Implied term of trust and confidence does not apply to a dismissal

In two recent conjoined appeals the House of Lords has considered the circumstances in which an employee can bring a claim based on the implied duty of trust and confidence.

In Eastwood and another v Magnox Electric plc (and McCabe v Cornwall Country Council and others) [2004] UKHL 35, the House of Lords concluded that the implied term of trust and confidence does not apply to the act of dismissal. This is because the unfair dismissal legislation provides a remedy, albeit of limited financial compensation, where there is an unfair dismissal.

Although this general principle seems straightforward the judgment raises difficult issues. First and foremost it draws a distinction between the dismissal and issues arising before the dismissal. If before the 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 remains unimpaired by a subsequent unfair dismissal and the statutory rights flowing from it. Such a cause of action exists independently of the dismissal. Therefore, in cases where the employer has breached the implied term of trust and confidence before the dismissal, an unlimited common law claim can be brought.

This distinction causes uncertainty. Although many cases will be clear, many will not. In the ordinary course an employer's failure to act fairly in the steps leading to dismissal does not of itself cause the employee financial loss. The loss arises when the employee is dismissed and it arises by reason of his dismissal. In such circumstance the resultant claim for loss would be made under the normal unfair dismissal legislation. However there are circumstances when financial loss is caused. These include suspension and when an employee suffers from financial loss from psychiatric or other illness caused by his pre-dismissal unfair treatment. In such cases the employee has a common law cause of action which precedes and is independent of his subsequent dismissal.

If pre-dismissal action can result in unlimited damages whereas a dismissal itself can only result in limited financial compensation then clearly one consequence is that it may be cheaper for an employer to dismiss an employee rather than, for example, suspend him. The limit on compensation on unfair dismissal causes this anomaly and, in his judgement, lord Nicholls suggested that this merited urgent attention by the government and legislature.

It is hoped that the government will act swiftly to resolve these problems and employers should watch the legal developments on this issue closely.

If you require specific advice about how this judgement might affect your decisions and procedures please contact Simon Jeffreys on +44(0) 207 367 3421 or at simon.jeffreys@cms-cmck.com or Anthony Fincham on +44(0) 207 367 2783 or at anthony.fincham@cms-cmck.com