Scottish Court of Session Decisions

With effect from 18 July 1988 the pursuer was employed by the defenders in their Information Services Department, his job title being Senior Support Analyst. After certain concerns had arisen about his appearance and his attitude at work, he was in March 1994 interviewed by more senior staff. Following that interview he was absent from work on medical grounds. With the exception of a very brief trial period he remained absent until his employment was terminated by the defenders in 1995. For the purposes of the debate before me, the defenders accepted that that absence was supported by medical evidence. During that absence the defenders paid to the pursuer sick pay benefit as provided for in the Staff Manual referred to in his contract of employment.

The pursuer was dismissed by the defenders with effect from 30 November 1995. The ground of dismissal was redundancy. A redundancy payment was made to him in terms of the Staff Manual which included, but substantially exceeded, the relevant statutory redundancy entitlement. For the purposes of the present action the pursuer accepts that his dismissal was by reason of redundancy. The pursuer instituted proceedings before an industrial tribunal on a claim that he had been unfairly dismissed. That claim was unsuccessful but the pursuer does not for the purposes of the present action concede that the manner in which he came to be dismissed by reason of redundancy was consistent with his terms of employment. I shall return to that matter at the end of this Opinion. The issue discussed at debate was whether or not the dismissal of the pursuer with effect from 30 November 1995 by reason of redundancy was, having regard to his then status as a person absent from work and in receipt of sick pay benefit, a breach of his contract of employment.

The pursuer's contract was constituted by an offer by the defenders dated 20 July 1988, subsequently accepted by the pursuer on 22 July. In terms of that offer the defenders' General Manager (UK) wrote:

The Schedule referred to opened with the following statement:

Paragraphs 9 and 10 of the Schedule were respectively in the following terms:-

The Staff Manual referred to is a document of some bulk. Section B of it, which was the only part produced and discussed before me, runs from page 31 to page 102. It is headed "BENEFITS AND SCHEMES/CONDITIONS OF EMPLOYMENT". Section B deals with staff pension scheme, periods of notice, holiday regulations, staff mortgage/subsidy scheme, company movers allowance, sick pay entitlement, sickness and other absence procedure, staff personal accident insurance, arrangements in respect of life business, permanent health insurance, staff social activities, long service award, purchase of annual travel season tickets, national savings scheme, private health care, staff discount schemes, flexible working hours, redemployment and redundancy procedure, maternity regulations and extraneous business activities. The Staff Manual is expressed in language which is essentially informative in character. Statements are from time to time supplemented by passages introduced by the word "Note".

In respect of sick pay entitlement section B8 refers to three types of sick pay benefit. Benefit A, which was applicable to the pursuer at the relevant time, is described in the following terms:

As at 30 November 1995 the pursuer had been in receipt of Benefit A for about 20 months (about 87 weeks).

In respect of long term sickness paragraph 5 of section B8 provides:-

The arrangements for sickness and accident benefit and for ill-health retirement pension are then set out. The former, if put in place, is subject to reduction or termination by the defenders in certain circumstances. The latter, which is dependent on the employee being a member of the Staff Pension Scheme, is not so subject.

In respect of sickness and other absence from work section B9 advises the reader that strict local control is exercised over absences and that, if they are not satisfactorily explained, managers have authority to arrange for deduction of salary. It is also stated that managers must satisfy themselves that all absences are satisfactorily explained and properly notified and evidenced. It is to be assumed that, in respect of the pursuer's receipt of sick pay Benefit A, the relative managers were so satisfied.

Section B20 sets forth procedural arrangements in respect of redeployment and redundancy. The Schedule to the pursuer's contract of employment imposes no express restriction on termination of his employment other than the requirement of notice, which requirement was fulfilled in respect of his dismissal with effect from 30 November 1995. Neither in the provisions in the Schedule to the contract relative to termination nor in those in the Staff Manual relative to redeployment and redundancy procedure is there any express qualification in respect of persons in respect of sick pay benefit; neither in the relative paragraph of the defenders' offer of employment nor in the provisions in the Staff Manual in respect of sick pay benefit is there any express qualification in respect of dismissal on the ground of redundancy or on any other ground.

