(back to preceding text)

    32.  The existence of this boundary line produces other strange results. An employer may be better off dismissing an employee than suspending him. A statutory claim for unfair dismissal would be subject to the statutory cap, a common law claim for unfair suspension would not. The decision of the Court of Appeal in Gogay v Hertfordshire County Council [2000] IRLR 703 is an example of the latter. Likewise, the decision in Johnson's case means that an employee who is psychologically vulnerable is owed no duty of care in respect of his dismissal although, depending on the circumstances, he may be owed a duty of care in respect of his suspension.

    33.  It goes without saying that an inter-relation between the common law and statute having these awkward and unfortunate consequences is not satisfactory. The difficulties arise principally because of the cap on the amount of compensatory awards for unfair dismissal. Although the cap was raised substantially in 1998, at times tribunals are still precluded from awarding full compensation for a dismissed employee's financial loss. So, understandably, employees and their legal advisers are seeking to side-step the statutory limit by identifying elements in the events preceding dismissal, but leading up to dismissal, which can be used as pegs on which to hang a common law claim for breach of an employer's implied contractual obligation to act fairly. This situation merits urgent attention by the government and the legislature.

The present cases

    34.  It follows from what is set out above that I would dismiss the appeal in Mr McCabe's case and allow the appeals of Mr Eastwood and Mr Williams. In the case of all three men the assumed facts constitute causes of action which accrued before the dismissals. They disclose reasonable causes of action which should proceed to trial.

LORD STEYN

My Lords,

    35.  On the assumed facts Mr Eastwood, Mr Williams and Mr McCabe arguably have causes of action which accrued before and independently of their dismissals. In all three cases there are reasonable causes of action which should be allowed to proceed to trial. They are unaffected by the restrictive effect of the decision of the House of Lords in Johnson v Unisys Limited [2003] 1 AC 518. In my view the Court of Appeal in Eastwood v Magnox Electric plc [2002] IRLR 447 erred in extending the principle in Johnson to wiping out accrued rights. The decision of the Court of Appeal in McCabe v Cornwall County Council [2003] IRLR 87 avoided this pitfall. I therefore agree that the appeal in Mr McCabe's case should be dismissed and that the appeals of Mr Eastwood and Mr Williams should be allowed.

    36.  There is however a wider perspective to be mentioned. It may be necessary to reconsider the decision in Johnson in a future case. Having disagreed with the main thrust of the majority decision in Johnson, I make this suggestion with considerable diffidence. Moreover, although the printed cases lodged on behalf of the employees invited the House to depart from Johnson if necessary, the House did not in the event hear oral argument from counsel for the employees calling in question the correctness of Johnson. My observations must, therefore, be read subject to this caveat. On the other hand, the subject is of enormous importance: the personal contract of employment affects almost all individuals and families at some time. And, as I shall attempt to show, there are grounds for thinking that Johnson has left employment law in an unsatisfactory state. I will only be able to touch on a few aspects. But my remarks may provide some focus for a future re-examination of the position.

    37.  The ground upon which Johnson was decided is summarised in the headnote of the Appeal Cases report. It reads as follows (para 518H-519A):

". . . under Part X of the Employment Rights Act 1996 Parliament had provided the employee with a limited remedy for the conduct of which he complained; that, although it was possible to conceive of an implied term which the common law could develop to allow an employee to recover damages for loss arising from the manner of his dismissal, it would be an improper exercise of the judicial function for the House to take such a step in the light of the evident intention of Parliament that such claims should be heard by specialist tribunals and the remedy restricted in application and extent;"

In other words, the majority held that the statutory regime of unfair dismissal precludes a common law development in respect of wrongful dismissal despite the different meanings of those concepts.

    38.  This is the context in which Lord Hoffmann, who gave the leading opinion in Johnson, observed (para 55 (at p 544)) about section 116(1) of the Industrial Relations Act 1971 (the ultimate precursor of the current section 123(1) of the Employment Rights Act 1996):

". . . I know that in the early days of the National Industrial Relations Court it was laid down that only financial loss could be compensated: see Norton Tool Company Limited v Tewson [1973] 1 WLR 45; Wellman Alloys Limited v Russell [1973] ICR 616. It was said that the word 'loss' can only mean financial loss. But I think that is too narrow a construction. The emphasis is upon the tribunal awarding such compensation as it thinks just and equitable. So I see 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."

