United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MISS E SMITH (of Counsel) Instructed by: Messrs Salans Solicitors Clements House 14-18 Gresham Street London EC2V 7NN
For the Respondent	MR N HART (Solicitor) Messrs Clarke Willmott No. 1 George Square Bath Street Bristol BS1 6BA

SUMMARY

Unfair Dismissal

Contract of Employment

The Tribunal's approach to the question whether a potentially fair reason was established was erroneous. However, having regard to the procedure adopted by the employer, the finding of unfair dismissal was inevitable and correct.

The appeal was allowed only to the extent of declaring that a fair reason was established and giving guidance on the way in which to approach the issue of compensation.

The words "in the opinion the Board of Directors" in the context of clause 13.8 of the Service Agreement refer to the opinion of the full Board, not a management committee.


 


HIS HONOUR JUDGE RICHARDSON

1. This is an appeal by the Bristol Golf Club Limited hereafter "the Company" against a Decision of the Employment Tribunal sitting in Bristol entered in the Register on 14th May 2004. The Tribunal upheld claims by Mr Nicholas Holmes that he was wrongfully and unfairly dismissed from his employment as the Company's Chief Executive.
2. Two issues arise. One relates to the construction of clause 13.8 of Mr Holmes' written Service Agreement dated 21st February 2000, in particular to the meaning of the phrase "in the…opinion of the Board of Directors" in that clause. The other relates to the Employment Tribunal's findings on the question of unfair dismissal.

The Service Agreement

3. The Service Agreement appointed Mr Holmes as Chief Executive and Director. He was defined in the Agreement as "the Executive". The Agreement provided that he was responsible for the day to day management of the Company: clause 2.1. The term of the Agreement is defined as follows:

3.1 The appointment under this Agreement and the Executive's period of continuous employment with the Company shall be deemed to have commenced on 31^st January 2000 and shall continue (subject to earlier termination as provided in this Agreement) unless and until terminated by either party giving to the other not less than 3 month's prior written notice to expire at any time during the period of one year from the said commencement date and thereafter by giving not less than 6 month's written notice."

4. The Service Agreement contained certain definitions. By clause 1.1:

"1.1 In this Agreement the following words and expressions shall unless the context otherwise requires have the following meaning:-

"Board" means the board of directors of the Company from time to time and includes any committee of the Board duly appointed by it."

5. By clause 2.2 the duties of Mr Holmes were defined. It was his duty to devote the whole of his time attention and skill to the duties of his office, and to perform his duties faithfully and diligently. The last sentence of Clause 2.2 is one example of how the words "the Board of Directors" and "Board" are used in the Agreement. Other examples will be found in Clause 2.5, 2.8, 6.1, 7, 8, 11, 12 and 17. Clause 13 in particular is headed "Summary Termination". It reads (so far as most material to this case) as follows:

"The Company shall have the power to terminate with immediate effect the Executive's employment by notice in writing without compensation in any of the following events, namely:-

13.4 if he commits nay act of gross misconduct; or

13.5 if he is guilty of any conduct which in the reasonable opinion of the Board brings him the Company or any Associated Company into disrepute; or

13.6 if he is convicted of any criminal offence (excluding an offence under road traffic legislation for which he is not sentenced to any term of imprisonment whether immediate or suspended); or

13.7 if he commits any act of dishonesty whether relating to the Company, any Associated or Subsidiary Company, any of its or their employees or otherwise; or

13.8 if he is in the reasonable opinion of the Board of Directors incompetent in the performance of his duties; or"

History

6. Although the Service Agreement is dated 21 February 2000 it is clear that Mr Holmes actually began work on 31 January 2000. He was required to work closely with a management board. The Company was a new venture, operating a newly constructed golf course and functioning also in the leisure industry. The Company planned to make substantial operating profits from 2001 onwards, the aim being to float the Company's shares in 2005. It is common ground that there were early problems; whether they are to be described as poor drainage or abnormal weather conditions may not greatly matter. Profit targets were not met. The Tribunal summarised a great deal of documentary evidence laconically:

"whilst profits did not meet the Board's expectations they were reported by Mr Holmes to be in line with other operators".

