DISQUALIFIED DIRECTORS AND THEIR SHADOWS

A Director (and indeed the Board of Directors) is appointed and empowered by the Shareholders of a Company to run the company as an agent of the said shareholders, (hence the agency principle). The power however is accompanied with a heavy responsibility to run the affairs of the company to a statutory and ethical standard.

In many instances when the Director(s) fail to carry out this duty in accordance with the said standards and the company suffers loss, either by way of Insolvency or otherwise, the Directors are usually held to account or indeed responsible for the losses. Note the distinction between the responsibility and accountability of Directors. A brief word on the distinction between the two- Responsibility is the functional duty to carry out an act, which may be delegated or shared, whilst accountability refers to the ultimate and singular burden of seeing that the act is carried out, this can neither be shared nor delegated- to put it in layman's terms- accountability is where the buck stops, as is well known, you can't pass the buck.In the event of Director's of a company carrying out an act that exposes the company to loss and/or Insolvency, there are a number of sanctions that they may face, examples being:

a. Criminal Sanctions: If the act amounts to Criminal conduct e.g Fraud, Manslaughter etc The Directors as well as the company may face charges;

b. Civil Sanctions: If the c onduct of the directors directly results in financial loss to the Shareholders, the directors may face civil action to recoup the losses so suffered. In the UK however, where the Company is deemed to have committed a criminal act for which it faces sanction of a fine as tends to be the case, civil action has never been brought based on the contractual principle "Ex turpi causa non oritur actio" which means in plain English that a claimant cannot bring civil action based on his own illegal act. This principle is however being currently tested in the UK Courts in the case of William Morrisons v Webster and Others. Where this supermarket chain brought action for damages against the Former Chairman on Safeway (which Morrisons bought in 2004) following criminal sanction against Morrisons based on cartel price-fixing of dairy products by the defendants, before the purchase by Morrisons, the case is currently on-going and indeed an application to strike out the Claim was refused by the Court.

c. Disqualification: Where a Director has carried out an act which is deemed to be of such a serious nature as to merit the person from being barred for a specified period from acting as a Director of a Company - in the public interest, a disqualification order can be made preventing the said person from so acting as a Director.

The mechanism for this is provided in the UK under the Company Directors Disqualification Act 1986, which provides for a procedure whereby an Order of Court is made on application for the person to be disqualified from:

i. Acting as a director of a company taking part, directly or indirectly, in the promotion, formation or management of a company;

ii. Being a liquidator or an administrator of a company;

iii.Being a receiver or manager of a company's property.

The five main circumstances, in which a Director may be disqualified being:

i. Upon conviction of an Indictable offence (An indictable offence is a serious criminal offence such as a Felony) Section 2;

ii. For persistent breaches of Companies Legislation- This refers to failure to file returns and documentation relating to the company on at least three occasions in the five years preceding the Order, also for conviction for an indictable offence related to failure to so file such documentation. Section 3

iii. If in the winding up of a company the person has been guilty of either fraudulent trading (whether convicted or not) or for fraud committed whilst an Officer, Receiver, Liquidator or administrative receiver of the company or in breach of such duties while so acting. Section 4

iv. On Summary Conviction for an offence (whether indictable or otherwise) related to the failure to file company documentation or otherwise comply with requirements of Companies legislation relating to the filing of such documents. This order may be made by the court trying the said offence. Section 5

Disqualification is an instrument used to regulate the actions of Directors who would otherwise be provided the protection of limited liability of a company. Limited Liability refers to the principle in Company Law limiting the liability of the Shareholder to the value of the shares. Also it acts to lift the corporate veil. The sense behind this being that a registered company can act in its own name and indeed be sued or charged for an offence in its own name, however in circumstances as have been detailed here, the Corporate "veil" can be lifted for direct action against the directing hands that did the act.