This observation was relevant to Lord Hoffmann's reasoning that the development of a general common law remedy as contended for by the employee would have involved a complete or virtually complete overlap with the statutory remedy. Lord Hoffmann's assumption was shared by the other Law Lords hearing the case. In Dunnachie v Kingston upon Hull City Council [2004] UKHL 36 the House has now unanimously held that section 123(1) of the 1996 Act does not permit the recovery of non-pecuniary loss. While Lord Hoffmann's observation was in terms of precedent only an obiter dictum it did lend support to his reasoning. That support of the reasoning in Johnson has now disappeared. It does not necessarily follow that, if the true position had been appreciated, Johnson would have been decided differently. But it raises some doubt about the reasoning in Johnson.

    39.  A second matter not considered in Johnson was the type of demarcation disputes which would be generated. Johnson laid down the proposition that cases of dismissal may only be brought in the employment tribunal. On the other hand if before dismissal, whether actual or constructive, an employee has acquired a cause of action at law, for breach of contract or otherwise, that cause of action survives his subsequent unfair dismissal: see the lucid analysis of Lady Smith in King v University Court of the University of St Andrews [2002] IRLR 252 (Ct Sess). This dichotomy will often give rise to questions whether earlier events do or do not form part of the dismissal process. After all, such problems in relationships between an employer and an employee will often arise because of a continuing course of conduct. In practice this will inevitably lead to curious distinctions and artificial results. It will involve case by case decision making rather than principled adjudication. The outcome of litigation will be very unpredictable. This policy aspect of the consequences of the reasoning of the majority in Johnson was not considered by the House in that case. But the present appeals illustrated the type of difficulties and uncertainties inherent in the legalism which prevailed in Johnson. This is relevant because the way in which a rule or principle operates in the real world is one of the surest tests of its soundness.

    40.  A third perspective is raised by the decision of the Court of Appeal in Gogay v Hertfordshire County Council [2000] IRLR 703. This case was decided after the Court of Appeal decision in Johnson ([1999] ICR 809) and before the House of Lords' decision in Johnson. Gogay was referred to in the argument of counsel in the House but not mentioned in any of the opinions of the majority. It concerned a claim brought in respect of psychiatric injury caused by the manner in which an employer operated a disciplinary procedure. Giving the leading judgment Hale LJ observed (para 68-69)

"The case before us can be distinguished from Johnson [in the Court of Appeal]. The complaint here relates to a suspension, which manifestly contemplates the continuation of the employment relationship. The clear import of Malik is that the ambit of Addis should be confined. There are in this case two differences from Addis: first, this was not a dismissal, and secondly, this was psychiatric illness rather than hurt feelings. In my judgment, therefore, the judge was right to award damages for both the financial loss and the non-pecuniary damage resulting from the claimant's illness.

I recognise that this produces the strange result that, according to Johnson, the defendant authority would have done better had they dismissed rather than suspended the claimant. That simply reinforces my view that the sooner these matters are comprehensively resolved by higher authority or by Parliament, the better."

Unfortunately, as Hale LJ implicitly pointed out, Johnson will tend to encourage precipitate and unfair decisions by employers to dismiss employees. The decision of the Court of Appeal in Gogay sits uneasily with Johnson. How in policy terms the disharmony should be reconciled is not clear. The majority's reasoning in Johnson also means that, although the exercise of the power to suspend must be exercised with due regard to trust and confidence (or fairness), the more drastic power of dismissal may be exercised free of any equivalent constraint. An employee confronted with a repudiatory breach of contract by an employer who elects to treat the contract as continuing may still have a claim for breach of contract. But in practice an employee may often not have much choice but to accept the repudiation. If the employee accepts the repudiation, the claim becomes one of unfair dismissal and the Johnson exclusion zone comes into play. In constructive dismissal cases the employee's response to the employer's breach will dictate whether there can be common law liability. The more outrageous the breach the less likely it is that the employee can affirm the contract: Lizzie Barmes, The Continuing Conceptual Crisis in the Common Law of the Contract of Employment, (2004) 67 (3) MLR 435, at 451. Contractual analysis arguably suggests a more even-handed solution as between employer and employee. These negative policy factors were not explicitly considered in Johnson.

