(back to preceding text)

    23. The unfair dismissal legislation must be put in context. At the time of the Donovan Report collective bargaining was seen as the main form of protection of individuals. It apparently covered about 83% of the workforce in 1980. It has, however, been contracting steadily. It fell to 35% in 1998. In the result individual legal rights have now become the main source of protection of employees: see Brown, Deakin, Nash and Oxenbridge, "The Employment Contract: From Collective Procedures to Individual Rights" (2000) 38, British Journal of Industrial Relations, 611, 613-616. At the time of the Donovan Report reinstatement was envisaged as a major remedy: paras 551-552. In practice, however, only about 3% of applicants are reinstated: see Davies and Friedland, Labour Legislation and Public Policy, (1993), p 210, citing statistics dating from 1987/8. My understanding is that about 3% still represents the reinstatement figure. Not surprisingly, the award of compensation by a tribunal has to be the primary remedy. The 1971 Act in section 116 adopted the formula, which appears with minor changes in the current law, that the compensation should be "such amount as the . . . tribunal considers just and equitable in all the circumstances, having regard to the loss sustained by the aggrieved party in consequence of the matters to which the complaint relates, in so far as the loss was attributable to action taken by or on behalf of the party in default". Hugh Collins, Justice in Dismissal, (1992), pp 218-223 has shown how the award of compensation, by reason of artificial limits, has markedly failed to meet the aim of corrective justice in accordance with the employee's contractual rights. One of those limits was the requirement of the unfair dismissal system that such cases had to be resolved in accordance with a very expeditious timetable. Initially, the claim had generally to be lodged within four weeks, that being a period within which the seriousness of damage to employment prospects would often not have become clear: see sections 22, 106(4) and (5) read with schedule 6, para 5 of the Industrial Relations Act 1971. Even now section 111(2) of the Employment Rights Act 1996 provides that such claims must generally be lodged within 3 months, that still being a period within which the seriousness of damage to employment prospects may not have become clear. More importantly, the low statutory limit on the award of compensation made the attainment of corrective justice impossible. At the inception of the statutory regime section 118(1) of the Industrial Relations Act 1971 placed a limit on the maximum amount of compensation of two years pay or £4,160 (whichever was the lesser). In 1975 the alternative way of expressing the limit was abolished. The monetary limit was from time to time increased. In April 1998 it reached £12,000. In October 1999 the maximum was increased to £50,000. It is now index-linked. It has been pointed out that allowing for inflation, £4,160 in 1971 is now worth about £50,000: HC Research Paper 98/99. The statutory system was therefore always only capable of meeting the requirements of cases at the lower end of seriousness. Manifestly, it was always incapable, for example, of affording any significant financial compensation to employees with substantial salaries and pension entitlements in cases where they suffered a serious loss of employment prospects due to the manner of their dismissal. In such cases, inter alia, the artificial statutory limits from the inception inhibited significant compensation. If Parliament is deemed to have been aware of the Addis decision, one must also deem Parliament to have been aware that the system it was creating was only capable of dealing effectively and justly with less serious cases where the threshold of a breach of contract was not necessarily established. Moreover, the changing nature of the relationship between employer and employee, and numerous judicial inroads in case law on Addis's case were already well documented before 1971. The third edition of Treitel, The Law of Contract, was published in 1970. Treitel observed, at p 813, that "the rule may be that general damages cannot be recovered for injury to reputation by a non-trader, but that special damages can be recovered for actual loss resulting from such injury" (author's emphasis). In my view the headnote in Addis's case (and its recitation in the Donovan Report) in respect of special damages is based on a misconception. But at the very least the relevant part of the rule in Addis's case was controversial. In all these circumstances it is unrealistic to say that Parliament would have assumed the common law as reflected in the headnote in Addis's case to be set in stone and incapable of principled development. I would therefore reject this argument.