Who makes the Order:

The Order is made by a Court- on application, under the auspices of the Secretary of State for Business Innovation and Skills

The Procedure

In the event of the failure or liquidation/administration of a company, the Official Receiver (or Insolvency Professional in a voluntary liquidation, administrative receivership or administration) after reviewing the conduct of the Directors for the 3 years preceding liquidation, if any misconduct is found such as- allowing the company to continue to trade when it was unable to pay its debts;a failure to keep proper accounting records, failure to prepare and file accounts or make returns to Companies House, failure to submit tax returns or pay over to the Crown tax or other money due,failure to co-operate with the OR/IP, the information is passed to the Office of Secretary of State for Business, Innovation and Skills, where a decision is made as to whether it shall be in the public interest to seek a disqualification order, where the same is decided, the application is then made to the Court on the auspices of the Secretary of State.

An application has to be made within 2 years of the winding up of the company or voluntary liquidation/administration etc. The court may of course extend time for the application to be made beyond the 2-year time-limit.

Upon a decision to apply for disqualification being made, the Director is given notice of the same. Furthermore, the Official Receiver or Insolvency Professional prepares a report which is submitted to the Court.. The director is then given the opportunity to respond to any allegations raised against him, by way of filing an affidavit in Court, rebutting any issues of misconduct raised in the report. Accountants and other officers of the company may also give evidence of fact either in support or in opposition facts contained in the report. The court then hears the application and makes a decision after considering evidence from both sides. If a disqualification is decided, the court will then decide how long it should last for i.e. between 2- 15 years.

A new procedure was introduced in April 2001, whereby a Director could give an undertaking to comply with the restrictions ordinarily imposed by a disqualification order and is the same in effect; only that it avoids the need for Court proceedings. The undertaking would be made to the Secretary of State and would be enforced by an application to court for breach of undertaking.

The Effects of Disqualification:

The disqualification order is an almost total ban on any form of Executive activity by the banned director and for the avoidance of doubt, the person is absolutely barred from acting as: a. A director of a company; b. Receiver of a company's property;c. Directly or indirectly being concerned or taking part in the promotion, formation or management of a company; or Being a member of or being concerned or taking part in the promotion, formation or management of a limited liability partnership and; d. From acting as an insolvency practitioner.

The consequence of breach of a disqualification order is a fine, imprisonment or both. This is detailed in Section 13 of the act as thus- ” If a person acts in contravention of a disqualification order or of section 12(2), or is guilty of an offence under section 11, he is liable-(a) on conviction on indictment, to imprisonment for not more than 2 years or a fine, or both ; and; (b) on summary conviction, to imprisonment for not more than 6 months or a fine not exceeding the statutory maximum, or both.”.

The next part of this study is the nature of Shadow Directorship

Shadow Directors:

A Shadow Director is defined by in section section 251, Companies Act 2006 (formerly Section 741(2) of the Companies Act 1985) ; section 251, Insolvency Act 1986; section 22(5), Company Directors Disqualification Act 1986) (CDDA) as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act (although a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity).”

Guidance on the mechanics of the definition in the former Section 741(2) was provided by the High Court and reinforced by the Court of Appeal in Secretary of State for Trade and Industry v Deverell and another as thus:

a) Majority of the board must be accustomed to act in accordance with the directions or instructions of the alleged shadow director. The purpose of the legislation is to catch a person who effectively controls the running of the company by controlling the board. Therefore, a person is unlikely to be within the definition of a shadow director if only one or two directors on a board of several directors follow his instructions;

b) The directors must “do something in conformity with” such instructions. It is not sufficient for the alleged shadow director simply to give instructions to the directors; his instructions “must be translated into action by the board”;

c) The directors must act on the alleged shadow director’s directions as a regular course of conduct of the directors over a period of time.

