Holding court
Date: 16 July 2010
Authors: Ian Smith
Issue: Vol 160, Issue 7426
Categories: Features, Employment
As part of the much discussed economic retrenchment, there has been talk of measures to curb excessive pay-outs in the public sector and bonuses in the private sector. One question for employment lawyers has been whether the courts might make any contribution here by taking a less generous view of individual rights under such schemes.
However, the two cases considered this month strongly suggest that this is not going to be the case, thus putting the ball firmly back into the government’s court if moves are to be made in such a direction. The first shows a much more restrictive approach by the Court of Appeal to the application of public law concepts such as ultra vires to agreements to pay off staff, and the second shows a continuation of the courts’ existing powers to ensure that employees receive the bonuses to which they are contractually entitled, strongly suggesting that any fundamental changes to bonus cultures may have to start with the contracts themselves, rather than finding ways around existing entitlements.
Payoff by NHS trust
A previous column commented on the decision of Treacy J at first instance in Gibb v Maidstone & Tunbridge Wells NHS Trust [2010] EWCA Civ 678, [2010] All ER (D) 229 (Jun) denying the claimant, the ex chief executive of the trust, the payment of the amount of a compromise agreement over and above her notice money because the decision to pay her that extra was ultra vires, on the basis that it was “irrationally generous” (see 159 NLJ 7390, p 1460).
In times of public concern over large pay-offs in the public sector, this was a potentially important development, but it has now been overturned by the Court of Appeal. While the case is perhaps most notable for a sustained blast by Sedley LJ against the injustice he sees as having been done to her by the previous health secretary who stepped in to stop the trust making the severance payment it had agreed, the principal judgment on the substance of the case was by Laws LJ who accepted that payments by public authorities to their employees can be challenged under administrative law principles, but obviously found it in general invidious if an authority is using such principles to try to avoid a contractual agreement made by itself. He said that in such circumstances an authority will have a “very steep hill to climb”.
On the facts here, that hill had not been surmounted. He considered the main grounds on which the judge had found irrationality and disagreed. The trust (placed in a very difficult position by the outside intervention) had done a reasonable financial assessment of their possible liabilities to the claimant, had taken into account possible unfair dismissal proceedings and had reasonably taken into account the claimant’s length of service. Against the backdrop of the NHS legislation which gives trusts wide discretion in remuneration decisions, this fell short of ultra vires.
For good measure, Laws LJ added that, if wrong on this, he would have found for the claimant on her secondary claim of unjust enrichment by the trust and, although expressing no firm conclusion, seemed to give a favourable view to a possible third ground of breach of trust and confidence by the trust in assuring the claimant that the payment she was agreeing to had been lawfully determined. Sedley LJ agreed with the ultra vires point but declined to comment on the other two and Rimer LJ agreed on the ultra vires and unjust enrichment points but expressed no view on the trust and confidence point.
Less interventionist
Thus, it may be now that courts will be less interventionist in striking down high pay-offs (especially as Sedley LJ said that the judge had erred “by letting himself be drawn into acting more nearly as an auditor than as a judge”—a neat phrase for counsel to throw at any judge tempted to do likewise) and if the new government want to stop such payments this puts the ball very much back into their (legislative) court. One final comment offered by your humble and possibly misguided author concerns the way that perceptions and expectations can colour cases such as this. Have we simply become punch drunk at the level of pay-offs so often reported in the news?
At one point, Sedley LJ made the following comment: “On the scale of severance payments not only in the private sector but also in parts of the public sector, £240,000 was not on its face outlandish compensation for the arbitrary termination of a career which it was unlikely Ms Gibb would be able to resume or resurrect”.
So, that’s alright then. Moreover, his judgment (starting off with an admirable reference to the Admiral Byng principle of shooting one admiral pour encourager les autres) proceeds on the basis that the claimant was entirely innocent of the outbreak of disease in the hospital in the light of which she resigned prior to a report highly critical of the hospital; while this may be technically correct, she was the chief executive at the time—when did the idea that the buck stops at the top become so hopelessly old fashioned? End of rant, pro tem.
Bonus entitlement
In a sense Rutherford v Seymour Pierce Ltd [2010] IRLR 606, QBD can be seen as a private sector stable mate of the previous one. In times of deep suspicion of bonuses and the bonus culture generally, this decision of Caulson J shows that ultimately it is all a matter of contract law and that if necessary a court may intervene to protect an employee from a capricious misuse of employer discretion. The case is also of interest for one particular ruling on the relationship between implied and express terms.
The employee was a salesman in an investment bank. In November 2007 he was summarily dismissed for alleged poor performance. Unfair dismissal was admitted in tribunal proceedings and all matters compromised except for the issue in this case—he had not been paid any bonus for the final quarter of 2007, which was payable in December, after he had left. The employers argued that there should be implied into his contract a term that, to be entitled to any particular bonus, an employee had to be still in the firm’s employment at the date of its award. They argued that such a term was common in the industry and should be implied here from normal usage and to give business efficacy. The validity of such a clause in an express form has been accepted by the Court of Appeal in Commerzbank AG v Keen [2007] IRLR 132 (see Harvey A II [26]), but in fact the firm lost on this major point.
Neat reversal
The judge neatly reversed the employers’ argument by saying that the fact that such a provision was often covered expressly (as indeed it was now in the firm’s own recent contracts) showed that it was an issue not normally to be implied as a matter of course. That was particularly so because it could allow an employer to dismiss an employee immediately before the declaration of a bonus in order to avoid liability for it. Moreover, it was not to be brought in by the side wind of custom and practice because it was little more than a “mere trade custom” which fell short of the ancient mantra of being “notorious, invariable or certain”.
As no such limiting term was to be implied, what should the employee receive? This led into the territory of discretion versus reasonableness. These days it is not sufficient just to say that the employer had a discretion and so could have awarded nil. Cases such as Clark v BET plc [1997] IRLR 348, QBD, Clark v Nomura plc [2000] IRLR 766, QBD and Horkulak v Cantor Fitzgerald [2004] IRLR 942, CA show that a court can intervene on grounds of irrationality or perversity (see Harvey A II [400]) but here the judge arguably took a wider view (more based on trust and confidence). He said that those were cases attacking a decision to give (or not to give) a bonus. Here, no decision had been taken because it had been assumed by the employers that the employee was not eligible.
In such a case, the judge is in effect subrogated into the employer’s shoes, to decide what a reasonable exercise of the discretion would have produced: “Thus, if the court is required to calculate the bonus, it has the same unfettered discretion as the original bank, which discretion must, of course, be exercised reasonably. In particular, it cannot be assumed that the discretion would have been exercised so as to give the least possible benefit to a claimant, if such an assumption would be unrealistic on the facts....” [para 33].
On the facts, the allegation of poor performance had not been made out, and a figure of £70,000 was awarded.
Ian Smith, barrister, emeritus professor of employment law at the Norwich Law School, UEA, & an editor of Harvey on Industrial Relations and Employment Law
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