In this action the pursuer seeks payment from the defenders. The essential foundation of his action is that it was "an implied term of the parties' contract that the defenders would not use their contractual powers of dismissal where their use would frustrate an accruing or accrued entitlement under the sickness benefit or ill-health retirement pension scheme and that in consequence the pursuer would not be dismissed from his employment with the defenders while incapacitated except for a summary dismissal by the employer by reason of his fundamental breach of contract". The pursuer's claim is formulated as a claim for a sum due under the contract or alternatively as damages for its breach; but no issue presently arises in respect of those alternative formulations. The defenders challenge the relevancy of the pursuer's claim, the issue for present determination essentially being whether the defenders were or were not entitled to dismiss on the ground of redundancy a person such as the pursuer for the time being in receipt of short term sickness benefit with a prospective entitlement to long term sickness provision.

Mr Napier for the defenders submitted that on a sound construction of the express terms of the contract of employment, including the Staff Manual incorporated into it, the defenders had the right to terminate the contract by reason of redundancy. That right was not lost because, at the time the pursuer was dismissed on that ground following notice, he was absent from work by reason of sickness and had not exhausted the 104 weeks of sick pay entitlement under section B8. The right to terminate in those circumstances remained notwithstanding that the pursuer was at the time of dismissal within about four months of reaching the threshold for long term sickness provision. It was acknowledged that there was in this as in any other contract of employment an implied term of trust and confidence but the existence of that term did not give rise to a different result in this case. On the assumption that the pursuer would at the expiry of 104 weeks have satisfied the criteria for one or other of the long term sickness provisions, the defenders were not, in circumstances where he had been dismissed by reason of redundancy prior to the expiry of that period, obliged under the contract to pay him benefit under either of those provisions; nor were they liable in damages for any breach of contract.

In developing those propositions Mr Napier submitted that the only limitation on termination under the express terms of the contract was the requirement to give notice. Termination on the ground of redundancy was permitted; it was specifically contemplated in the Schedule. The defenders accepted that, in order to give proper effect to the rights in respect of sickness absence, some limitation on the right to terminate should be recognised. The appropriate limitation, where an employee was in receipt of short term sickness benefit, was that there was no right to terminate (a) on grounds of sickness or of absence caused by sickness, (b) on wholly arbitrary grounds and (c) without any cause at all. This result could be arrived at either by construction of the express terms of the contract or (as in Aspden v Webbs Poultry & Meat Group (Holdings) Limited [1996] IRLR 521) by implying a term to that effect. On a sound analysis the right of the employer to dismiss on grounds of redundancy had, within the cluster of contractual rights and duties, a higher priority than the right of the sick employee to accrue service to the full extent of 104 weeks with a view to obtaining subsequently a long term sickness provision. The pursuer's contention would have been easier to maintain if the long term provision had been covered by insurance (as in Aspden and, possibly, in Adin v Sedco Forex International Resources Limited [1997] IRLR 280) or if he had not received under the contract compensation for dismissal on the grounds of redundancy. The Note appended to paragraph 1.1 of section B8 did not have contractual force. In any event, it was no more than a statement of intention; it was not inconsistent with a right to dismiss on genuine grounds of redundancy. The construction urged by the pursuer would lead to a very unreasonable result and it was accordingly unlikely that the parties could have intended it (Wickman Tools v Schuler A.G. [1974] AC235, per Lord Reid at page 251). The defenders, on that construction, would never be able to dismiss on grounds of redundancy employees who were absent from work by reason of sickness however short that absence or minor the medical condition. That would be unfair to the remainder of the work force and would encourage spurious absences when a redundancy situation was suspected. None of the authorities justified the construction for which the pursuer contended. Reference was also made to Baynham and Others v Phillips Electronics (UK) Limited [1995] TLR421, Bainbridge v Circuit Foil (UK) Limited [1997] I.C.R.541 and Brompton v AOC International Limited &c [1997] IRLR639.