Of great significance is the dictum in the lead judgement of Lord Justice Morritt: “(1) The definition of a shadow director is to be construed in the normal way to give effect to the parliamentary intention ascertainable from the mischief to be dealt with and the words used. In particular, as the purpose of the Act is the protection of the public and as the definition is used in other legislative contexts, it should not be strictly construed because it also has quasi-penal consequences in the context of the Company Directors Disqualification Act 1986. I agree with the statement to that effect of Sir Nicolas Browne-Wilkinson V-C in In re Lo-Line Electric Motors Ltd [1988] Ch 477, 489. (2) The purpose of the legislation is to identify those, other than professional advisers, with real influence in the corporate affairs of the company. But it is not necessary that such influence should be exercised over the whole field of its corporate activities. I agree with the statements to that effect of Finn J in Australian Securities Commission v AS Nominees Ltd, 133 ALR 1, 52-53 and Robert Walker LJ in In re Kaytech International plc [1999] BCC 390, 402. (3) Whether any particular communication from the alleged shadow director, whether by words or conduct, is to be classified as a direction or instruction must be objectively ascertained by the court in the light of all the evidence. In that connection I do not accept that it is necessary to prove the understanding or expectation of either giver or receiver. In many, if not most, cases it will suffice to prove the communication and its consequence. Evidence of such understanding or expectation may be relevant but it cannot be conclusive. Certainly the label attached by either or both parties then or thereafter cannot be more than a factor in considering whether the communication came within the statutory description of direction or instruction. (4) Non-professional advice may come within that statutory description. The proviso excepting advice given in a professional capacity appears to assume that advice generally is or may be included. Moreover the concepts of "direction" and "instruction" do not exclude the concept of "advice" for all three share the common feature of "guidance ". (5) It will, no doubt, be sufficient to show that in the face of "directions or instructions" from the alleged shadow director the properly appointed directors or some of them cast themselves in a subservient role or surrendered their respective discretions. But I do not consider that it is necessary to do so in all cases. Such a requirement would be to put a gloss on the statutory requirement that the board are "accustomed to act" "in accordance with" such directions or instructions. It appears to me that Judge Cooke, in looking for the additional ingredient of a subservient role or the surrender of discretion by the board imposed a qualification beyond that justified by the statutory language.”

The implications of this in summary being thus:

a. The definition of a Shadow Director should not be construed strictly or literally but should have regard to the facts of each individual case, because of the consequence of criminal sanction in the event of breach.;

b. The definition of Shadow Director is very likely to apply to any person who gives directions or instructions to the Directors of a company unless the same is by way of professional advice.

c. The purpose of the directions or instructions are less important than the fact that they were given (except where given for professional purposes);

d. The Directors who acted in compliance with the direction or direction of the Shadow Director, need not be shown to act in a subservient position but more importantly to have acted or be accustomed to act (i.e. there should be a course of conduct).

The co-relation between Shadow Directorship and Disqualification of Directors is statutorily expressed in Section 22(5) of the Company Directors Disqualification Act 1986) (CDDA), which repeats the definition above i.e. " Shadow director, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but so that person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity)”

This definition being important as per Morritt LJ, based on the penal sanction attendant on breach of the disqualification order, in that if a person were to act as the Shadow Director of a company whilst disqualified, the consequences are serious and are detailed as stated above in Section 13 of the CDDA as thus- If a person acts in contravention of a disqualification order or of section 12(2), or is guilty of an offence under section 11, he is liable-(a) on conviction on indictment, to imprisonment for not more than 2 years or a fine, or both ; and; (b) on summary conviction, to imprisonment for not more than 6 months or a fine not exceeding the statutory maximum, or both.

The simple fact being that it is extremely risky for a disqualified Director to seek to continue to run or manage a company in the Shadows (literally and figuratively), since the Court will examine in details the nature of communication with the Directors and if any instructions are given and acted upon by a majority of the Board, then a Shadow Directorship will be assumed, unless the instructions were given in professional capacity.

