittedly without the benefit of oral argument, persuades me that this test has indeed been satisfied. What is plain is that if the common law is allowed to develop as argued for by the employee in Johnson no claimant would be allowed to make a double recovery. In practice this will pose no more serious problems than in other areas where possible double recovery problems occur and are dealt with by judges on the facts of each case.

  46. In McCabe in the Court of Appeal, decided after Johnson in the House of Lords, Auld LJ described the law on this matter as "clearly still in a state of development"; para 22, at p 512. Brooke LJ stated (para 33 at 515):

    I am very uneasy about certain aspects of the present state of the law, which appear to me to warrant re-examination by the House of Lords, or by Parliament, at an early date.

    The concerns expressed in McCabe are understandable.

  47. If the central ground on which Johnson was decided proves, upon re-examination, vulnerable, one may pose the question whether the result of Johnson could be justified on different grounds.

  48. It would be wrong now to assume that Addis v Gramophone Co Ltd [1909] AC 488 reflected settled law which made impossible the development contended for in Johnson. In Mahmud v Bank of Credit & Commerce International SA [1998] AC 20 Lord Nicholls of Birkenhead observed about Addis (at pp 38H-39D):

    For present purposes I am not concerned with the exclusion of damages for injured feelings. The present case is concerned only with financial loss. The report of the facts in Addis's case is sketchy. Whether Mr. Addis sought to prove that the manner of his dismissal caused him financial loss over and above his premature termination losses is not clear beyond a peradventure. If he did, it is surprising that their Lordships did not address this important feature more specifically. Instead there are references to injured feelings, the fact of dismissal of itself, aggravated damages, exemplary damages amounting to damages for defamation, damages being compensatory and not punitive, and the irrelevance of motive. The dissenting speech of Lord Collins was based on competence to award exemplary or vindictive damages.

    However, Lord Loreburn LC's observations were framed in quite general terms, and he expressly disagreed with the suggestion of Lord Coleridge C.J. in Maw v Jones (1890) 25 QBD 107, 108, to the effect that an assessment of damages might take into account the greater difficulty which an apprentice dismissed with a slur on his character might have in obtaining other employment. Similarly general observations were made by Lord James of Hereford, Lord Atkinson, Lord Gorell and Lord Shaw of Dunfermline.

    In my view these observations cannot be read as precluding the recovery of damages where the manner of dismissal involved a breach of the trust and confidence term and this caused financial loss. Addis v Gramophone Co Ltd was decided in the days before this implied term was adumbrated. Now that this term exists and is normally implied in every contract of employment, damages for its breach should be assessed in accordance with ordinary contractual principles. This is as much true if the breach occurs before or in connection with dismissal as at any other time.

    My analysis was to the same effect: 50A-51E. The other Law Lords in the case agreed with this analysis. On a careful analysis of Addis it will be seen that there was no majority for ruling out the recovery of financial loss flowing from the manner of a wrongful dismissal. The headnote of Mahmud rightly states "Addis v Gramophone Co Ltd [1909] AC 488 not followed". In Johnson the view prevailed that because of the statutory regime the common law development contended for could not be permitted. But in terms of stare decisis the status of Addis remained exactly the same as it was when Mahmud was decided. The reasoning of the majority in Johnson did not re-invigorate the corpse of Addis. In any event, in the present case the House heard no oral argument on the status of Addis.

  49. In Johnson Lord Hoffmann was prepared to accept the existence within the contract of "a separate term that the power of dismissal will be exercised fairly and in good faith": para 46. Lord Nicholls did not deal with the point. Lord Millett was prepared to countenance a common law term imposing upon the employer "a more general obligation .... to treat his employee fairly even in the matter of dismissal": para 79. This explains the ratio decidendi of Johnson as I have set it out in para 37 above. In my dissenting judgment in Johnson I further pointed out that the implied obligation of mutual trust and confidence was developed in the context of a series of constructive dismissal cases. I cited Hepple & O'Higgins, Employment Law, 4th ed (1981) pp 134-135, paras 291-292. I added that it cannot, therefore, be confined to breaches during the subsistence of the contract: para 21. After a detailed discussion I concluded (para 24):

    The interaction of the implied obligation of trust and confidence and express terms of the contract can be compared with the relationship between duties of good faith or fair dealing with the express terms of notice in a contract. They can live together. In any event, the argument of counsel for the employers misses the real point. The notice provision in the contract is valid and effective. Nobody suggests the contrary. On the other hand, the employer may become liable in damages if he acts in breach of the independent implied obligation by dismissing the employee in a harsh and humiliating manner. There is no conflict between the express and implied terms.