No term, the argument continued, should be implied to the effect contended for by the pursuer. The conditions for implying such a term were not satisfied. The express provisions in the Staff Manual relating to redundancy did not suggest that there was an exemption where individuals were absent by reason of sickness. Where detailed express provision was made there was little scope for importing additional terms by implication. Reference was made to Ali v Christian Salvesen Food Services Limited [1997] IRLR17, per Waite L.J. at paragraphs 14-15. Dismissal by reason of redundancy did not destroy the acknowledged obligation of trust and confidence as did conducting a business fraudulently (Mahmud v Bank of Credit and Commerce International S.A. [1998] AC20) or subjecting an employee to humiliating treatment (Bliss v South East Thames Regional H.A. [1987] I.C.R.700). Reference was also made to Newns v British Airways plc, especially per Steyn, L.J. at para.27. The implied obligation to maintain trust and confidence could be breached by dismissing purportedly on grounds of redundancy where this was done arbitrarily or for an improper collateral purpose; but no such case was made here. The obligation in respect of trust and confidence should not be enlarged so as to swamp all other terms of the contract. So far as the pursuer's argument amounted to the proposition that an employer had an obligation to act reasonably, it was inconsistent with settled law. Reference was made to Western Excavations (E.C.C.) Ltd v Sharp [1978] I.C.R.221 and White v Reflecting Roadstuds Ltd [1991] I.C.R.733. The pursuer's action, at least in so far as formulated on its present grounds, should be dismissed.

Mr O'Neill for the pursuer submitted that the action as pled was relevant and that the defences, except in so far as related to quantum, were irrelevant. The fact that the pursuer's claim for compensation for unfair dismissal had been dismissed by an industrial tribunal did not preclude the contractual claim made in the present action nor was it relevant to it. Reference was made to Clink v Speyside Distillery Co Ltd 1995 S.C.L.R.797 and Jones v Mid-Glamorgan County Council [1997] I.C.R.815.

The principle of good faith and mutual trust, which was implied in every contract of employment, underpinned such a contract, which was to be construed in light of that principle. The recognition of that principle had involved a significant change in legal culture. The defenders could not escape their contractual undertaking to provide long term sickness cover by dismissing the employee while in receipt of temporary sickness benefit. The Note appended to paragraph 1.1 of section B8 had contractual effect or at least was part of the factual matrix; it was of the first importance. Paragraph 1.1 read as a whole assured an employee that, albeit his job might be filled, he would be kept on the staff, would continue to receive benefit and, if he remained sick beyond 104 weeks, would be provided for under the long term sickness arrangements. The defenders' contention, if right, would have the effect of rendering nugatory the contractual sick pay provisions. Section B8 had, as the Note at the end of that section stated, to be read in conjunction with section B9. The latter section set forth a strict regime for the monitoring of persons claiming sickness benefit. If a person failed to satisfy those strict tests, he could lose the status of a person in receipt of benefit under paragraph 1.1 of section B8. If, however, he satisfied those tests, section B8 in its entirety applied to the effect that, if he remained sick beyond 104 weeks, paragraph 5 would come into play. The defenders had provided a benevolent sickness pay scheme and were contractually obliged to give effect to it. The consequence for the present case of Mahmud was that in construing and applying the Staff Manual it was necessary always to bear in mind the principle of good faith. It was unnecessary that the employee should actually have experienced loss of trust and confidence during the period of his employment; employee vulnerability and protection and the disparity of power between employer and employee were central considerations. The situation was analogous to that of the principle uberrimae fidei in contracts of insurance.