The professional advice route does not provide a trouble-free escape route however, because Section 1 very clearly disqualifies the person from being involved with the promotion, formation and management of a company. Thus, if the advice is given in the course of management of a company offering professional services, it would arguably be in clear breach of section 1(d) of the act.

The two elements being : i. Management and ii. Of a company.

We shall examine these hypothetically:

i. Management

Chambers Dictionary defines management as “management noun 1 - the skill or practice of controlling, directing or planning something, especially a commercial enterprise or activity. 2 the managers of a company, etc, as a group. 3 manner of directing, controlling or using something.”

Using this as a general guide, the key elements would be control, direction of the organisation, enterprise or activity, the next element being:


ii. Company

Guidance is provided in S. 22. (2) of the CDDA- “ The expression “company”— in section 11, includes an unregistered company and a company incorporated outside Great Britain which has an established place of business in Great Britain, and (b) elsewhere, includes any company which may be wound up under Part V of the Insolvency Act.”

Part V of the Insolvency Act and specifically S.220 defines an unregistered company as thus “Meaning of "unregistered company" (1) For the purposes of this Part, the expression "unregistered company" includes any trustee savings bank certified under the enactments relating to such banks, any association and any company, with the following exceptions –

(a) a railway company incorporated by Act of Parliament,

(b) a company registered in any part of the United Kingdom under the Joint Stock Companies Acts or under the legislation (past or present) relating to companies in Great Britain.

(2) On such day as the Treasury appoints by order under section 4(3) of the Trustee Savings Banks Act 1985, the words in subsection (1) from "any trustee" to "banks" cease to have effect and are hereby repealed.”

There is no mention of Partnerships or Sole Traderships, however for greater clarity, reference must be made to the Companies Act 2006 which defines a company in Section 1 as thus:

“(1) In the Companies Acts, unless the context otherwise requires— “company” means a company formed and registered under this Act, that is—
(a) a company so formed and registered after the commencement of this Part, or

(b) a company that immediately before the commencement of this Part—

(i) was formed and registered under the Companies Act 1985 (c. 6) or the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)), or (ii) was an existing company for the purposes of that Act or that Order, (which is to be treated on commencement as if formed and registered under this Act).

(2) Certain provisions of the Companies Acts apply to—

(a) companies registered, but not formed, under this Act (see Chapter 1 of Part 33), and;

(b) bodies incorporated in the United Kingdom but not registered under this Act (see Chapter 2 of that Part).

(3) For provisions applying to companies incorporated outside the United Kingdom, see Part 34 (overseas companies)”

As seen above, the contrary position is found in the provisions of Part V of the Insolvent Partnerships Order 1994, which provides for the winding up of Insolvent Partnerships as an Unregistered Company either on presentation of a petition against all members, where no petition is presented against any member, or indeed Insolvency proceedings not involving winding up. The operative fact being that there is provision for a Partnership to be deemed an unregistered company.

Once again, this definition does not clearly extend to a Partnership or indeed a Sole Trader and is subject to inference rather than clear prescription in the CDDA, thus it is arguable that to come under the definition of company under Section 22(5), the company would have to be one registered under the Companies Acts or be a Limited Liability Partnership or even a Limited Partnership, it is important to note that this principle has not been tested judicially.

Conclusion

In conclusion and for the sake of good order it is important to distinguish between a Shadow Director and a De facto Director

De Facto Directors:

In Secretary of State for Trade and Industry v. Deverell and Another, reference was had to the judgement in In re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 applying the definition of Millett J: "A de facto director ... is one who claims to act and purports to act as a director, although not validly appointed as such”

The judgement also affirmed the definition given by Judge Cook in Deverell (at the High Court) in which he set out two categories of de facto directors (in addition to two categories i.e shadow and proper directors so called) i.e “De facto directors type 1, being those who assume to act, claim to be and are held out by the company as being directors”; (b)” De facto directors type 2, being those who directly assume the functions of the directors and act on a equal footing with those who are but without having any sort of label”

The essential characteristics of De facto Directors being that they either openly assume the duties and profile of Directors or they directly hold themselves out as Directors, even if they are not properly appointed as such.

