House of Lords
|Session 2003 - 04
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Eastwood and another (Appellants) v. Magnox Electric plc (Respondents). McCabe (Respondent) v. Cornwall County Council and others (Appellants)
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
Eastwood and another (Appellants)
Magnox Electric plc (Respondents)
Cornwall County Council and others (Appellants)
THURSDAY 15 JULY 2004
The Appellate Committee comprised:
Lord Nicholls of Birkenhead
Lord Rodger of Earlsferry
Lord Brown of Eaton-under-Heywood
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Eastwood and another (Appellants) v. Magnox Electric plc (Respondents)
McCabe (Respondent) v. Cornwall County Council and others (Appellants)
 UKHL 35
LORD NICHOLLS OF BIRKENHEAD
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  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  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  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)  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  ICR 666, affirmed  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.
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  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.
8. The ramifications of this decision came under scrutiny in Johnson v Unisys Ltd  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:  IRLR 447. Peter Gibson LJ delivered the only reasoned judgment. Having referred to Johnson's case, he said at paragraph 23:
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':  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:  EWCA Civ 1887,  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.