    41.  A fourth troublesome feature of the reasoning of the majority in Johnson is that it was assumed that an employer's conduct causing psychiatric illness to an employee resulting in financial loss may be compensated under section 123(1). But for this assumption Lord Nicholls of Birkenhead could not have described the common law remedy in question as "covering the same ground as the statutory right". Lord Hoffmann observed (para 55):

"In my opinion, all the matters of which Mr Johnson complains in these proceedings were within the jurisdiction of the industrial tribunal. His most substantial complaint is of financial loss flowing from his psychiatric injury which he says was a consequence of the unfair manner of his dismissal. Such loss is a consequence of the dismissal which may form the subject matter of a compensatory award."

These observations were critical to the decision in Johnson.

    42.  Was the assumption that in an unfair dismissal case an employment tribunal may award compensation for financial loss flowing from psychiatric injury correct? The jurisdiction of an employment tribunal does not extend to the awarding of compensation "in respect of personal injuries": see The Employment Tribunals Extension of Jurisdiction (England and Wales) Order 1994, SI No. 1623, 12 July 1994, para 3, as amended by the Employment Rights (Dispute Resolution) Act 1998, section 1(2)(a); and section 3(3) of the Employment Tribunals Act 1996. A claim in contract or tort for damages for psychiatric injury is a claim in respect of personal injuries: Page v Smith [1996] 1 AC 155, at 188E-F, 190C-E, per Lord Lloyd of Berwick; compare Limitation Act 1980, section 38(1), s.v. "personal injuries". There is no reason to give to the words "in respect of personal injuries" in the statutory regime governing employment tribunals any different meaning. On the plain meaning of those words claims for financial loss caused by psychiatric injury are excluded from the jurisdiction of employment tribunals. Subject to a novel judicial interpretation to bring such claims under the statutory regime, there are cogent grounds for thinking that in Johnson the majority proceeded on a fundamentally wrong assumption. The unfair dismissal scheme is less comprehensive than it was thought to be. The symmetry between the statutory regime and the proposed common law development visualised by the majority probably did not exist. If this is the case, the core reasoning of the majority in Johnson is flawed.

    43.  A fifth matter is the reception of Johnson. Since Johnson was decided more than two years ago, there has been a great deal of comment on this decision by academic and practising labour lawyers: see Professors Deakin and Morris, Labour Law, 3rd ed, 2001, 410-411, 418-419; Professor Freedland, The Personal Employment Contract, 2003, 162-167, 303-305, 342-345, 362-364; Professor Freedland, 2001, 30 ILJ 309; Professor Collins, Claim for Unfair Dismissal, 2001, 30 ILJ 305; Professor Bob Hepple QC and Gillian Morris, The Employment Act 2002 and the Crisis of Individual Employment Rights, 2002, 31 ILJ 245, 253; Douglas Brodie, Legal Coherence and the Employment Revolution, 2001, 117 LQR 604, 624-625; Lizzie Barmes, The Continuing Conceptual Crisis in the Common Law of the Contract of Employment, (2004) 67(3) MLR 435. Making due allowance for differences in emphasis between the writers on the subject, there is apparently no support for the analysis adopted in Johnson.

    44.  The thrust of much of the comment on the central question is summarised by Deakin and Morris (Labour Law, para 5.3, at p 419):

"More generally, the argument that legislative intervention somehow equates to Parliament 'occupying the field' at the expense of the future development of the common law would, if more generally applied, have already prevented the application of the implied term of mutual trust and confidence to many other aspects of the employment relationship. It may be argued that just as employment legislation normally acts as a 'floor of rights' in relation to the contract of employment, implicitly encouraging the parties to improve on the basic standards supplied by statute, so the court should be willing, in appropriate cases, to use the enactment of protective legislation as a basis for extending, rather than limiting, recognition of the legitimate common law interests of the employee."

A footnote to the first quoted sentence observes:

"Thus there has been extensive statutory intervention in the areas of health and safety at work, grievance procedures, and the exercise of employer discretion in relation to occupational pension schemes, all of which have been the subject of judicial innovation in respect of the duty of mutual trust and confidence and which were accepted as legitimate in both Malik and Johnson. . . ."