7. In February 2003 a meeting described as an appraisal meeting was held in London, attended by Mr Holmes and by some members of a Management Board. The minutes of that meeting were signed on 7 March 2003. The Tribunal records that the minutes were not supplied to Mr Holmes, but does not say expressly whether they are accurate. A letter to Mr Holmes on the same day refers to the meeting and sets out matters giving concern to the Management Board. The letter includes concerns along the following lines. Firstly, there was a concern that the Company was under performing against financial targets. The point was made to Mr Holmes that he had given and endorsed financial projections to the Board and also to shareholders and that it was not acceptable materially to miss those targets especially when they were reviewed on a month to month basis. It was pointed out that the year ended 31 December 2004 was the second year in which this had occurred. A concern was also voiced relating to substantial delay in implementing Management Board decisions. The point was made also that despite not insubstantial experience within the industry, it was felt that Mr Holmes was not being as innovative, imaginative or proactive as he could be to ensure the Company's profitability and explore ideas and sources of income. The letter contains criticisms relating to Mr Holmes' capability as a Chief Executive. The complaint is not simply that he was unsuccessful.
8. The Tribunal found it to be clear, from evidence of members of the Management Board, that they had decided by February 2003 that Mr Holmes' employment as chief executive was to be terminated, though he might be re-engaged as general manager which in their view would be a different and less responsible position. At the conclusion of the letter dated 7 March 2003 the Company said that only that the senior management structures of the Company might have to be reviewed.
9. On 7th August 2003 Mr Collier, the Chairman of the Company, wrote to Mr Holmes. He said the Company was not going to be able to meet a target towards which it had been working since April. He said that the Company wished to discuss with Mr Holmes his willingness to accept the post of general manager. He asked for a response before the next meeting of the management board on 5th September. On 20th August Mr Holmes wrote asked for details of the new position and time to consider it. However, at the Management Board meeting on 5th September Mr Holmes was dismissed. The Tribunal found that the management had already decided to dismiss Mr Holmes before he went into the meeting. He was told when he joined the meeting that he could resign and receive a cheque for £50,000 or be summarily dismissed. He said he would not resign. He was summarily dismissed by Mr Collier.
10. On 8th September it appears that a meeting of the Board of Directors was held. Mr Holmes although he remained a Director, was not invited. Following that meeting Mr Collier wrote to Mr Holmes confirming that the Board had unanimously decided to terminate the Service Agreement "pursuant to Clause 13.8".

The course of proceedings

11. Mr Holmes complained of wrongful dismissal and unfair dismissal. The Company's Notice of Appearance stated the reason for dismissal in the alternative. Capability, conduct and some other substantial reason were all pleaded: see paragraph 7. The Notice of Appearance after dealing with events prior to dismissal then set out allegations of misconduct which occurred after the dismissal and further allegations of misconduct which occurred before but were discovered after the dismissal: see paragraphs 19-21. The Notice of Appearance asserted that it would be just and equitable for any basic or compensatory award to be reduced on the grounds of Mr Holmes' own conduct before the dismissal. It said that Mr Holmes would have been dismissed for gross misconduct if the Company had been aware of it. The Notice of Appearance scarcely dealt with wrongful dismissal, except to say that the dismissal was in accordance with the terms of the Contract of Service. It did say, in passing that on 5 September Mr Holmes was referred to clause 13.8 and told the Management Board formed the opinion that he was not competent to carry out the duties expected of him.
12. The Notice of Appearance did not seek to justify wrongful dismissal by reference to the allegations of misconduct discovered afterwards. That is why the Tribunal were able to deal with what they describe as "liability" in respect of both wrongful and unfair dismissal. The allegations of misconduct discovered afterwards have been left to be dealt with as part of the question of remedy. The remedy claimed in this case is compensation.
13. At the hearing the Tribunal summarised the company's case as follows:

"The Respondent admits the dismissal but maintains it was on the grounds of capability, a potentially fair reason, and that it acted reasonably in all the circumstances in treating it as a justifying dismissal."