The distinction between a de facto Director and a Shadow Director being that the latter does not hold himself out, rather preferring to give directions from the background.

Edward C.Keazor ©

Non-Financial Loss in Employment Claims- When, Which, How?!?

One recurring question that Lawyers face from clients in the course of taking Instructions for Employment related claims, is whether a claim can be made for non-financial loss, such as Injury to feelings, Mental stress, Loss of Family life to name a few..

Just a bit of background here: Financial Claims can be made for pure financial loss i.e. actual financial loss suffered, such as loss of earnings if you’re fired, wages deducted unlawfully or in breach of contract etc or for non-financial loss such as compensation for distress, which as you can imagine has no direct monetary value- and which necessarily needs proof, assessment and/or determination by the court or by agreement of the parties.

The fact is that non-financial Claims can only be made in very limited contexts in Employment Tribunal Claims, the said being mainly in the area of Discrimination Claims.

A brief word about Discrimination Claims:

These are Covered statutorily by the Race Relations Act 1976 and the Disability Discrimination Acts 1995 and 2005 as well as a number of Regulations covering Age, Sex and Transgender Discrimination and indeed the Human Rights Act 1998, covering discrimination claims against Public bodies. The main forms of Discrimination Claims are:

a. Racial (necessarily including Nationality and ehnicity); b. Religious; c. Gender; d. Age; e. Disability; and f. Sex/Sexual Orientation/Trans-gender Discrimination, which are specifically prohibited by law and damages are claimed on the basis compensation for Injury to feelings, since generally the damage caused by this is usually intrinsic and psychological and in addition to any financial loss which may be suffered e.g. loss of earnings upon dismissal based on discrimination (this would naturally be unfair and entitle a claimant to compensation for Unfair Dismissal, in addition to damages for Injury to feelings).

It is however extremely difficult for a Claimant to found a Claim for Non-financial Damages on a premise other than discrimination- especially in a Claim for Unfair Dismissal.

The only permissible- though extremely narrow route- being for damages occasioned by the manner in which the Dismissal was carried out, i.e. in such a manner as to severely hurt the reputation of the Claimant, this in itself is still tied to financial loss, since the measure of the effect of the damages caused by the manner of dismissal being in difficulties in obtaining new employment and the loss suffered as a result of this in earnings.

To state the obvious, the law on Non-Financial claims in Employment Law has been prescribed by a line of cases- all decided by the House of Lords which defined to a large but rather complex extent- when a non-financial claim can be made and granted.

Chronology of Cases:

Addis v Gramophone Co Ltd [1909] AC 488

This being the classical case on the subject wherein the House of Lords determined rather conclusively that the only claims that can be entertained as arising from an Employment Contract being a purely Financial Claim, simply put the Law could not entertain any namby-pamby claims for Mental stress or Hurt feelings, there was either remedy for financial loss or nothing. The reasoning behind this is not far-fetched; this Judgement was delivered in Edwardian era (in short in the immediate-post Victorian era) with the concept of Master and Servant being the central philosophy behind Employment contracts.

Norton Tool Co Ltd v Tewson ([1972] ICR 501

Addis was the clear and unequivocal statement of the Law for over 60 years until this decision – delivered by the National Industrial Relations Court (forebear of the Employment Tribunals) which- whilst adopting Addis substantially- however carved a minor distinction, the key points being:

A.

That the Court in the course of a claim was empowered to award an amount believed to be just and equitable and that the amount of the award need not be arithmetically tied to the amount of proven or provable loss ( i.e. financial loss), in short that the court could use its discretion where just and equitable – or in its words where “natural and possibly essential”

B.