Hepple QC and Morris (31 ILJ 245, at 253) put the point as follows:

". . . in Johnson v Unisys Limited, the House of Lords, by a 4:1 majority, stopped the common law developing to 'reflect modern perceptions of how employees should be treated fairly and with dignity' in the context of dismissal. The reasoning of the majority has disturbing implications for employment rights in general. Although prepared to contemplate a term that a contractual power to dismiss without cause would be exercised fairly and in good faith, they regarded the introduction of the statutory remedy of unfair dismissal as fatal to the implication of such a contractual duty (and to the imposition of a duty of care).

. . .

The argument that Parliament had intended to freeze out the development of the common law by creating a statutory remedy for unfair dismissal is contentious; the absence of any reference to the common law in the legislation may have occurred because Parliament was content to let the courts develop it in the usual way. Indeed, it would be open to the courts to reason by analogy that a requirement for employers to follow a fair procedure is not regarded by Parliament as unduly onerous. The majority's reasoning means that although the exercise of the power to suspend must be exercised with due regard to trust and confidence, the more drastic power of dismissal is free from any equivalent constraint.

. . .

In viewing statutory rights as a ceiling rather than a floor, Johnson creates the anomalous situation that employees may be better protected by implied terms in areas in which Parliament has failed or chosen not to legislate than in those in which it has."

Freedland (The Personal Employment Contract, at 304 and 342) described the principal reasoning in Johnson, founded as it was on an account of the intention of Parliament, as "more than slightly artificial" and "rather contrived". He stated (at 342-343):

"It must be said that none of these various grounds of decision seems at all compelling in and of itself. In particular, the reasons advanced by the majority of the Law Lords seem rather contrived, and to be in the nature of rationalisations of a prior decision that it would be undesirable as a matter of policy for a claim of this nature to be allowed to succeed. Thus, if the obligation of mutual trust and confidence is a genuine reading of the implied intentions of the parties to the contract of employment, there seems no special reason why it should be regarded as stopping short of controlling the termination of the contract. If, on the other hand, the adjudication is a genuine attempt to comply with the design of the unfair dismissal legislation, it is rather surprising to have regarded Parliament, when it introduced a set of statutory protections for workers with regard to dismissal, as intending, indeed as enjoining, that the common law should not, in the future, develop parallel protections as part of the implied content of their personal work or employment contracts."

These are quotations from the writings of distinguished and experienced specialists in the field.

    45.  The decision of the majority in Johnson could be justified if, and only if, it could be shown that the co-existence of the statutory scheme and the development of a common law remedy would be unworkable. The majority in Johnson did not put their decision on the basis that this test is satisfied. Nothing in the opinions in the present case, arrived at admittedly without the benefit of oral argument, persuades me that this test has indeed been satisfied. What is plain is that if the common law is allowed to develop as argued for by the employee in Johnson no claimant would be allowed to make a double recovery. In practice this will pose no more serious problems than in other areas where possible double recovery problems occur and are dealt with by judges on the facts of each case.

    46.  In McCabe in the Court of Appeal, decided after Johnson in the House of Lords, Auld LJ described the law on this matter as "clearly still in a state of development"; para 22, at p 512. Brooke LJ stated (para 33 at 515):

"I am very uneasy about certain aspects of the present state of the law, which appear to me to warrant re-examination by the House of Lords, or by Parliament, at an early date."

The concerns expressed in McCabe are understandable.

    47.  If the central ground on which Johnson was decided proves, upon re-examination, vulnerable, one may pose the question whether the result of Johnson could be justified on different grounds.

    48.  It would be wrong now to assume that Addis v Gramophone Company Limited [1909] AC 488 reflected settled law which made impossible the development contended for in Johnson. In Mahmud v Bank of Credit and Commerce International SA [1998] AC 20 Lord Nicholls of Birkenhead observed about Addis (at pp 38H-39D):

"For present purposes I am not concerned with the exclusion of damages for injured feelings. The present case is concerned only with financial loss. The report of the facts in Addis's case is sketchy. Whether Mr Addis sought to prove that the manner of his dismissal caused him financial loss over and above his premature termination losses is not clear beyond a peradventure. If he did, it is surprising that their Lordships did not address this important feature more specifically. Instead there are references to injured feelings, the fact of dismissal of itself, aggravated damages, exemplary damages amounting to damages for defamation, damages being compensatory and not punitive, and the irrelevance of motive. The dissenting speech of Lord Collins was based on competence to award exemplary or vindictive damages.