We are told, and we accept, that at the hearing the Company's witnesses said that they dismissed Mr Holmes because he was not up to the standard of competence they expected of a chief executive. We quote a section from the statement of Mr Cockerell (at paragraph 116):

"It was our collective view that the Applicant had not performed in accordance with his contract and that he was not competent to do so...We felt that notwithstanding the credentials which he had presented at the time of his appointment he did not have the skills to be a chief executive. He had the skills to be a general manager and was able to build up a team of people around him but did not have the drive to press on and achieve that which we had required him to do. he Management Board were constantly giving directions as to what should or should not be done as opposed to a chief executive carrying out that role and the management board simply receiving progress reports and approving capital and income expenditure."

The Tribunal's decision

14. It is material to record that the Tribunal heard evidence from Mr Holmes and from three members of the Management Board including Mr Cockerell from whose statement we have quoted. It said that it was "satisfied that none of the witnesses were seeking to mislead us". The Tribunal having made primary findings of fact, some of which we have referred to above, gave the following reasons for its decision. We have added paragraph numbers:

"DECISION

1. We accept that in dealing with a senior employee it is not always appropriate to follow the detailed disciplinary procedure that may be adopted for less senior employees. However, this cannot justify the summary dismissal of any employee, without him being put on notice of complaints against him and given an opportunity to state his case.

2. In respect of the Unfair Dismissal it is clear that the Respondent took the decision to dismiss before meeting with the Applicant, who had been given no warning in terms that would be objectively seen as such that dismissal was being considered

3. He had been told that his position as Chief Executive was under review and that he was to be offered a position as General Manager. His request for details of that position was ignored and, having been dismissed at the commencement of the meeting on 5.09.03, he was told when he asked, that his dismissal was complete and no such option existed. His dismissal was on the grounds of capability but there is no sustainable evidence that he was incapable of fulfilling his role. He may have been unsuccessful in the eyes of his Co-Directors but that is a different matter to capability. The respondent has not established a potentially fair reason within the terms of Section 98 and the dismissal is found to be unfair.

4. With regard to the claim for wrongful dismissal, we are satisfied that there exists in all contracts of employment an implied term of trust and confidence - in effect a duty of good faith. We are surprised that the applicant should have entered into a service agreement containing the provisions of clause 13(8) but accept that he did so.

5. We have therefore to consider the provisions of that clause and the way in which the Respondent sought to implement it. The clause required that the Applicant should, in the reasonable opinion of the Board, be incompetent in the performance of his duty. It is questionable whether the Board can form such a reasonable opinion in the absence of hearing from the Applicant and it is questionable whether the Board meeting, which purported to reach that decision, was properly convened. Such considerations do not, however, have importance in the case as we have found as a fact that the Applicant was dismissed on 5.09.03 and that his supposed suspension and purported verification by the Board followed the dismissal which had been effected without any such resolution of the Board. The Applicant was, accordingly, wrongfully dismissed.

We find in favour of the Applicant on both claims"