    24. Conflict with express terms. Counsel for the employers was asked to place the employment contract of the employee before the House. It was done. It revealed that either party was able to terminate the contract by giving four weeks' notice. This proved to be a platform for an argument for striking out the claim which was not considered by the judge or by the Court of Appeal. It was also not raised in the agreed statement of facts and issues or in the written cases. Nevertheless, relying on the notice provision, counsel for the employers submitted that to apply the implied obligation of mutual trust and confidence in relation to a dismissal is to bring it into conflict with the express terms of the contract. He said orthodox contract law does not permit such a result. His argument approached the matter as if one was dealing with the question whether a term can be implied in fact in the light of the express terms of the contract. This submission loses sight of the particular nature of the implied obligation of mutual trust and confidence. It is not a term implied in fact. It is an overarching obligation implied by law as an incident of the contract of employment. It can also be described as a legal duty imposed by law: Treitel, The Law of Contract, 10th ed, p 190. It requires at least express words or a necessary implication to displace it or to cut down its scope. Prima facie it must be read consistently with the express terms of the contract. This emerges from the seminal judgment of Sir Nicolas Browne-Wilkinson V-C, in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] ICR 524. It related to an employer's express contractual right to refuse amendments under a pension scheme. The Vice Chancellor held that the employer's express rights were subject to the implied obligation that they should not be exercised so as to destroy or seriously damage the relationship of trust and confidence between the company and its employees and former employees. The employer's blanket refusal was unlawful. The decision did not involve trust law and the employer was not treated as a fiduciary. It was decided on principles of contract law. The Vice Chancellor described the implied obligation of trust and confidence as "the implied obligation of good faith". It could also be described as an employer's obligation of fair dealing. In the same way an employer's express right to transfer an employee may be qualified by the obligation of mutual trust and confidence: see United Bank v Akhtar [1989] IRLR 507, Sweet & Maxwell's Encyclopaedia of Employment Law, vol 1 paras 1.5101 and 1.5107. 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. I would therefore dismiss this argument.

    25. Unfair dismissal. Counsel for the employers further argued that in substance the claim, based on a failure to follow disciplinary procedures, is one for unfair dismissal. This is a misdescription of the claim. It is not a claim for unfair dismissal but one based on allegations of breach of the obligation of mutual trust and confidence. Counsel also said that a tribunal's award may include compensation for a breach in respect of the manner of a wrongful dismissal. That is so. But it is equally obvious that as at 1971, and afterwards, such amount would have been fairly nominal. Of course, an employee must not be allowed to recover the same damages twice. But such adjustments in common law damages can be and are often made.

    26. Inapplicability to termination. Counsel for the employers also argued that the implied obligation of trust and confidence is restricted to unacceptable conduct by the employer during the relationship. It is a legalistic point. It ignores the purpose of the obligation. The implied obligation aims to ensure fair dealing between employer and employee, and that is as important in respect of disciplinary proceedings, suspension of an employee and dismissal as at any other stage of the employment relationship. In my view this argument ought not to be accepted.

    27. Floodgates. Counsel for the employers further submitted that in virtually every case there could be a claim based on the manner of dismissal. He said there would be an enormous proliferation of claims in the County Court. These predictions are too alarmist. In Mahmud's case it was held, at p 39H, that the mere fact of dismissal could not of itself handicap an employee in the labour market. On the other hand, if the employer acts in a harsh and oppressive manner that inflicts unnecessary and substantial financial damage on the employee there is no principled reason why an employee should not put forward a claim for such loss. I would therefore reject the floodgates argument.

X. The cause of action

    28. In my view the employee has a reasonable cause of action based on a breach of the implied obligation of trust and confidence.

    29. Leaving aside legal objections, there are formidable evidential difficulties in the way of the employee. It was suggested at the hearing that the claim would at trial inevitably fail on causation. The difficulty is real: How would the employee prove that his psychiatric condition was caused by the manner of his dismissal rather than the fact of his dismissal? On the facts, which must be assumed to be correct, I am however inclined to think that it would not be right to strike out the claim on this ground. But remoteness presents an even more formidable difficulty for the employee even at this stage. This issue must be judged at the date of the re-employment of the employee in 1990. The allegations of the knowledge of the employers before that date are set out in the pleadings as follows:

"during the plaintiff's posting to Paris and his work on a conference in Barcelona in 1985, the defendant's servant or agent, Keith Binks, was made aware that the plaintiff was under extreme stress and was at risk of suffering psychological injury.

At the end of 1985 the plaintiff saw his GP who prescribed anti-depressants and wrote to the defendant requesting that the plaintiff be given time off work as a result of work-related stress. The defendant allowed the plaintiff some time off work as a result. The defendant's doctor was aware of the plaintiff's psychological condition as a result of a meeting with the plaintiff prior to his return to work in 1986. Further, in 1987 the defendant was aware of the plaintiff's special psychological needs, as was evidenced by its offering him one-to-one counselling because of his medical condition and impending redundancy."

