Minding your Ts and Cs: compensation for breach of contractual procedure

Julian Hoskins exaimes the Court of Appeal's decision to allow claims for general losses to be made in casesof breach of procedure.

30/06/2010

The Court of Appeal has put the compensation cat amongst the employment contract pigeons this month, in a decision which will weigh heavily with public sector employers (and any other employers operating contractual disciplinary procedures).  It has been held that employees dismissed because of a breach of a contractual disciplinary policy may be entitled to compensation for any resulting loss.  The doctor is question is claiming £4million in respect of his alleged career loss of earnings.  Julian Hoskins reports.

Background

It has long been accepted that an employee’s compensation for a dismissal in breach of their contract of employment is (broadly) limited to:

  1. any salary they would have earned had they received their proper notice; plus
  2. any additional salary that the employee would have earned during the time it would have taken for an employer to carry out a correct contractual disciplinary procedure.

It has also long been established that compensation is not available for pre-dismissal breaches of the implied term of mutual trust and confidence, in respect of the ‘manner’ of the dismissal.  This question was examined by the House of Lords in Johnson v Unisys Ltd (2001) and Eastwood v Magnox Electric plc; Cornwall County Court v McCabe (2004) and is referred to as ‘the Johnson exclusion zone’.  The  reasoning is that allowing employees to make such a claim for a pre-dismissal breach of contract would duplicate their unfair dismissal rights under the Employment Rights Act 1996.

In Edwards v Chesterfield Royal Hospitals NHS Trust, it was argued that these restrictions should not apply to Dr Edwards’ claim for wrongful dismissal.  Dr Edwards argues he is entitled to:

  • compensation for the salary he would have earned during his notice period, plus
  • salary for the period of time it would have taken for a proper disciplinary process to have been carried out, plus
  • compensation for the salary that he would have earned during his continued employment, had the procedure been followed correctly  and, as a result, he had been exonerated from the allegations made against him.

It is this last head of loss which was the main subject of the appeal by Chesterfield Royal Hospitals NHS Trust (‘the Trust’).

The facts

Dr Edwards was employed by the Trust as a consultant trauma and orthopaedic surgeon.  He was summarily dismissed for gross professional and personal misconduct.   Dr Edwards’ employment was subject to a three month notice period, and a contractual disciplinary procedure. 

As this case was a preliminary application to determine the extent to which Dr Edwards was entitled to claim compensation, it proceeded on the basis of assumed facts, which were that:

  • the Trust had failed to follow its contractual disciplinary procedure;
  • if the procedure had been followed correctly, Dr Edwards would not have been found guilty of misconduct or dismissed;
  • if Dr Edwards had not been dismissed, he would have continued to work for the Trust until his retirement.

Dr Edwards argues that, because of the way in which his employment was terminated, he will be unable to find permanent employment in the NHS. Dr Edwards is, therefore, claiming approximately £4 million compensation, to include career loss of earnings.  

The decision

The Court of Appeal held that the ‘Johnson exclusion zone’ only applies to a breach of the implied term of mutual trust and confidence.  In other words, the Court of Appeal has held that there is no reason why an employee cannot claim general damages for losses caused by an employer’s breach of an express term of their contract of employment, including a breach of contract which results in a dismissal.  Previously, it had been thought that the overlap between a dismissal in breach of a contractual disciplinary procedure, and the unfair dismissal rights in the Employment Rights Act 1996, would preclude an employee from bringing such a claim.

Therefore, following the Court of Appeal’s decision in Edwards, if an employee can show that they would not have been dismissed if an express contractual disciplinary procedure had been followed correctly, then they are entitled to general compensation for a breach of contract. 

What does this mean for me?

Employees who can establish that their dismissal was caused by a flaw in a contractual dismissal procedure are now able to claim general damages for any loss of earnings caused by such a breach.  This greatly increases the potential risk to which employers are exposed, as compensation for such claims could be substantial: it may include career loss of earnings, and the  statutory cap on compensation would not apply to claims brought outside of the Employment Tribunal. 

Therefore, as ever, it is best practice to ensure that disciplinary and dismissal procedures are explicitly and clearly stated to be non-contractual.

However, many employers (largely in the public sector) will not have the luxury of that option.  It is, therefore, now of even greater importance that contractual disciplinary procedures are followed carefully. 

That said, this decision is subject to two important qualifications.

  • The decision was made on the basis of assumed facts (that the Trust breached their procedure and that, if they had not breached their procedure, Dr Edwards would not have been dismissed).  In practice, it may be difficult for Claimants relying on this decision to prove that a procedural flaw alone resulted in their dismissal.
  • The Court of Appeal did not make any finding on whether Dr Edwards would actually be entitled to the full loss of salary that he seeks to recover.  This will not be established until the case goes to a full trial; it may be that it is decided that the loss Dr Edwards is claiming was not directly caused by the Trust’s breach or that the loss is too remote.

We understand that the Trust is seeking leave to appeal to the Supreme Court, so it is very likely that this decision will be re-visited in due course.

In the meantime, however, the decision stands and it remains open to Claimants to claim for general losses caused by the breach of an express contractual disciplinary procedure.

 


 

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