Wrongful dismissal

15. It is convenient first of all to deal with the question of wrongful dismissal. It is important here carefully to define the ground of appeal. There is rightly no appeal against the finding that the dismissal took place 5 September. It is rightly not argued that a retrospective opinion formed by the full board after dismissal could suffice for the purposes of Clause 13.8. The argument is that for the purposes of Clause 13.8 the opinion that Mr Holmes was incompetent did not need to be the opinion of the board of directors. It was sufficient if it was the opinion of the Management Board. That is said to flow from the definition of the Board in Clause 1. The Tribunal plainly did not take this view although the matter may not have been the subject of much argument. The Tribunal took the view that the opinion had to be that of the full board. This is the point in our judgment, which the Tribunal are making when they refer to the absence of any resolution of the board on 5 September. The point they are making is that it is the full board which did not meet until 8 September which was required to make the decision under Clause 13.8.
16. In our judgment the term "the Board of Directors" in Clause 13.8 does mean the full board of directors. Clause 13.8 envisages an opinion of the full board reached at a duly constituted meeting. It does not mean any committee of the board. There are two ways of approaching the construction of Clause 13.8.
17. If we approach it first of all purposively and having regard to the commercial context of the agreement, we would have no doubt that, even if the phrase "the Board of Directors" includes a committee of the Board for some purposes, the context of clause 13 would require the phrase to refer only to the Board of Directors properly so-called. We note that the definition in Clause 1.1 is applicable "unless the context otherwise requires".
18. The decision to dismiss a chief executive summarily on grounds of incompetence is in our judgment, one which in any properly run company would be a decision for the Board of Directors. If the argument for the Company is correct, any duly appointed committee of the Board would have that power. It is easy to see that a duly appointed committee might have power (for example) to sanction holidays or the like. But it would in our judgment require the clearest words to dilute clause 13.8 and permit the delegation to a sub committee of a fundamental decision on the competence of a chief executive. Clause 13.8 is onerous, permitting summary dismissal. The countervailing safeguard would in our judgment be understood by all concerned as being that nothing other than the opinion of the full Board would suffice.
19. If alternatively we were to approach the matter literally we consider the same conclusion would be reached. We are not confident about a literal interpretation of the Service Agreement, bearing in mind that the phrase "the Board" and "the Board of Directors" are used in different contexts for no obvious policy reason. However, the definition of "the Board" is "the board of directors….and includes any committee of the Board". Therefore the opinion has to be the opinion of the board of directors including any committee of the Board. We are not satisfied that Clause 13.8 can be read as meaning merely the opinion of any committee of the Board.
20. For those reasons, in our judgment once the Tribunal had reached its finding that the dismissal was affected by the Management Board on 5 September it was correct to conclude that Clause 13.8 was not satisfied by the opinion of the Management Board reached on that day.

Unfair dismissal

Submissions

21. On behalf of the Company Miss Smith attacks the finding of the Tribunal that no potentially fair reason for dismissal had been established by the Company. She points out that a reason for dismissal is set of facts known to the employer or set of beliefs held by the employer which caused him to dismiss the employee: see Abernethy v Mott, Hay and Anderson [1974] IRLR 213 per Cairns LJ at paragraph 13. She says that the reason relied on by the Respondent was capability, a potentially fair reason within section 98(2). She points out that the Tribunal found the witnesses to be honest and yet gave no reason for rejecting their evidence, that reason for dismissal related to capability.
22. She further challenges the Tribunal's decision that there was no sustainable evidence that Mr Holmes was incapable of fulfilling his role. She has taken us through some of the evidence that was before the Tribunal. She says that the Tribunal were wrong to describe that evidence as unsustainable. She further submits that the Tribunal erred in law in finding the procedure to be unfair. She submits that the Tribunal ought to have considered the process as a whole, found that sufficient concerns were expressed to Mr Holmes and found it was reasonable to dismiss Mr Holmes in the manner in which he was dismissed having regard in particular to his senior position as a chief executive. She referred us to cases which indicate that different considerations may apply where to the questions of procedure were a senior manager is dismissed: see James v Waltham Holy Cross UDC [1973] IRLR 202, McPhail v Gibson [1976] IRLR 254 and Cook v Thomas Linnell & Sons Ltd [1977] IRLR 132.
23. On behalf of Mr Holmes, Mr Hart submits that the dismissal was plainly unfair. It is the plain unfairness of the dismissal on which the Tribunal has, he says, has concentrated in paragraphs 1 and 2 of the Decision which we have quoted. He interprets paragraph 3 of the Decision in a different way from Miss Smith. He says that paragraph 3 is part of the Tribunal's reasoning in relation to section 98(4) of the 1996 Act. He accepts that it is not usual in such a case to refer to the absence of a potentially fair reason, but submits this is what the Tribunal meant. He then submits that there was evidence upon which the Tribunal could reach the conclusion that it did and that no error of law is demonstrated by it.