The "loss" suffered by an employee who is unfairly dismissed without notice, and the compensatory award to which he is entitled in respect of that loss, must be calculated without taking into account any wages he earns during what should have been his period of notice (this is generally known as "the rule in Norton Tool");

C.

It however conclusively excluded damages for Injury to feelings from a Claim for Unfair Dismissal. The dictum of Sir John Donaldson the President of the National Industrial Relations Court is repeated below


“The court or tribunal is enjoined to assess compensation in an amount which is just and equitable in all the circumstances, and there is neither justice nor equity in a failure to act in accordance with principle. The principles to be adopted emerge from section 116 of the Act of 1971. First, the object is to compensate, and compensate fully, but not to award a bonus, save possibly in the special case of a refusal by an employer to make an offer of employment in accordance with the recommendation of the court or a tribunal. Secondly, the amount to be awarded is that which is just and equitable in all the circumstances, having regard to the loss sustained by the complainant. 'Loss' in the context of section 116 does not include injury to pride or feelings. In its natural meaning the word is not to be so construed, and that this meaning is intended seems to us to be clear from the elaboration contained in section 116(2). The discretionary element is introduced by the words 'having regard to the loss.' This does not mean that the court or tribunal can have regard to other matters, but rather that the amount of the compensation is not precisely and arithmetically related to the proved loss. Such a provision will be seen to be natural and possibly essential, when it is remembered that the claims with which the court and tribunals are concerned are more often than not presented by claimants in person and in conditions of informality. It is not, therefore, to be expected that precise and detailed proof of every item of loss will be presented, although, after making due allowance for the skills of the persons presenting the claims, the statutory requirement for informality of procedure and the undesirability of burdening the parties with the expense of adducing evidence of an elaboration which is disproportionate to the sums in issue, the burden of proof lies squarely upon the complainant.”

It is important to give some background to this decision. Addis was decided on the basis of Common Law; however this case was decided by the National Industrial Relations Court, which was created by Section 99 of the Industrial Relations Act 1971. The history of this law being that in 1968, the Royal Commission on Trade Unions and Employers' Associations recommended a statutory system of remedies for unfair dismissal, the said recommendations subsequently giving rise to the Industrial Relations Act 1971. Unfair dismissal was a completely new principle with a unique set of remedies and the National Industrial Relations Court was conferred with exclusive jurisdiction to hear complaints and award remedies. There are side arguments of the realpolitik behind this court being that this court was created by the Conservative Government of Ted Heath to counter the Union’s and thus reflected the same establishment oriented viewpoint of Addis, however that is not the focus of this write-up. The Industrial Relations Act 1971 Act was later repealed by the Trade Union and Labour Relations Act 1974; however the unfair dismissal provisions were retained and, subsequently transformed into Part X of the Employment Rights Act 1996. The new adjudicating authority being the Employment Tribunals, as we have them today.

Johnson v Unisys [2001] IRLR 279

This case represented the first real deviation from the reasoning in Addis. The House of Lords, in Johnson v Unisys, essentially gave organic effect to the statutory provision first referred to in Norton Tools the power of tribunals to award amounts, it "considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer" This being the provision of Section 123 Employment Rights Act 1996.

The facts of the case being that Mr Johnson was employed by Unisys and worked for them for 16 years till 1987, was made redundant and then re-employed in 1990 and then dismissed in 1994 based on allegation, he filed a claim at the Tribunal for Unfair dismissal and was awarded damages of £11,691.88. He subsequently filed a Claim at the Milton Keynes County Court for Breach of the Implied Contractual Term of Mutual Trust and Confidence – (which cause of action had been firmly established by the House of Lords in Mahmud v Bank of Credit and Commerce International SA [1998] AC 20) and an alternative claim for Negligence. The main plank of his claim being that the manner of his dismissal caused him severe mental distress in that: a. His fragile mental state was known to Unisys prior to his being made redundant in 1987; b. His dismissal in 1994, caused him to fall into a spiral of depression, alcoholism, attempted suicide, culminating in him being admitted to a Mental Hospital; c. He made over 100 applications for alternative work, but was unsuccessful and at the age of 52, was unlikely to ever find work.