However, Lord Loreburn LC's observations were framed in quite general terms, and he expressly disagreed with the suggestion of Lord Coleridge C.J. in Maw v Jones (1890) 25 QBD 107, 108, to the effect that an assessment of damages might take into account the greater difficulty which an apprentice dismissed with a slur on his character might have in obtaining other employment. Similarly general observations were made by Lord James of Hereford, Lord Atkinson, Lord Gorell and Lord Shaw of Dunfermline.

In my view these observations cannot be read as precluding the recovery of damages where the manner of dismissal involved a breach of the trust and confidence term and this caused financial loss. Addis v Gramophone Company Limited was decided in the days before this implied term was adumbrated. Now that this term exists and is normally implied in every contract of employment, damages for its breach should be assessed in accordance with ordinary contractual principles. This is as much true if the breach occurs before or in connection with dismissal as at any other time."

My analysis was to the same effect: 50A-51E. The other Law Lords in the case agreed with this analysis. On a careful analysis of Addis it will be seen that there was no majority for ruling out the recovery of financial loss flowing from the manner of a wrongful dismissal. The headnote of Mahmud rightly states "Addis v Gramophone Company Limited [1909] AC 488 not followed". In Johnson the view prevailed that because of the statutory regime the common law development contended for could not be permitted. But in terms of stare decisis the status of Addis remained exactly the same as it was when Mahmud was decided. The reasoning of the majority in Johnson did not re-invigorate the corpse of Addis. In any event, in the present case the House heard no oral argument on the status of Addis.

    49.  In Johnson Lord Hoffmann was prepared to accept the existence within the contract of "a separate term that the power of dismissal will be exercised fairly and in good faith": para 46. Lord Nicholls did not deal with the point. Lord Millett was prepared to countenance a common law term imposing upon the employer "a more general obligation … to treat his employee fairly even in the matter of dismissal": para 79. This explains the ratio decidendi of Johnson as I have set it out in para 37 above. In my dissenting judgment in Johnson I further pointed out that the implied obligation of mutual trust and confidence was developed in the context of a series of constructive dismissal cases. I cited Hepple and O'Higgins, Employment Law, 4th ed (1981) pp 134-135, paras 291-292. I added that it cannot, therefore, be confined to breaches during the subsistence of the contract: para 21. After a detailed discussion I concluded (para 24):

"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."

This was, of course, said in the context of a claim for financial loss.

    50.  At the hearing of the present appeals the House did not have the benefit of oral argument on potential scope of the implied obligation of mutual trust and confidence, or what Sir Nicolas Browne-Wilkinson V-C in Imperial Group Pension Trust Limited v Imperial Tobacco Limited [1991] 1 WLR 589, at 597, more simply called "the implied obligation of good faith". Perhaps it would be conducive to clarity if the latter description is generally used.

    51.  As a result of Johnson the law in the vitally important area of personal contracts of employment is in an unsatisfactory state. The cap (now standing at £55,000) under the statutory scheme on compensatory awards for true financial loss is one aspect of the problem. No doubt it is intended to protect the competitiveness of business but if it is allowed to constrain the development of the common law it may come at too high a price in the failure of corrective justice. The inhibitory effect of Johnson on the development of the common law poses a great structural problem. It prevents, and will continue to prevent, the natural and sensible evolution of our employment law in a critical area. I do not believe that Parliament ever intended such a result. A re-examination by Parliament is needed.

    52.  I have had the privilege of reading the speech of my noble and learned friend, Lord Nicholls of Birkenhead, in draft. I agree with it and, for the reasons he gives, I too would make the orders which he proposes in each of the appeals.

LORD RODGER OF EARLSFERRY

My Lords,

    53.  I have had the privilege of considering the speech of my noble and learned friend, Lord Nicholls of Birkenhead, in draft. I agree with it and, for the reasons he gives, I too would make the orders which he proposes in each of the appeals.

LORD BROWN OF EATON-UNDER-HEYWOOD

My Lords,