Our conclusions on unfair dismissal

24. We agree Miss Smith's criticisms of paragraph 3 of the Decision. Appellate Courts have often pointed out the importance of structured approach by a Tribunal to its reasoning. Errors are avoided if a structured approach is taken. The provisions of section 98 lend themselves to a structured approach. A wise Tribunal will quote them and follow them in its process of reasoning.

"98 General

(1) In determining for the purposes of this Part whether the dismissal of an employee is fair or unfair, it is for the employer to show-

(a) the reason (or, if more than one, the principal reason) for the dismissal, and

(b) that it is either a reason falling within subsection (2) or some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which the employee held.

(2) A reason falls within this subsection if it-

(a) relates to the capability or qualifications of the employee for performing work of the kind which he was employed by the employer to do,

(b) relates to the conduct of the employee,

(c) is that the employee was redundant, or

(d) is that the employee could not continue to work in the position which he held without contravention (either on his part or on that of his employer) of a duty or restriction imposed by or under an enactment."

(3) In subsection (2) (a)

(a) "capability" in relation to an employee, means his capability assessed by reference to skill, aptitude, health or any other physical or mental, quality, and

(b) "qualifications", in relation to an employee, means any degree, diploma or other academic, technical or professional qualification relevant to the position to be held.

(4) Where the employer has fulfilled the requirements of subsection (10, the determination of the question whether the dismissal is fair or unfair (having regard to the reason shown by the employer)-

(a) depends on whether in the circumstances (including the size and administrative resources of the employer's undertaking) the employer acted reasonably or unreasonably in treating it as a sufficient reason for dismissing the employee, and

(b) shall be determined in accordance with equity and the substantial merits of the case."