The House of Lords whilst refusing Mr Johnson’s appeal- nonetheless decided conclusively that there was "no reason why in an appropriate case it should not include compensation for distress, humiliation, damage to reputation in the community or to family life". A very radical decision in that it broke the yolk of an 80+ year old judicial mindset. This case however did not overrule Norton Tools and in fact made no reference at all to it, hence the question at this stage remained- to a large extent unresolved. It however opened the door for the award of damages for non-financial loss.


Dunnachie v Kingston upon Hull City Council [2004] ICR 1052 HL

This case provided the final or indeed, the present statement of the law on this subject. On an aside I shall add that this judgement was described by myself and some colleagues in Chambers as the Ping-Pong Judgement, in that I was leading a case M v. London Probation Office, in which part of our clients claim was for Injury to feelings and of which the decision in Dunnachie clearly had an impact. The Claim was filed when the Employment Tribunal, awarded damages for Injury to feelings based on Johnson v Unisys; set down for preliminary directions when the EAT overruled the Employment Tribunal, in the middle of hearing when the Court of Appeal upheld the Employment Tribunal’s decision and Judgement delivered just after the decision of the House of Lords determining conclusively that a Claim for Non-Financial Loss can not be made as part of a Claim under Section 123(1) of the Employment Rights Act 1996. Just for the avoidance of doubt this section relates to Compensatory Award for Unfair Dismissal and states thus “Subject to the provisions of this section and sections 124 and 126, the amount of the compensatory award shall be such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer.” In effect closing the door on the “Just and Equitable” open door for Claimant’s seeking to get damages for Breach of the Implied Term of Mutual Trust and Confidence

The facts of this case were thus: Mr Dunnachie worked for the Kingston upon Hull City Council between 1986 and 2000. In January 1995 he was appointed senior environmental health officer and then acting principal health officer In March 2000. On 8 March 2001 he resigned on notice with effect from 9 April 2001 alleging constructive dismissal and then commenced proceedings in an employment tribunal on 29 June 2001.The tribunal held that he had been unfairly dismissed and also awarded him the sum of £438.46 in respect of an unlawful deduction of wages. The actual conduct complained of being a series of acts of harassment and bullying by Mr Dunnachie’s Line Manager, which resulted in his being compelled to leave the employment of the Council. The comment of the Tribunal repeated “The respondent's treatment of the applicant by those officers caused his ill-health. We are satisfied that there was the clearest evidence of a breach of the implied term of mutual trust and confidence.”

The employer appealed to the Employment Appeal Tribunal. The main ground being as to whether compensation for injury to feelings may be recovered under section 123(1). The EAT allowed the appeal, upholding Norton Tools, with the President, Burton J, concluding that Lord Hoffmann’s dictum in Johnson v Unisys was obiter (i.e. not part of the main decision, otherwise referred to as the Ratio) and that on a correct construction of section 123 of the 1996 Act, it did not allow recovery for non-financial loss.

Mr Dunnachie further appealed to the Court of Appeal, purely on the question of whether the Claim for Injury to feelings. The Court of Appeal decided that: a. The comments of Lord Hoffman in Johnson v Unisys were indeed Obiter (or merely peripheral to the main case), but that nonetheless; b. Section 123(1) indeed allowed claims for non-financial loss in this case Injury to feelings.