An implied term to the effect contended for by the pursuer was supported by the decision and reasoning of Sedley J. in Aspden which received support from Brompton per Staughton L.J. at para.320. Reference was also made to Harvey on Industrial Relations and Employment Law, para.A[262]-[270]. The defenders' approach involved seeking to imply a term to the effect that the provisions for dismissal by reason of redundancy took primacy over the sickness arrangements in section B8. There was no justification for this. The contract should be approached in a way which furthered the principle of mutual trust. In the field of employment law it was proper to imply an overriding obligation to that effect independent of and in addition to the literal interpretation of the actions which were permitted to the employer under the terms of the contract (United Bank Limited v Akhtar [1989] IRLR 507, per Knox J. at para.50). Reference was also made to Johnstone v Bloomsbury Health Authority [1992] 1 Q.B.333, Mihlenstedt v Barclays Bank International Limited [1989] IRLR 522, Scally v Southern Health Board [1992] 1 AC 294, Imperial Group Pension Trust Ltd & others v Imperial Tobacco Ltd [1991] 1 WLR 589, Bainbridge v Circuit Foil (UK) Ltd and Prestwick Circuits Ltd v McAndrew 1990 SLT 654. The defence to the merits of the action should be repelled. Alternatively, if the Court was against the pursuer's claim as presently formulated, he should be afforded an opportunity to aver a case that the manner in which he had been dismissed by reason of redundancy was in the particular circumstances inconsistent with the observation of the obligation of mutual trust and confidence.

The issues raised at the debate essentially concern, in my view, interpretation of the terms (express and implied) of the pursuer's contract of employment with the defenders. The offer of appointment with its attached Schedule and the Staff Manual have, together with the pursuer's acceptance of that offer, to be read as a whole. The Staff Manual (or at least section B of it, the only part produced in full at the debate) is expressed in language which may be characterised as informative or descriptive in nature. It is not expressed in the language of obligation. Plainly, of course, the Manual gives rise to rights and to obligations but it would be inappropriate to approach its interpretation as if it were, say, an item of legislation. Although some cross-references do occur, it is in general vain to look in provisions dealing with one aspect of the scheme (say, those in respect of sickness) for express qualifications in relation to another aspect (say, those in respect of redundancy) or vice versa and inappropriate to seek to draw inferences from the absence of any such qualifications. The purpose of the document is, it seems, in general to apprise the reader of the arrangements in place where, in the examples given, sickness or redundancy respectively arise, without introducing any complications in respect of their possible inter-relationship. Different aspects of the scheme may in some circumstances arise for consideration together; in such circumstances their inter-relationship will require to be addressed as a matter of interpretation, any apparent inconsistency being resolved by the same mechanism. The informative character of the Staff Manual also, in my view, makes it inappropriate to draw any rigid distinction of status between the text of a paragraph or a section and the terms of any note or notes appended to either. Each has, in my view, to be given similar force and effect, though particular words require to be construed according to their terms and their context. I construe paragraph 1.1 as read with its Note as meaning that under Benefit A payment of salary is paid for up to 104 weeks of invalidity, it being the defenders' general policy to retain an invalid employee on the staff for the period of 104 weeks although his post may be filled prior to the expiry of that period.