Taking into account what the employer is alleged to have known, as well as the lapse of time, I would not dissent from the view of Lord Woolf MR that there is no realistic prospect that the employee will be able to overcome this obstacle.

XII. Disposal

    30. For the reasons I have given I would dismiss the appeal.

LORD HOFFMANN

My Lords,

    31. Mr Johnson has spent his working life in the computer industry. In 1971, at the age of 23, he started work for Unisys Ltd, a multinational software service company. In 1987 he was made redundant but in 1990 Unisys re-employed him. In January 1994, however, he was summarily dismissed for some alleged irregularity. The company paid him a month's salary in lieu of notice. He complained to an industrial tribunal of unfair dismissal and the tribunal upheld his claim. It found that the company had not given him a fair opportunity to defend himself and had not complied with its disciplinary procedure. On 26 July 1995 it ordered Unisys to pay him £11,691.88 compensation.

    32. On 11 August 1997 Mr Johnson commenced an action in the Milton Keynes County Court against Unisys for damages at common law. He claimed alternatively for breach of contract or negligence. In his re-amended particulars of claim, he alleged that his dismissal was in breach of various implied terms of his contract of employment. The main one was that the employer would not without reasonable cause conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of trust and confidence between itself and the employee. The existence of this implied term in a contract of employment has recently been affirmed by the House of Lords in Mahmud v Bank of Credit and Commerce International SA [1998] AC 20. It is commonly called the implied term of trust and confidence. He also pleaded various other implied terms; for example, that the company would not, without reasonable cause, do anything which would injure his physical or mental health, harm his professional development and so forth. But the alleged breach of all these terms lies in the fact that he was dismissed without a fair hearing and in breach of the company's disciplinary procedure.

    33. Mr Johnson says that in consequence of the manner and the fact of his dismissal, he suffered a mental breakdown. He became depressed, attempted suicide and started to drink heavily. In 1994 he spent five months in a mental hospital and since then has occasionally had to be re-admitted. His family life has suffered and despite over 100 applications, he has been unable to find work. He is 52 and considers it unlikely that he will find remunerated work again. He says that severe damage of this kind was reasonably foreseeable by Unisys because during the period before his redundancy in 1987 it was known to persons whose knowledge should be attributed to the company that he was under stress and at risk of suffering psychological injury. The alternative claim in tort is based upon the allegation that Unisys owed him a duty of care because it ought reasonably to have foreseen that such injury was likely to result from dismissing him in the way it did.

    34. Unisys applied to Judge Ansell in the Milton Keynes County Court to strike out the particulars of claim on the ground that the alleged facts disclosed no cause of action at common law. The judge did so. Mr Johnson appealed to the Court of Appeal (Lord Woolf MR, Hutchison and Tuckey LJJ) which affirmed the judge's decision. Mr Johnson now appeals to your Lordships' House.

    35. My Lords, the first question is whether the implied term of trust and confidence upon which Mr Johnson relies, and about which in a general way there is no real dispute, or any of the other implied terms, applies to a dismissal. At common law the contract of employment was regarded by the courts as a contract like any other. The parties were free to negotiate whatever terms they liked and no terms would be implied unless they satisfied the strict test of necessity applied to a commercial contract. Freedom of contract meant that the stronger party, usually the employer, was free to impose his terms upon the weaker. But over the last 30 years or so, the nature of the contract of employment has been transformed. It has been recognised that a person's employment is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem. The law has changed to recognise this social reality. Most of the changes have been made by Parliament. The Employment Rights Act 1996 consolidates numerous statutes which have conferred rights upon employees. European law has made a substantial contribution. And the common law has adapted itself to the new attitudes, proceeding sometimes by analogy with statutory rights.

    36. The contribution of the common law to the employment revolution has been by the evolution of implied terms in the contract of employment. The most far reaching is the implied term of trust and confidence. But there have been others. For example, in W A Goold (Pearmak) Ltd v McConnell [1995] IRLR 516, Morison J (sitting in the Employment Appeal Tribunal) said that it was an implied term of the contract of employment that an employer would reasonably and promptly afford employees an opportunity to obtain redress of grievances. He inferred such a term from what is now section 3 of the Employment Rights Act 1996, which requires that an employee be provided with a written statement of the particulars of his employment, including a note of how he may apply if he has any grievances. So statute and common law have proceeded hand in hand.

