Antony White Q.C., Matrix Chambers

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Antony White Q.C., Matrix Chambers

ILS, London, 9^th October 2004

Title: "Compensation for unfair dismissal after Dunnachie v. Kingston Upon Hull City Council [2004] 3 WLR 310 "

Introduction

Christopher Dunnachie took up employment with Kingston Upon Hull City Council at the age of 19. He qualified as an Environmental Health Officer, was promoted to Senior Environmental Health Officer, and then to Acting Principal Health Officer. He was an effective officer with a good career. That career was brought to an end by what Lord Justice Sedley described as "a bad case of workplace bullying, compounded by an equally serious refusal by management to deal with it". In the year leading up to his constructive dismissal in April 2001 Mr Dunnachie was undermined and humiliated by his manager and subjected to such unreasonable treatment that his health was affected and he had no option but to resign. His complaint of unfair dismissal was upheld by an Employment Tribunal which awarded him Ł10,000 compensation for the humiliation and distress he had suffered in addition to compensation for financial losses.

The Employment Tribunal’s decision was the subject of three separate appeals to the Employment Appeal Tribunal. In the most important of these appeals the EAT held in a judgment reported at [2003] ICR 1294 that the Tribunal had no jurisdiction to award compensation for non-economic loss in unfair dismissal proceedings. Accordingly, it set aside the award of Ł10,000 for distress, humiliation and injury to feelings. In a second, unreported, judgment delivered on 23/6/03 the EAT rejected the employer’s appeal against the finding of unfair dismissal. In a third judgment reported at [2004] ICR 227 the EAT allowed the employer’s appeal against the quantification of compensation for financial losses and remitted that part of the case to a different Tribunal for further consideration. The judgment dealing with compensation for financial losses is important since it provides guidance on the circumstances in which an Employment Tribunal may use the Ogden Tables as a tool for the assessment of long-term financial loss. However, the principal importance of Mr Dunnachie’s litigation lies in the subsequent appeals to the Court of Appeal and House of Lords in relation to the availability of compensation for non-economic loss in unfair dismissal proceedings.

The Relevant Statutory Provision

The award of Ł10,000 compensation to Mr Dunnachie for distress, humiliation and injury to feelings was made by the Tribunal under Section 123 of the Employment Rights Act 1996. The relevant part of Section 123(1) provides as follows:-

"…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 insofar as that loss is attributable to action taken by the employer."

The provision now contained in Section 123(1) of the 1996 Act was first introduced in Section 116(1) of the Industrial Relations Act 1971. It was subsequently re-enacted by Schedule 1, Paragraph 19, of the Trade Union and Labour Relations Act 1974, then by Section 76 of the Employment Protection Act 1975, then by Section 74 of the Employment Protection (Consolidation) Act 1978, and finally by Section 123(1) of the 1996 Act.

Norton Tool Co Limited v. Tewson [1973] 1 WLR 45

Shortly after the introduction of protection against unfair dismissal in the Industrial Relations Act 1971 the National Industrial Relations Court ruled in Norton Tool Co Limited v. Tewson [1973] 1 WLR 45 that compensation could not be awarded under Section 116(1) for injury to feelings. Sir John Donaldson at pp.48-9 stated:-

"…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."

The decision in Norton Tool became part of the orthodoxy of the law of unfair dismissal. It was referred to and followed in countless Tribunal decisions and in a number of reported decisions of the EAT. Its correctness was assumed in both the Court of Appeal and House of Lords. However, in the cases in the Court of Appeal and House of Lords where it was referred to, its correctness was not questioned.

Lord Hoffmann’s Statement in Johnson v. Unisys Limited [2003] 1 AC 518

In Johnson v. Unisys Limited [2003] 1 AC 518 the House of Lords by a majority of 4 to 1 held that the common law could not develop a duty on an employer to act fairly towards an employee in relation to a decision to dismiss since such a development could not co-exist satisfactorily with the availability of a limited statutory remedy for unfair dismissal. Giving the leading speech Lord Hoffmann regarded it as relevant to his conclusion that compensation for financial losses flowing from psychiatric injury caused by dismissal and for non-financial losses such as distress, damage to family life and other matters, were available in unfair dismissal proceedings.

Mr Johnson was claiming damages for personal injury suffered as a consequence of the manner of his dismissal. The damages claimed included both compensation for financial losses consequent upon psychiatric injury, and also compensation for non-financial losses such as pain, suffering and loss of amenity. Lord Hoffmann explained in Paragraph 54 of his speech (with which Lords Bingham and Millet agreed) that Parliament had given Employment Tribunals "a very broad jurisdiction to award what they considered just and equitable but subject to a limit on the amount". In Paragraph 55 he continued:-

"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. The only doubtful question is whether it would have been open to the Tribunal to include a sum by way of compensation for his distress, damage to family life and similar matters. As the award, even reduced by 25%, exceeded the statutory maximum and had to be reduced to Ł11,000, the point would have been academic. But perhaps I may be allowed to comment all the same. 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… 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."