The Employer then appealed to the House of Lords, for a final determination on this point. The decision of the House of Lords was to the effect that: a. To re-inforce the decision of the Court of Appeal, that the comments of Lord Hoffmann at paragraph 55 of Johnson and Unisys were indeed obiter and; b. That Section 123(1) could not and did not give rise to a right to claim for Non-Financial loss, because to do so would be to stretch the principle or indeed blur the lines between separate claims for financial and non-financial loss. Lord Steyn’s dictum is instructive as to the rationale of restricting claims under S.123 (1) to financial loss " Sir John Donaldson in Norton Tool observed that the natural meaning of "loss" in section 116(1) does not include injury to feelings. He added that this view is reinforced by the elaboration in section 116(2) of the 1971 Act, now section 123(2) of the 1996 Act. It is significant that in sections 116(2) and 123(2), and indeed in the remainder of sections 116 and 123, there is no reference to non-economic loss. “It may be of some assistance to imagine a parliamentary draftsman, faced in 1971 with a departmental brief to prepare a bill which would make provision for compensation for financial loss as well as for a solatium for injury to feelings. Such instructions could have been given pursuant to the recommendation in 1968 of the Royal Commission that the remedy for unfair dismissal should include compensation for "injured feelings and reputation": Cmnd 3623, para 553. Is it conceivable that a parliamentary draftsman would have provided for the two radically different remedies by the rolled-up wording of section 116(1)? Intuitively, I regard it as implausible that if such a policy decision had been made the technique of providing simply for compensation for "loss" would have been adopted.”

Lord Steyn also addressed the comments of Lord Justice Sedley at the Court of Appeal “In my view section 123(1) must be construed as a composite formula. The interpretation preferred by Sedley LJ splits up the formula in a way which, with great respect, is more than a little contrived. It unjustifiably relegates the criterion of loss to a subordinate role. Given the hypothesis that the legislature expressly provided for the recovery of economic loss, it fails to explain why the legislature did not also expressly provide for compensation for injury to feelings. It also fails to take full account of the context. For example, on this expansive interpretation there would as already mentioned be nothing on the face of the statute to exclude the award (subject to the cap which is now standing at £55,000) of aggravated or exemplary damages. This could not have been intended. The better view is that the provision was not intended, in the words of Brooke LJ, to provide for "palm tree" justice.”

The judgement left very few ambiguities and sealed the fate of potential Claims for Injury to Feelings brought under an Unfair Dismissal Claim, the simple answer is that it is not possible. Injury to feelings may be couched under a claim for Discrimination which is a specific legal provision, allowing for the same; however there is no carte blanche under Compensation Claims for Unfair dismissal allowing for non-financial claims.

Conclusion.

When drafting an application before the Employment Tribunal it’s important to be clear as to what you can or cannot claim for. If an employer has been guilty of improper conduct giving rise to an employee feeling that the Contract of Employment has broken down fundamentally, Constructive Dismissal is the route to take, however an employee choosing to leave on the basis that the said conduct is a Breach of the Implied Contractual Term of Mutual Trust and Confidence, should be aware that the particular conduct on its own does not give rise to damages on its own, but must still be subject to Section 123 of the Employment Rights Act, which lays ground rules for determining the amount of compensation and which is indexed as we have seen here based on pure financial loss. Which if you have worked for over a year, would consist of a Basic Award, computed against your years of service x weekly salary and a Compensatory award based on actual loss, which could include actual loss of earnings e.g. earnings lost whilst you’re out of work or the difference between new earnings and old earnings if the new earnings are less.

Where there has been simple Unfair Dismissal, the nature of the dismissal i.e. the conduct of the employer is irrelevant as to the nature of the quantum of the damages to be awarded and Section 123 still remains the award benchmark.

Two negative parameters on an award for damages, which must still be borne in mind, are i. Polkey Deductions: A deduction which is made, where the Tribunal is of the view that the dismissal would have taken place in any event, this deduction could be as much as a 100% and varies from case-to-case; and ii. Where there has been a failure to mitigate loss. This means effectively that whilst a Claimant might have suffered financial loss, he has a responsibility to mitigate his loss, by actively looking for work, as opposed to sitting back accumulating lost earnings; the Tribunal will require this as an act of good faith. This principle is common to the general Law of Contract in any event.

© Edward Keazor