by Laurie Anstis on December 14, 2011
The Supreme Court have given judgment today in the joined appeals of Edwards v Chesterfield Royal Hospital and Botham (FC) v Ministry of Defence  UKSC 58.
Any employment law decision by the Supreme Court is significant, but this one is particularly significant given that it is a decision by a 7-person panel (usually a panel of 5 judges hears a case) and deals with one of the classic problems of employment law – to what extent is an employment contract just like any other contract, and to what extent does it have its own special rules?
The appeals centred on the question of whether an employee who is dismissed in breach of a contractual disciplinary procedure can sue their employer for the losses that they suffer as a result of the breach of contract.
Most disciplinary procedures are non-contractual, but there are some disciplinary procedures that are built into contracts of employment, particularly in some public sector institutions.
In these cases, the employees sought to argue that their employers had not followed the contractual disciplinary procedure, and that as a result of that failure to follow the procedure they had been dismissed. They argued that if the agreed procedures had been followed, they would not have been dismissed. They claimed compensation based on their losses, including (in the Botham case) legal costs, and loss of earnings that would have exceeded the cap on compensation for unfair dismissal.
Under ordinary principles of contract law, such an argument would be fairly respectable. A judge would be careful to examine the individual’s claim that they would not have been dismissed if the agreed procedure had been followed, and would need to be convinced that the losses claimed were foreseeable and caused by the breach of contract, but in principle it could be a good argument under ordinary principles of contract.
The question for the Supreme Court was whether those ordinary rules should be followed, or whether there were special things about employment contracts that meant that different rules should apply.
The House of Lords, the predecessor of the Supreme Court, had already looked at this kind of question before. In Johnson v Unisys, they had considered whether a dismissal in breach of the implied duty of trust and confidence could result in this kind of claim. The implied duty of trust and confidence is a contractual term, so if employment contracts are like any other form of contract then there would be no reason for not allowing an employee to claim damages for breach of contract where they had been dismissed in a manner which was itself in breach of the duty of trust and confidence.
In Johnson v Unisys, the House of Lords decided that there was something special about employment contracts. What was special about them was that Parliament had enacted special rules providing for compensation for unfair dismissal, which apply to no other area of contract law. The House of Lords decided that it would undermine unfair dismissal law if they were to find this alternative way in which compensation for dismissal could be obtained, and decided that damages could not be awarded for a dismissal which was in breach of the implied term of trust and confidence.
The House of Lords had another opportunity to consider the point in Eastwood v Magnox Electric and McCabe v Cornwall County Council. If the reason why damages were not available for a dismissal in breach of the duty of trust and confidence was because of unfair dismissal law, what about loss suffered as a result of a breach of the duty of trust and confidence which was not to do with dismissal? What if, for instance, a breach of the duty of trust and confidence resulted not in dismissal but in an employee being suspended without pay. Could that employee claim damages?
To cope with this situation, the House of Lords developed the concept of the “Johnson exclusion area”. Claims which were within that area would not be allowed, because of the Johnson v Unisys case. This covered dismissals and events closely connected with dismissal, for which the employee was left with an unfair dismissal claim only. On the other hand, there would be claims which “precede and are independent of” dismissal. They would be allowed.
This is all very well, but it does cause difficulties about what is within, and what is outside, the Johnson exclusion area. It also causes difficulties for employees who are dismissed but who may not be able to bring an unfair dismissal claim, because they do not have the necessary one (soon to be two) year’s service, or employees whose losses will exceed the cap on compensation for unfair dismissal.
That brings us to the Edwards and Botham cases. These did not rely on the implied term of trust and confidence, but instead on expressly agreed terms. Part of these employees’ express contracts with their employers had been that if disciplinary matters had arisen, they would be dealt with in accordance with agreed procedures. What if they weren’t?
The Supreme Court was divided. By a majority of 4 to 3 they found that the employees could not bring their claims, but there are five separate judgments, all of which bear reading to determine why the Supreme Court reached the decision that it did.
Lords Dyson and Walker
Lord Dyson, supported by Lord Walker, gave the lead judgment.
Paragraphs 19 – 37 of the judgment are devoted to a history of the development of disciplinary procedures in the context of unfair dismissal law, citing the ACAS Code of Practice and various other statutory developments, before stating the question as being (para 39):
“… whether, if provisions about disciplinary procedures are incorporated into a contract of employment, they are intended to be actionable at common law giving rise to claims for damages in the ordinary courts.”