In Mr Dunnachie’s case the Employment Tribunal applied and followed this passage in Lord Hoffmann’s speech when awarding Ł10,000 compensation for distress, humiliation and injury to feelings.

The Decision of the Employment Appeal Tribunal

In a full and careful judgment Burton P. allowed the employer’s appeal against Mr Dunnachie’s award of Ł10,000 compensation for non-economic loss: [2003] ICR 1294. Burton P. attached great significance to the fact that Norton Tool had not been questioned in the period between 1972 and 2001 when it had been universally followed and applied. He held that Lord Hoffmann’s observations in Johnson v. Unisys were obiter and accordingly no more than "the expression of opinion by a very experienced and influential Law Lord". Burton P. drew attention to the competing arguments relating to the interpretation of the words used in Section 123 of the Employment Rights Act 1996, but attached far greater importance to perceived practical problems if compensation for non-financial loss were to be recoverable in unfair dismissal proceedings. At Paragraph 50 he concluded:-

"We are satisfied that the fundamental nature of these claims in the Employment Tribunals is a (limited) economic claim, both in respect of unfair dismissal (limited to Ł53,500) and wrongful dismissal or other claim for damages for breach of contract of employment (expressly not including damages for personal injury) (limited to Ł25,000). That self-contained and comprehensible structure appears to be what was intended by the legislation and has worked well. There is no need for it to be changed, and considerable problems would ensue if it were to be."

The Decision of the Court of Appeal

The Court of Appeal, by a majority, allowed Mr Dunnachie’s appeal: [2004] ICR 481. Although by a majority it was held that the remarks of Lord Hoffmann in Johnson v. Unisys Limited at Paragraph 55 were obiter (per Brooke L.J. and Evans-Lombe J.; Sedley L.J. dissenting), a different majority decided that Section 123(1) of the 1996 Act on its proper construction allowed compensation for non-economic damage (per Sedley L.J. and Evans-Lombe J.; Brooke L.J. dissenting).

Sedley L.J. said of Lord Hoffmann’s speech in Johnson v. Unisys Limited:-

"It seems to me, in the end, that Lord Hoffmann in Paragraph 55 was grasping a nettle which, although it had sprung up only in oral argument, he recognised as having a sting: that to deny a remedy at common law on the ground that a parallel statutory scheme existed, when the statutory scheme apparently denied the very remedy that was being sought at common law, was intellectually unsatisfactory and in practice would leave a black hole. It was to fill that jurisprudential space that, as it seems to me, he said what he did in the critical passage."

Sedley L.J. went on to hold that even if Lord Hoffmann’s view was obiter, it was correct. Like Lord Hoffmann he attached particular significance to the flexibility of the "just and equitable" formula. Evans-Lombe J. disagreed with Sedley L.J. as to whether Lord Hoffmann’s remarks were obiter or ratio, but agreed with the remainder of his analysis. Evans-Lombe J. added a further reason for agreeing with Sedley L.J., namely that in his view "loss" in Section 123(1) was not necessarily confined to financial loss.

Brooke L.J. delivered a powerful dissenting judgment. Focusing in particular on the legal context in which the Industrial Relations Act 1971 was enacted he concluded that it was "inconceivable that in this particular context Parliament intended the word [loss] to mean anything other than financial loss."

The Court of Appeal gave leave to the employer to appeal to the House of Lords.

The Decision of the House of Lords

Dunnachie was not the only post-Johnson v. Unisys Limited case which was troubling the Courts. In two cases concerning psychiatric damage suffered by employees as a result of conduct by their employers prior to dismissal two differently constituted Courts of Appeal had reached very different conclusions: Eastwood v. Magnox Electric plc [2003] ICR 520 and McCabe v. Cornwall County Council [2003] ICR 501. The House of Lords decided to list the appeals in Dunnachie, Eastwood and McCabe before the same Appeals Committee in May 2004. Eastwood and McCabe were heard together, with the appeal in Dunnachie heard immediately afterwards.

The House of Lords unanimously allowed the employer’s appeal in Dunnachie: [2004] 3 WLR 310. Lord Steyn, with whose speech the other members of the House agreed, held that Lord Hoffmann’s observation in Johnson v. Unisys Limited had been obiter. In the course of oral argument Lord Hoffmann suggested it had been a "throwaway remark". Lord Steyn accepted that Lord Hoffmann’s remarks were relevant to his reasoning, but stated that Lord Hoffmann’s tentative language excluded the view that they were intended to form part of the ratio decidendi. That left the House free to consider the correct interpretation of Section 123(1) of the 1996 Act.

