On 22 June 2011, the Supreme Court heard appeals on the joined cases of Edwards v Chesterfield Royal Hospital NHS Foundation Trust [2010] EWCA Civ 571 and Botham v Ministry of Defence [2010] EWHC 646 (QB). Both cases involve the scope of damages recoverable by an employee who has been dismissed by their employer as the result of a disciplinary procedure which failed to comply with a contractually agreed disciplinary procedure.

The appeals were heard by a seven justice panel of Lords Phillips and Walker, Lady Hale and Lords Mance, Kerr, Dyson and Wilson.

The facts

The claimants in Edwards and Botham were employed as a consultant trauma and orthopaedic surgeon and a community youth worker respectively, and each had an employment contract which provided that their employment could be terminated upon three months’ notice.  The written contracts also contained terms which set out the disciplinary procedure that would be followed in the event of any allegations of misconduct against the employee.

Both of the claimants were subsequently summarily dismissed following various allegations of misconduct made against them.

The claimant in Edwards contended that the disciplinary process which resulted in his dismissal did not, for various reasons, comply with the procedure set out within his contract of employment. The claimant subsequently issued proceedings seeking damages for breach of contract, claiming that if the disciplinary process had been carried out in accordance with the contract, he would have been exonerated of the allegations against him and been able to continue in his position until his eventual retirement.

The claimant in Botham similarly claimed that the disciplinary process which had ended in his dismissal had not complied with procedure contained within his contract, and issued a claim against his employer (the Ministry of Defence) for wrongful and unfair dismissal. The claimant’s claim was upheld by the Employment Tribunal, who cited in their judgment a number of procedural errors that amounted to a breach of the claimant’s employment contract. The Tribunal awarded damages for wrongful dismissal based on the statutory regime set out by the Employment Rights Act 1996 (the “ERA”), being a sum in lieu of the three month notice period that the claimant would have been entitled to had his employment been terminated in accordance with the terms of his contract. The claimant was awarded a further discretionary sum in respect of the finding of unfair dismissal.

The law

It is the contention of the claimants in both Edwards and Botham that, as their dismissals were brought about by an improper disciplinary process that constituted a breach of their employment contracts they are entitled to damages awarded pursuant to ordinary contractual principles over and above those set out in the ERA.  Accordingly, they ought to be able to recover for all losses flowing from the respective employers’ breaches of contract, including loss of reputation, future earnings and, in Botham, the legal fees incurred in pursuing a claim at the Employment Tribunal.

The key issue before the courts in these cases is therefore whether the breach of an express term committed in connection with an employee’s dismissal falls within the principle established in Johnson V Unisys Ltd [2001] UKHL 13 (that is, an employee may not claim damages for breach of the implied term of trust and confidence where the circumstances that gave rise to the breach related only to the manner in which the employee had been dismissed, referred to as the ‘Johnson exclusion area’ by Lord Nicholls in the later case of Eastwood v Magnox Electric plc; Cornwall County Court v McCabe [2004] UKHL 35)).  If so, the employee’s claim will be limited to the remedies set out within the applicable statutory regime.  If not, the Court will need to determine whether the breach represents a stand-alone cause of action.

Previous decisions: Botham

The case of Botham was heard in the High Court by Mrs Justice Slade of the Queen’s Bench Division. The claimant’s claim was for damages over and above the loss of earnings for the notice period that had previously been awarded by the Employment Tribunal and for legal costs that had been incurred in pursuing the claim.

It was submitted on behalf of the defendant that the claim brought by the claimant was one for wrongful dismissal, and that the loss sustained by the claimant resulted solely from the dismissal and not any prior breach of contract. Slade J agreed and, opining that the claimant’s claim arose from the claimant’s dismissal and therefore fell squarely within the Johnson exclusion area as identified in Eastwood, held that the claimant’s remedies were for that reason limited to loss of earnings in respect of the notice period as per the ERA. For the same reason, any legal costs that had been incurred in relation to the disciplinary proceedings and pursuing a claim in relation to dismissal were not recoverable (in accordance with the statutory ‘no costs’ regime in Employment Tribunal proceedings). The claimant’s claim was dismissed and an appeal referred to the Supreme Court for consideration alongside the case of Edwards.

Previous decisions: Edwards

The case of Edwards is being heard as a preliminary issue of law. It is therefore being assumed, for the purposes of the decision, that were the matter to proceed to full trial the claimant would prove that the defendant failed to follow the contractual disciplinary procedure, and that if this failure had not occurred the claimant would have been exonerated of all allegations against him and continued in his position until his retirement.

It is the claimant’s claim that were he to be successful in proving these points, he should be entitled to recover damages for all losses sustained as a result of this breach of contract, including future earnings from the date of his dismissal up until the date of his proposed retirement at the age of 65 and loss of pension.

It is the defendant’s position that, as this is a claim for wrongful dismissal, the claim falls within the Johnson exclusion area and any damages ought to be limited to loss of earnings for the three month notice period in accordance with the ERA. It was submitted on behalf of the defendant that the decision of the High Court in Botham supported this contention. This reasoning was supported at first instance by the decision of Nicol J in the High Court, who held that the claimant’s damages should be limited to the notice period and also any period during which he would have remained in employment whilst a compliant disciplinary procedure was being carried out (the ‘Gunton extension’; Gunton v Richmond-upon-Thames London Borough Council [1980] I.C.R. 755 followed).

The Court of Appeal disagreed. Moore-Bick LJ, referring to the obiter comments of Lord Hoffman in Johnson, held that breaches of express terms of contracts of employment fell outside the Johnson exclusion area. The judgments in Johnson and Eastwood recognised that the provisions of the ERA in no way superseded an employee’s common law or contractual rights. In this case, the breach of contract which arose from the failure to use the correct disciplinary procedure and any claim which may have resulted from the dismissal itself were separate. As observed by Lloyd LJ, had the claimant acted timely when it became clear that the defendant was going to commit the breach of the express term, they could have obtained an injunction to prevent them from doing so. The decision in Botham and the submissions of the defendant were therefore rejected by the Court of Appeal as seeking to extend the scope of the Johnson exclusion area ‘beyond its proper sphere’ (per Moore-Bick LJ at para. 42). Accordingly, a breach of contract had occurred and could be remedied by reference to ordinary principles of contract law, including the award of damages in respect of all loss flowing directly from the breach.

Issues before the Supreme Court

The issues before the Supreme Court are therefore as follows:

1. Whether an employee can recover damages at common law for financial loss arising from his dismissal when that dismissal was attributable to the employer’s non-compliance with a contractually binding disciplinary procedure and was therefore in breach of the contract of employment or whether the employee is confined to his statutory remedies for wrongful and/or unfair dismissal; and

2. The basis of any assessment in calculating such common law damages, including whether legal costs incurred in respect of the disciplinary proceedings and pursuing a claim at the Employment Tribunal can be recovered.