25. It is important to follow a process of reasoning through section 98 both so that the decision may be understood by the parties and an appellate court and also so that it may be applied in the context of a subsequent remedies hearing. If no potentially fair reason has been found, there can be no question of any argument at the remedies hearing that the dismissal would have taken place in any event for the reason in question. If a potentially fair reason has been found, such an argument may be possible. It will depend upon the Tribunal's findings when considering section 98(4). This Tribunal has not approached its reasoning in any structured way. It is at paragraph 3 (indeed only in second half of that paragraph) that it approaches what was in reality the first question for it to consider namely, whether the company had had established a reason for the dismissal of the kind set out in section 98(1). The reason relied on, was said fall within section 98(2) (a). The company's case we are satisfied, was that Mr Holmes was dismissed because he did not have the qualities and aptitude for a chief executive of the business. So, if true, the reason fell within section 98(2) (a).
26. The Tribunal then had to consider whether the Company had satisfied it that the reason given was the true reason for dismissal. Here paragraph 3 of the Decision is difficult to understand. The Tribunal record that the dismissal was on the ground of capability. They seem as we have said, to have found the Company's witnesses to be honest. So they do not seem to have been saying that capability was a pretext for dismissal. It is therefore difficult to see why they say the Company has not satisfied them of a potentially fair reason.
27. There seem to be two threads to the Tribunal's reasoning. Firstly, they say that the fact that he may have been unsuccessful in the eyes of the directors is a different matter from capability. No doubt it is possible to think of cases where lack of success may be a reason quite distinct from questions of capability. But in many cases the two will be linked: see Cook v Thomas Linnell & Sons Ltd (1977) IRLR 132 at paragraph 13. Here the directors were saying that that the Company's lack of success was bound up with Mr Holmes' qualities and aptitude as a chief executive. If that was genuinely the directors' view, then there was potentially a fair reason for dismissal.
28. Secondly, the Tribunal say there is no sustainable evidence that Mr Holmes was incapable of fulfilling the role. If the Tribunal mean that there was no evidence at all, they are wrong. There was evidence. We have not cited all of it, but we have cited the statement of Mr Cockerell and the letter in February. If the Tribunal mean there was evidence, but they did not consider that the Company's conclusion was reasonable, then they are confusing the existence of the reason (section 98(1)) with subsequent questions which might arise as to whether it was reasonable to dismiss (section 98(4)). This part of the Tribunal's reasoning is, in our judgment, flawed and inadequate.
29. We take the view, which is most consistent with the wording used, that the Tribunal must have taken an unduly narrow view of section 98(2)(a). In our judgment the Tribunal, having made no criticism of the honesty of the employer's witnesses, was wrong to conclude that the employer had no established a potentially fair reason. Moreover the Tribunal then did not go on to consider whether the employer was reasonable for the purposes of section 98(4) except in procedural terms. In our judgment, bearing in mind the tribunal's conclusions as to the witnesses, the only conclusion upon which the tribunal could have come, was that a potentially fair reason had been established for the purposes of section 98(1).
30. Does it follow from this that the tribunal's conclusion namely, that there was an unfair dismissal was wrong? In our judgment it does not. In our judgment paragraph 1 of the Tribunal's reasons is unassailable. Not only does it contain no error of law, it is plainly and unarguably right, and in our judgment the reason given in paragraph 1, if it stood alone, would justify the conclusion that this dismissal was unfair. There may be circumstances in which senior employees can be dismissed on grounds relating to capability without a formal hearing: Cook v Thomas Linnell & Sons Ltd was such a case, though it should be noted that the employer in that case was offering the employee a different post upon reasonable terms. But as the Tribunal correctly point out, the Company was dismissing Mr Holmes summarily. On 5th September they were not offering him another job. What they did was to bring him to a meeting which was a fait accompli, and tell him without any prior warning and any chance to state his case or appeal that he must resign and take £50,000 or be dismissed. This so far departs from all modern standards of equity that it is in our judgment, really unarguable that this dismissal was fair. It was in our judgment plainly unfair, and the Tribunal did not err in law in reaching this conclusion.
31. We suspect that the Tribunal may have focused on the procedural aspects of dismissal and dealt hastily with the underlying reason and the question of capability because the procedural aspects of the dismissal were so obviously flawed and so likely to be determinative of its decision.
32. The question which we have debated with the parties and anxiously considered is how to reflect these conclusions in the future of this litigation. One extreme would be simply to uphold the unfair dismissal decision. That would or might leave the Tribunal when considering the question of remedy to proceed on the basis that no fair reason had been established. That as we have said is not our conclusion. The other extreme would be to allow the appeal and direct a full re-hearing. That would be an unfortunate outcome where this Appeal Tribunal is satisfied that the result, the finding of unfair dismissal, was correct. We bear in mind that there is in any event to be a remedies hearing which will have to deal with the remaining allegations of misconduct. It would be unfortunate if, in addition, it was necessary to start from scratch.
33. We think that the right course is to declare that the Company established a potentially fair reason for the purposes of section 98(1), to allow the appeal to that extent only, otherwise to dismiss the appeal, and to give the following guidance to the Tribunal which may if it is available be the same Tribunal when it considers the question of remedy.
34. The question of compensation should not be considered on the basis that the Company failed to establish a potentially fair reason. It should be considered on the basis that the Company established a potentially fair reason, but the decision to dismiss was unfair for the purposes of section 98(4) having regard to equity and the substantial merits of the case, since no fair procedure was followed at the time of dismissal for the reasons given in the Tribunal's decision.
35. The remedies hearing will no doubt focus on the remaining issues relating to conduct. But if it is argued that Mr Holmes would in any event have been dismissed at some point for reasons relating to his capability, or for that matter for reasons to do with the Company's finances, these will be matters for the Tribunal to consider and to make appropriate findings on, untrammelled by an earlier conclusion that the Company had not established a potentially fair reason.
36. We emphasise again that the Tribunal considering this matter further should define the issues carefully, make its findings of fact carefully and apply them issue by issue. For those reasons, therefore, as we have said the appeal will be allowed only to the extent of declaring that the company established a potentially fair reason, otherwise it will be dismissed.