Like Brooke L.J. in Court of Appeal, Lord Steyn focused on the meaning of the word "loss" in the context of Section 116(1) of the Industrial Relations Act 1971. Wearing 1971 spectacles he regarded it as inconceivable that the Parliamentary draftsman had intended a formula based on "loss" to allow the recovery of compensation for non-economic loss. Unlike Sedley L.J. in the Court of Appeal, Lord Steyn did not regard the "just and equitable" formula as sufficiently flexible to extend to non-economic loss. Like Burton P. in the EAT, Lord Steyn attached considerable significance to the fact that Norton Tool had been universally followed and applied between 1972 and 2001, and had attracted only isolated academic criticism.

The Decisions of the House of Lords in Eastwood and McCabe

One reason why UNISON supported Mr Dunnachie’s appeals to the Court of Appeal and House of Lords was its concern about the effect of the decision in Johnson v. Unisys Limited. UNISON’s view was that if the full rigour of Johnson v. Unisys Limited as interpreted by Eastwood were to be maintained, the position arrived at by the Court of Appeal in Dunnachie might be regarded as acceptable. On the other hand, if the decision of the Court of Appeal in Dunnachie were to be overruled, this would provide some incentive to depart from, or at least limit, Johnson v. Unisys Limited. In essence, either the statutory remedy should be available, or the common law door should not have been closed on the incorrect assumption that a statutory remedy existed.

From this perspective the decision of the House in the joined appeals of Eastwood and McCabe is of some interest, although not, it would appear, the end of the story. In a decision reported at [2004] 3 WLR 322 the House of Lords allowed the employee’s appeal in Eastwood and dismissed the employer’s appeal in McCabe. The House did not depart from its previous decision in Johnson v. Unisys Limited. It was held that although it would be desirable for the implied obligation on an employer at common law to act fairly towards his employee to apply to a decision to dismiss him, such a development could not co-exist satisfactorily with the statutory code regarding unfair dismissal. However, that limitation on the development of the common law had been taken too far in Eastwood. Johnson v. Unisys Limited is confined to a claim based upon dismissal. If prior to his 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 his subsequent unfair dismissal and the statutory rights which flow from it. The House recognised that drawing this somewhat arbitrary line would inevitably lead to great difficulties of causation – how is the loss which flows from conduct prior to dismissal which results in psychiatric injury to be disentangled from the loss which flows from the increase in that psychiatric injury which the dismissal contributes? The House also recognised that the law following Johnson v. Unisys Limited was left in the anomalous position that an employer may be better off dismissing an employee than suspending him. Suspension in breach of the implied obligation of trust and confidence might give rise to an uncapped claim at common law. Dismissal in circumstances of equal unfairness will only lead to a capped claim before the Employment Tribunal.

Both Lord Nicholls and Lord Steyn, who gave the only reasoned speeches, recognised the unsatisfactory state in which Johnson v. Unisys Limited had left the law. Lord Nicholls, with whose speech Lords Hoffmann, Rodger and Brown agreed) suggested that the answer might be to remove the cap on compensatory awards for unfair dismissal claims. He suggested that this required urgent attention by the Government and the legislature. Lord Steyn on the other hand appeared to suggest that Johnson v. Unisys Limited had been wrongly decided and ought to be reconsidered in the light of the ruling in Dunnachie, the adverse reception from the academic writers, and the unsatisfactory way it had worked in practice. He concluded his speech by calling for a re-examination by Parliament.

The Underlying Policy Considerations

In the course of argument before the House of Lords in Dunnachie Their Lordships were concerned to establish the likely increase in the average award of compensation for unfair dismissal if non-economic loss could be included. The decision of the House of Lords in that case makes no explicit reference to the cost to industry and to the national economy of the interpretation placed on Section 123(1) by the Court of Appeal. However, it would be naïve to think that such matters played no part in the decision.

In Eastwood and McCabe at Paragraphs 13 and 51 Lords Nicholls and Steyn referred explicitly to the policy considerations underpinning the cap on compensation for unfair dismissal. Lord Nicholls stated:-

"In fixing these limits on the amount of compensatory awards Parliament has expressed its view on how the interests of employers and employees, and the social and economic interests of the country as a whole, are best balanced in cases of unfair dismissal."

Lord Steyn said of the cap:-

"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."

Conclusion

It is too early to say whether the House of Lords’ call for legislative intervention will be acted upon. Any alteration in the existing state of the law would need to take into account the policy considerations mentioned above. Interestingly, one view of this unedifying chapter of English employment litigation is that it would be cheaper to reverse the decision of the House of Lords in Dunnachie and allow recovery of non-financial loss in unfair dismissal proceedings (possibly at a fixed or low level) than to remove the cap on unfair dismissal compensation altogether or allow both common law and statutory claims to co-exist.

ANTONY WHITE Q.C.
9^th October 2004

Matrix Chambers
Griffin Building
Gray’s Inn WC1R 5LN

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