UK: No contractual damages for manner of dismissal

The Supreme Court has ruled that employees are not entitled to claim contractual damages for the manner of dismissal, whether in relation to a breach of an express disciplinary policy or breach of the implied term of trust and confidence.

Where there is the potential for findings of misconduct to cause reputational damage and therefore future loss of earnings, it could be more costly for employers to impose a disciplinary sanction less than dismissal (such as suspension) than to dismiss.

The Supreme Court yesterday handed down judgment in the combined cases of Edwards v Chesterfield and Botham v Ministry of Defence. In both cases the employees claimed that, had it not been for a breach of a provision in a contractual disciplinary policy, they would not have been dismissed.  Further, they would not have suffered a loss of reputation (allegedly caused by the misconduct findings in Edwards and by the dismissal in Botham), which in turn gave rise to an ongoing loss of earnings.

A majority of the Supreme Court has overturned the Court of Appeal's judgment and ruled that Parliament had intended unfair dismissal rights to be an exclusive remedy for failings in disciplinary process.  It endorsed the House of Lords' decision in Johnson v Unisys that contractual claims for breach of the implied term of trust and confidence in the manner of dismissal should therefore be precluded, and went on to extend this principle to also cover breaches of an express contractual disciplinary policy. 

Damages can only be claimed in relation to contractual beaches which precede and are independent of the dismissal, for example loss caused by suspension, or financial loss from mental illness caused by pre-dismissal unfair treatment.  No claim can be brought for damages for the breach of a disciplinary process in relation to the manner of dismissal - the so-called "Johnson exclusion area".  The only exception to this would be if the parties expressly agreed that a breach will give rise to such a claim. 

The Supreme Court acknowledged the fine line between breaches in the "Johnson exclusion area" and those independent of the dismissal.  Mr Edwards sought to argue that his claim for damages for loss of reputation arose out of the employer's breaches in reaching findings of misconduct, which he argued could be distinguished from the decision to dismiss.  The majority of the Supreme Court was unwilling to draw this distinction where it was the misconduct findings that led immediately to the dismissal.  It also rejected Mr Botham's claim to recover the legal costs of his unfair dismissal claim on the basis that these also arose from the manner of dismissal.

It does remain possible for an employee to seek an injunction to prohibit an employer from dismissing without first complying with a contractual disciplinary policy.  An employee who has been wrongfully summarily dismissed can also still claim damages in respect of the lack of valid notice of dismissal, covering loss of earnings during the notice period and loss of earnings for the period it would have taken to complete any contractual disciplinary procedure (at least according to current Court of Appeal authority, which the Supreme Court declined to consider).

Practical impact

This is an important ruling for employers with a contractual disciplinary procedure.  They could still face an application for an injunction where they have threatened to dismiss in breach of the procedure but, once the decision to dismiss has been made, compensation for the manner of dismissal can only be sought under the unfair dismissal regime with its service requirement (currently one year, due to increase to two years from April 2012) and cap on compensation (currently the compensatory award is capped at £68,400).

The ruling is also important to employers without contractual policies, in that the Supreme Court could have, but decided not to, reconsider the approach taken in Johnson (although Lord Philips did say that "it may be that this area of the law merits fundamental review").  Employers can continue to rely on this authority, at least until another case makes its way to the Supreme Court.

However, employers should remember that, where the disciplinary sanction is something other than dismissal, damages for consequential loss eg damage to reputation caused by findings of misconduct, will still be recoverable.  In some cases this may well influence the employer's decision on the appropriate disciplinary sanction.