Central to Mr O'Neill's submission was the contention that the decision of the House of Lords in Mahmud had, against the background of earlier authority and of academic writing, ushered in a radically new approach towards the interpretation and application of employment contracts, with a strong emphasis on the vulnerability of an employee's position and on the trust owed by his employer to him. I do not so read the speeches of Lord Nicholls and Lord Steyn in that case. Mahmud came before their Lordships on the basis of an agreement that the contracts of employment of Mr Mahmud and of his colleague Mr Malik each contained an implied term to the effect that the bank, their employer, would not, without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. The argument proceeded on that footing and ranged round the type of conduct and other circumstances which could, or could not, constitute a breach of that implied term (Lord Nicholls at page 34A). The foundation for that agreed formulation of the implied term was Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666 per Browne- Wilkinson J. at page 670, subsequently followed in other cases including Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd. The question whether a term as so formulated was to be implied generally in contracts of employment being a pure question of law, their Lordships in Mahmud required, notwithstanding the agreement of parties in that case, to consider whether such implication was legally well founded (Lord Steyn at page 46F). They held that it was. The question then turned on its application to the circumstances experienced by Mr Mahmud and Mr Malik. Their Lordships, having considered a number of arguments to the contrary, held that it applied in the way contended for by the employees in that case. While it was, as Lord Steyn observed at page 46B, a change in legal culture which had made possible the evolution of the implied term of trust and confidence, I find nothing in the speeches of Lord Nicholls or Lord Steyn to suggest that their endorsement heralds the introduction of a radically new canon of construction special to employment contracts. I acknowledge, of course, that once a term, as in the accepted formulation, is recognised as implied in every contract of employment (including that of the present pursuer), the very existence of that term as a term of the contract may impinge on the interpretation of other terms, the contract requiring to be read as a whole. That is, however, somewhat short of the revolutionary change which Mr O'Neill urged me to deduce from Mahmud.

Mr Napier accepted that the contractual power to dismiss, ex facie unlimited otherwise than in respect of notice, was implicitly limited in certain respects. This limitation was, he suggested, the result either of a reconciliation of apparently inconsistent express terms or of the implication of a term.

I accept that the defenders' power to dismiss is subject to limitation. Where provision is, as here, made in the contract for payment of salary or other benefit during sickness, the employer cannot, solely with a view to relieving himself of the obligation to make such payment, by dismissal bring that sick employee's contract to an end. To do so would be, without reasonable and proper cause, to subvert the employee's entitlement to payment while sick. The same unwarranted subversion may occur if a sick employee were to be dismissed for a specious or arbitrary reason or for no cause at all. As Lord Coulsfield said in Adin at paragraph 19 (under reference to Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd) it is helpful to bear in mind that "the provisions dealing with benefits for disability are part of the remuneration package of the employee under the contract, not some form of charity on the part of the employer". Lord Coulsfield rejected an interpretation of the contract, urged on behalf of the employer in that case, the effect of which would have been that rights given to the employee could "be taken away at the employer's discretion, without cause" (my italics). A similar result may be arrived at by the process of analysis of implying a term which controls the exercise of an ex facie unrestricted discretion or power (See United Bank Ltd v Akhtar, especially per Knox, J. at paragraph 44).

The italicised words from Lord Coulsfield's Opinion are, in my view, important. It does not in my opinion follow from adoption of the approach endorsed by the House of Lords in Mahmud that where there is cause the employer may not exercise a power, including a power of dismissal, the practical effect of which is to bring to an end the entitlement of the employee to sickness pay.

It is accepted for the purposes of the present action that the pursuer's dismissal with effect from 30 November 1995 was by reason of redundancy. It is not, at least at present, suggested that the particular manner and circumstances in which he came to be identified or selected for redundancy were inconsistent with the terms of his contract. For present purposes it must be assumed that his identification or selection for redundancy was genuine and with cause, having regard to the whole circumstances then obtaining. On a sound construction of the contract as a whole (including its implied term of trust and confidence) dismissal in such circumstances is not, in my view, in breach of it, albeit a consequence is to bring to an end the pursuer's current entitlement to temporary sickness benefit and to cut off his prospective entitlement to permanent sickness provision. Nor is such action in such circumstances, in my view, in breach of the particular implied term "that the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee". The effect of Mr O'Neill's submission was that a person who for the time being was genuinely sick (and satisfied the defenders' strict measures for confirmation of that condition) was, because of the rights conferred on him presently and prospectively under section B8, immune subject to one exception from risk of dismissal; the exception was that such a person might be dismissed summarily for gross misconduct. Accordingly, an employee who, when a redundancy situation arose, happened to have recently been invalided with some relatively minor illness from which there were good prospects of a fairly early return to work would for that reason require to be excluded from the pool of employees from whom persons might be selected for dismissal on the ground of redundancy. That would be grossly disadvantageous to employees who happened to be well as against employees who happened to be ill at the material time. It is a result which the parties to this contract cannot reasonably be supposed to have intended when the contract was entered into in 1988 - at which time the pursuer was presumably in health. It is not a result which the Note to para.1.1 of section B8 compels; the matter of retention on the staff is there expressed in terms of intention, not in terms of commitment in all circumstances.