    37. The problem lies in extending or adapting any of these implied terms to dismissal. There are two reasons why dismissal presents special problems. The first is that any terms which the courts imply into a contract must be consistent with the express terms. Implied terms may supplement the express terms of the contract but cannot contradict them. Only Parliament may actually override what the parties have agreed. The second reason is that judges, in developing the law, must have regard to the policies expressed by Parliament in legislation. Employment law requires a balancing of the interests of employers and employees, with proper regard not only to the individual dignity and worth of the employees but also to the general economic interest. Subject to observance of fundamental human rights, the point at which this balance should be struck is a matter for democratic decision. The development of the common law by the judges plays a subsidiary role. Their traditional function is to adapt and modernise the common law. But such developments must be consistent with legislative policy as expressed in statutes. The courts may proceed in harmony with Parliament but there should be no discord.

    38. My Lords, I shall consider first the problem posed by the express terms of the contract. In developing the implied term of trust and confidence and other similar terms applicable to the continuing employment relationship, the courts were advancing across open country. No express provision that BCCI would be entitled to conduct a fraudulent business, or that the employer in W A Goold (Pearmak) Ltd v McConnell would have no grievance procedure, stood in their way. But the employer's right to dismiss the employee is strongly defended by the terms of the contract. In the present case, Mr Johnson's contract provided:

"If you decide to leave UNISYS you are required to give the company four weeks notice; equally, the company may terminate your employment on four weeks notice... In the event of gross misconduct, the company may terminate your employment without notice."

    39. The effect of such a provision at common law was stated with great clarity by McLachlin J of the Supreme Court of Canada in Wallace v United Grain Growers Ltd (1997) 152 DLR (4th) 1, 39:

"The action for wrongful dismissal is based on an implied obligation in the employment contract to give reasonable notice of an intention to terminate the relationship (or pay in lieu thereof) in the absence of just cause for dismissal.… A 'wrongful dismissal' action is not concerned with the wrongness or rightness of the dismissal itself. Far from making dismissal a wrong, the law entitles both employer and employee to terminate the employment relationship without cause. A wrong arises only if the employer breaches the contract by failing to give the dismissed employee reasonable notice of termination. The remedy for this breach of contract is an award of damages based on the period of notice which should have been given."

    40. Likewise in Malloch v Aberdeen Corporation [1971] 1 WLR 1578, 1581 Lord Reid said:

"At common law a master is not bound to hear his servant before he dismisses him. He can act unreasonably or capriciously if he so chooses but the dismissal is valid. The servant has no remedy unless the dismissal is in breach of contract and then the servant's only remedy is damages for breach of contract."

    41. The action for wrongful dismissal could therefore yield no more than the salary which should have been paid during the contractual period of notice. In the present case Mr Johnson's letter of engagement referred to Terms and Conditions of Employment contained in the company's Employee Handbook, which stipulated expressly that "The company reserves the right to make payment in lieu of notice". Unisys exercised that right.

    42. My Lords, in the face of this express provision that Unisys was entitled to terminate Mr Johnson's employment on four weeks notice without any reason, I think it is very difficult to imply a term that the company should not do so except for some good cause and after giving him a reasonable opportunity to demonstrate that no such cause existed.

    43. On the other hand, I do not say that there is nothing which, consistently with such an express term, judicial creativity could do to provide a remedy in a case like this. In Wallace v United Grain Growers Ltd (1997) 152 DLR (4th) 1, 44-48, McLachlin J (in a minority judgment) said that the courts could imply an obligation to exercise the power of dismissal in good faith. That did not mean that the employer could not dismiss without cause. The contract entitled him to do so. But in so doing, he should be honest with the employee and refrain from untruthful, unfair or insensitive conduct. He should recognise that an employee losing his or her job was exceptionally vulnerable and behave accordingly. For breach of this implied obligation, McLachlin J would have awarded the employee, who had been dismissed in brutal circumstances, damages for mental distress and loss of reputation and prestige.