“Parliament intended such provisions to apply to contracts of employment inter alia in order to protect employees from unfair dismissal and to enhance their right not to be unfairly dismissed. It has specified the consequences of a failure to comply with such provisions in unfair dismissal proceedings. It could not have intended that the inclusion of these provisions in a contract would also give rise to a common law claim for damages …”
And in paragraph 44:
“That is not to say that an employer who starts a disciplinary process in breach of the express terms of the contract of employment is not acting in breach of contract. He plainly is. If that happens, it is open to the employee to seek an injunction to stop the process. [Counsel for Edwards] submitted that, if in such a situation there is a breach of contract sufficient to support the grant of an injuction but (for whatever reason) the employee does not obtain an injunction, it is anomlous if the normal common law remedy of damages is not available to him. The short answer to that submission is that an injunction to prevent a threatened unfair dismissal does not cut across the statutory scheme for compensation for unfair dismissal.”
[Side note: cases such as this tend to have a habit of throwing up obiter remarks by senior judges that send employment lawyers into a spin. Will any employment lawyer be bold enough to attempt one of Lord Dyson’s injunctions against unfair dismissal?]
He goes on to find that both claims fall within the Johnson exclusion area.
Lord Phillips says that he initially considered the judgment of Lord Dyson to be “plainly right”, but was caused to reconsider his reasoning, if not the ultimate outcome, by the judgments of Lady Hale and Lord Kerr.
Lord Phillips determined the case on the question of remoteness of damage. He categorised the claims as claims for “stigma” damages, and that such claims (arising from dismissal) were ruled out by the case of Addis v Gramophone Co Limited  AC 488.
Lord Mance supports the decision to uphold the employers’ appeals, based on his assessment that in both cases the complaint and any losses were really all about the dismissal itself, rather than any procedure which lead to the dismissal.
Lady Hale, considered by some to be the employment law specialist in the court, commences with a pointed “declaration of interest as the only member of this court to have spent a substantial proportion of her working life as an employee rather than as a self-employed barrister or tenured office-holder” (para 110).
She goes on to say that in enacting unfair dismissal legislation, Parliament must be taken to have extended, rather than reduced, employee rights. At paragraph 120 she called for a review of contract law to permit concepts of contributory fault. At paragraph 121 she takes a narrow view of the Johnson exclusion area, seeking to limit it to the consequences of a dismissal in breach of the duty of trust and confidence. At paragraph 122 she says:
“… I am puzzled as to how it can be possible for an employee with a contractual right to a particular disciplinary process to enforce that right in advance by injunction but not possible for him to claim damages for its breach after the event.”
She concludes by saying that she would have found in favour of both employees.
Lords Kerr and Wilson
Lord Kerr distinguished between the two cases. In Edwards, the issue was in the formation of the disciplinary panel to hear his case. Lord Kerr finds that this was a fully formed cause of action before the dismissal, which should survive the dismissal. In the Botham case, the loss followed on from the dismissal, and there was no existing cause of action before the dismissal.
This was always going to be a difficult judgment, and the fact that it has divided the greatest judges in the country is an indication of how complex the issues are. There are aspects of the judgments that could be studied for hours, but I will just make a few observations.
First, with respect to Lord Dyson, I am concerned by the emphasis that he put on the place of disciplinary procedures in unfair dismissal law. In Edwards, the disciplinary procedure was the subject of a locally negotiated agreement, and the dispute was whether the disciplinary panel should have a member of his medical discipline and a legally-qualified chairman. This is a long way from being a simple everyday disciplinary procedure based on the ACAS code.
Second, judgments which attempt to divine the will of Parliament in enacting legislation forty years ago are always going to have difficulties. I am attracted by Lady Hale’s argument that Parliament did not intend to limit rights that employees would otherwise have had. If the logic of the argument is taken to the extreme, why should notice periods (themselves express terms governing termination of employment) have survived the introduction of unfair dismissal law?
Third, what is the status of these contractually-agreed procedures after this judgment? It appears that they are enforceable, but only by applications for injunctions or declarations, not by claims for damages. An application for an injunction is a major and costly step, well beyond the means of employees without the support of professional associations or trade unions. Will this judgment encourage expensive and disruptive injunction applications as the only means of enforcing an employee’s rights? Will unscrupulous employers be tempted to take short cuts and dismiss before the employee has the opportunity to apply for an injunction?
Above all that, what will stay in my mind longest from this judgment is Lady Hale’s observation that she was the only member of the court with substantial experience of being an employee.