    This was, of course, said in the context of a claim for financial loss.

  50. At the hearing of the present appeals the House did not have the benefit of oral argument on potential scope of the implied obligation of mutual trust and confidence, or what Sir Nicolas Browne-Wilkinson V-C in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589, at 597, more simply called "the implied obligation of good faith". Perhaps it would be conducive to clarity if the latter description is generally used.

  51. As a result of Johnson the law in the vitally important area of personal contracts of employment is in an unsatisfactory state. The cap (now standing at 55,000) under the statutory scheme on compensatory awards for true financial loss is one aspect of the problem. No doubt it is intended to protect the competitiveness of business but if it is allowed to constrain the development of the common law it may come at too high a price in the failure of corrective justice. The inhibitory effect of Johnson on the development of the common law poses a great structural problem. It prevents, and will continue to prevent, the natural and sensible evolution of our employment law in a critical area. I do not believe that Parliament ever intended such a result. A re-examination by Parliament is needed.

    Lord Hoffman

    My Lords,

  52. I have had the privilege of reading the speech of my noble and learned friend, Lord Nicholls of Birkenhead, in draft. I agree with it and, for the reasons he gives, I too would make the orders which he proposes in each of the appeals.

    Lord Rodger of Earlsferry

    My Lords,

  53. I have had the privilege of considering the speech of my noble and learned friend, Lord Nicholls of Birkenhead, in draft. I agree with it and, for the reasons he gives, I too would make the orders which he proposes in each of the appeals.

    Lord Brown of Eaton-under-Heywood

    My Lords,

  54. I have had the privilege of considering the speech of my noble and learned friend, Lord Nicholls of Birkenhead, in draft. I agree with it and, for the reasons he gives, I too would make the orders which he proposes in each of the appeals.


Cases

Addis v Gramophone Co Ltd [1909] AC 488; Malloch v Aberdeen Corporation [1971] 1 WLR 1578; Western Excavating (ECC) Ltd v Sharp[1978] ICR 221; Secretary of State for Employment v ASLEF (No 2) [1972] 2 QB 455; Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666, affirmed [1982] ICR 693; Mahmud v Bank of Credit and Commerce International SA [1998] AC 20; Johnson v Unisys Ltd [2003] 1 AC 518; Gogay v Hertfordshire County Council [2000] IRLR 703; McCabe v Cornwall County Council [2003] IRLR 87; Dunnachie v Kingston upon Hull City Council [2004] UKHL 36; King v University Court of the University of St Andrews [2002] IRLR 252; Page v Smith [1996] 1 AC 155; Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589

Legislations

Industrial Relations Act 1971: s.116

Employment Rights Act 1996: s.94, s.123

Employment Tribunals Extension of Jurisdiction (England and Wales) Order 1994 (SI No. 1623, 12 July 1994)

Employment Rights (Dispute Resolution) Act 1998: s.1(2)(a)

Employment Tribunals Act 1996: s.3(3)

Authors and other references

Donovan Commission, Report on Trade Unions and Employers' Associations, 1968

Lizzie Barmes, The Continuing Conceptual Crisis in the Common Law of the Contract of Employment, (2004) 67 (3) MLR 435

Deakin & Morris, Labour Law, 3rd ed, 2001

Freedland, The Personal Employment Contract, 2003

Freedland, 2001, 30 ILJ 309

Collins, Claim for Unfair Dismissal, 2001, 30 ILJ 305

Bob Hepple QC & Gillian Morris, The Employment Act 2002 and the Crisis of Individual Employment Rights, 2002, 31 ILJ 245

Douglas Brodie, Legal Coherence and the Employment Revolution, 2001, 117 LQR 604

Hepple & O'Higgins, Employment Law, 4th ed (1981)

Representations


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