    44. My Lords, such an approach would in this country have to circumvent or overcome the obstacle of Addis v Gramophone Co Ltd [1909] AC 488, in which it was decided that an employee cannot recover damages for injured feelings, mental distress or damage to his reputation, arising out of the manner of his dismissal. Speaking for myself, I think that, if this task was one which I felt called upon to perform, I would be able to do so. In Mahmud v Bank of Credit and Commerce International SA [1998] AC 20, 51 Lord Steyn said that the true ratio of Addis's case was the damages were recoverable only for loss caused by a breach of contract, not for loss caused by the manner of its breach. As McLachlin J said in the passage I have quoted, the only loss caused by a wrongful dismissal flows from a failure to give proper notice or make payment in lieu. Therefore, if wrongful dismissal is the only cause of action, nothing can be recovered for mental distress or damage to reputation. On the other hand, if such damage is loss flowing from a breach of another implied term of the contract, Addis's case does not stand in the way. That is why in Mahmud's case itself, damages were recoverable for financial loss flowing from damage to reputation caused by a breach of the implied term of trust and confidence.

    45. In this case, Mr Johnson says likewise that his psychiatric injury is a consequence of a breach of the implied term of trust and confidence, which required Unisys to treat him fairly in the procedures for dismissal. He says that implied term now fills the gap which Lord Shaw of Dunfermline perceived and regretted in Addis's case (at pp 504-505) by creating a breach of contract additional to the dismissal itself.

    46. It may be a matter of words, but I rather doubt whether the term of trust and confidence should be pressed so far. In the way it has always been formulated, it is concerned with preserving the continuing relationship which should subsist between employer and employee. So it does not seem altogether appropriate for use in connection with the way that relationship is terminated. If one is looking for an implied term, I think a more elegant solution is McLachlin J's implication of a separate term that the power of dismissal will be exercised fairly and in good faith. But the result would be the same as that for which Mr Johnson contends by invoking the implied term of trust and confidence. As I have said, I think it would be possible to reach such a conclusion without contradicting the express term that the employer is entitled to dismiss without cause.

    47. I must however make it clear that, although in my opinion it would be jurisprudentially possible to imply a term which gave a remedy in this case, I do not think that even if the courts were free of legislative constraint (a point to which I shall return in a moment) it would necessarily be wise to do so. It is not simply an incremental step from the duty of trust and confidence implied in Mahmud v Bank of Credit and Commerce International SA [1998] AC 20. The close association between the acts alleged to be in breach of the implied term and the irremovable and lawful fact of dismissal give rise to special problems. So, in Wallace v United Grain Growers Ltd (1997) 152 DLR (4th) 1, the majority rejected an implied duty to exercise the power of dismissal in good faith. Iacobucci J said, at p 28, that such a step was better left to the legislature. It would be "overly intrusive and inconsistent with established principles of employment law".

    48. Some of the potential problems can be illustrated by the facts of this case, in which Mr Johnson claims some £400,000 damages for the financial consequences of psychiatric damage. This form of damage notoriously gives rise at the best of times to extremely difficult questions of causation. But the difficulties are made greater when the expert witnesses are required to perform the task of distinguishing between the psychiatric consequences of the fact of dismissal (for which no damages are recoverable) and the unfair circumstances in which the dismissal took place, which constituted a breach of the implied term. The agreed statement of facts records that for the purposes of this appeal against a strike-out it is accepted that Mr Johnson's psychiatric illness was caused by "the circumstances and the fact" of his dismissal. At a trial, however, it would be necessary to decide what was caused by what.

    49. Another difficulty is the open-ended nature of liability. Mr Johnson's case is that Unisys had knowledge of his psychological fragility by reason of facts lodged in the corporate memory in 1985-87 and therefore should have foreseen when he was engaged that a failure to comply with proper disciplinary procedures on dismissal might result in injury which deprived him of the ability ever to work again. On general common law principles it seems to me that if the necessary term is implied and these facts are made out, the claim should succeed. It may be that such liability would be grossly disproportionate to the employer's degree of fault. It may be likely to inhibit the future engagement of psychologically fragile personnel. But the common law decides cases according to principle and cannot impose arbitrary limitations on liability because of the circumstances of the particular case. Only statute can lay down limiting rules based upon policy rather than principle. In this connection it is interesting to notice that although the majority in Wallace v United Grain Growers Ltd were unwilling to accept an implied term as to the manner of dismissal, they treated it as relevant to the period of notice which should reasonably have been given. McLachlin J said that this was illogical and so perhaps it is. But one can understand a desire to place some limit upon the employer's potential liability under this head.