The particular implied term relied on by the pursuer (as narrated earlier) is derived from Aspden. That case, in my view, turned largely on its own facts. At paragraph 13 Sedley J. stated:

That evidence related both to the particular history of the plaintiff's contractual position and to the treatment of others who had fallen sick. Sedley J. (at paragraph 14) accepted a submission that the employer was at one with the plaintiff and the other senior staff "in regarding the income replacement scheme as a boon for senior staff with health problems and one with which the company would never consider interfering by arbitrarily exercising its power of dismissal". He went on to find that the plaintiff had been arbitrarily dismissed, that he was ill, not malingering and not doing a job on the side and that he was dismissed when ill. The adverb "arbitrarily" suggests the absence of any good and genuine cause; it is consistent with Lord Coulsfield's expression "without cause" in Adin. If on a proper analysis of Aspden the dismissal was held to be in breach of contract because it proceeded on no genuine ground or on the ground solely of the plaintiff's health problems, I have no difficulty with it. On the facts of that case it can readily be accepted that it was not open to the employer to exercise his power to dismiss an employee who was sick merely because he was sick or for no reason whatever. I have more difficulty with the penultimate sentence of paragraph 15 where Sedley J. says:

In so far as Sedley J.'s conclusion is to be understood as laying down as a general proposition that gross misconduct is the only circumstance in which the employer could lawfully dismiss an employee in receipt of sick pay and with the prospect of permanent sickness provision, I must respectfully disagree. No question of a redundancy situation, however, arose in that case and, although redundancy is mentioned in paragraph 24 in the context of the computation of damages, the possibility of genuine dismissal by reason of redundancy was not, it appears, considered by Sedley J. in the context of interpretation of the power of dismissal. I do not accept that the particular implied term sought to be drawn by the present pursuer from Aspden is well founded in law.

In my view, on a sound construction of the pursuer's contract read as a whole, including the implied term of trust and confidence, the defenders were, notwithstanding that the pursuer was as at 30 November 1995 absent from work on grounds of sickness and properly in receipt of full salary under section B8, entitled to dismiss him by reason of redundancy. I reach this conclusion not by according "a higher priority" to the employer's right of dismissal than to the employee's rights and prospective rights but by declining to afford to the employee's rights under section B8 the absolute character urged by Mr O'Neill. I should add, however, that I do not accept Mr Napier's submission that there is a relevant distinction between the situation (as in Aspden and Adin) where the benefit scheme is covered by insurance and the situation (as in the present case) where the employer carries that burden directly. Nor do I regard the circumstance that the pursuer has received a redundancy payment as relevant, save possibly in respect of any hypothetical calculation of damages.

The pursuer's action as presently framed is, in my view, accordingly irrelevant and, subject to any amendment of his pleadings, will fall to be dismissed. Mr O'Neill indicated that, if I were of that view, he would wish to have an opportunity to consider whether an amendment might be proposed. Mr Napier did not oppose that course. I shall, accordingly, without pronouncing a further order at this stage, put the case out By Order on Wednesday 2 September 1998 at 3.00pm for discussion of further procedure in light of this Opinion.

Act: O'Neill

Balfour & Manson

Alt: Napier

Mackay Simon

13 August 1998