Eastwood v Magnox Electric Plc

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLORD NICHOLLS OF BIRKENHEAD
Judgment Date15 Jul 2004
Neutral Citation[2004] UKHL 35

[2004] UKHL 35

HOUSE OF LORDS

The Appellate Committee comprised:

Lord Nicholls of Birkenhead

Lord Steyn

Lord Hoffmann

Lord Rodger of Earlsferry

Lord Brown of Eaton-under-Heywood

Eastwood

and another

(Appellants)
and
Magnox Electric plc
(Respondents)
McCabe
(Respondent)
and
Cornwall County Council

and others

(Appellants)
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...

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