The Implied Duty of Trust Concerning Contracts of Employment - Essay Example

The Implied Duty of Trust with Reference to Contracts of Employment I. Introduction UK courts have gravitated toward the position that a duty of trust and confidence is automatically implied into the terms of a contract of employment.1 This emerging concept dictates that the employer is no longer at liberty to treat employees as one might a disposable commodity.2 Although the duty of implied trust and confidence is a mutual one, the breadth of decided cases tend to support the view that the duty is primarily one for the employer leaving the employee the primary beneficiary of the implied duty of trust.3 This is so although the implied duty of trust has been used and applied to a number of different scenarios. It would appear from the decided cases, that the primary purpose of the implied duty of trust is to ensure that the employer acts in good faith and does not unfairly or inequitably exercise his/her power under the employment contract.4 This paper explores the emerging concept of the implied duty of trust and confidence in the employment contract and argues that it is a significant development, used for the purpose of regulating and restraining the employer’s conduct in asserting his/her power under the employment contract. II. The Emergence of the Implied Duty of Trust and Confidence The implied duty of trust is a relatively new concept of employment law.5 The duty itself is most likely founded on the fundamental principle of co-operation required of parties to a contract generally.6 It is also part of the history of employment law and its shift away from the underlying tenet of the preexisting master/servant characterization of employment relationships. In this regard, the emerging duty of trust can be detected in Lord Slynn’s judgment in Spring v Guardian Assurance Plc [1995] 2 AC 196 in which Slynn J said: The changes which have taken place in the employer/employee relationship, with far greater duties imposed on the employer than in the past, whether by statute of by judicial decision, to care for the physical, financial and even psychological welfare of the employee.7 The duty of mutual cooperation merely dictated that parties to a contract tailor their conduct so as not to undermine the terms and conditions of the contract.8 In other words the duty of mutual cooperation did not impose upon the parties a positive duty. The implied duty of trust which was developed from the duty of mutual cooperation does impose upon the parties a positive duty to take specific action. For example in Scally v Southern Health and Social Services Board [1992] 1 AC 294 the court held that the implied duty of trust and confidence imposed upon the employer a duty to inform employees of their rights to acquire benefits under a pension scheme.9 The classical authority however, is found in the case of Malik v Bank of Credit and Commerce International [1997] IRLR 462. In this case the implied duty of trust and confidence was described by Lord Steyn as: The 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 the employer and employee.10 In Malik, the employees had been dismissed on the grounds that their respective positions had become redundant. The employees alleged that their employer, the defendant bank, had violated the terms of the implied duty of trust and confidence by conducting the bank’s business corruptly. The employees argued that as result of their long tenure with the bank, their prospects for future job acquisition had been tainted by the bank’s stigma which was not only associated with the bank but former employees as well. It was held that the bank’s dishonesty, although aimed at the bank’s clientele, would function to compromise the trust and confidence implicit in the employment relationship.11 The Malik decision demonstrates just how far-reaching the implied duty of trust and confidence have emerged. The implications for the employer are that the implied duty of trust and confidence is particularly significant and onerous. Employers are required not only to treat employees in such a way so as not to undermine the implied duty of trust and confidence, but they must also conduct the day to day business in such a way as to ensure that the trust and confidence between the employee and employer is not compromised. The employer’s duty to conduct its day to day business in a manner conducive to the implied duty of trust and confidence does not require that the employer disclose negative conduct to the employee. It was held in Bank of Credit and Commerce International SA (in liq) v Ali (No.2) [1999] 4 All ER 83, that if the fraudulent conduct complained of was serious enough, it could constitute a breach of the implied duty of trust and confidence. However, it was the conduct itself that constituted the breach, not the failure to disclose the conduct.12 Essentially, the implied obligation of mutual trust and confidence evolved to regulate the conduct of employment relationships “in all its aspects”.13 A number of cases firmly established the existence of the implied duty of trust and confidence in the regulating and management of employment contracts. Over the last thirty years or so, the implied duty of trust owed by the employer to the employee has expanded.14 Even so, there are a number of unresolved issues arising out of the nature of the implied duty.15 III. The Nature and Content of the Implied Duty of Trust and Confidence As previously determined the implied duty of trust and confidence has been described by the House of Lords in the Malik case. Essentially, the implied duty functions to fill in gaps existing in the terms of the employment contract so that issues arising, that were not contemplated by the content of the actual employment contract are dealt with expeditiously and judiciously.16 To this end, the mutual duty of trust and confidence has been implied in a number of cases where the employer and the employee’s conduct are an issue, although in most cases, the employer’s conduct is the central issue. The implied duty of trust and confidence is most frequently applied in cases of unfair dismissal.17 Other applicable cases are the employer’s failure to comply with proper procedures for disciplinary action, exposing or permitting the employee to suffer stress, failure to provide healthy work systems, unfair allegations of impropriety, failure to provide the employee with information and advice, improper management of the company, discrimination, remuneration, sick pay and a number of other situations that impact the employee.18 Clearly the list of circumstances in which the employment relationship is subject to the implied duty of trust and confidence is exhaustive. Some of the situations in which the duty of implied trust is applied explain the content and nature of the duty. However, it was the issue of unfair dismissal that gave birth to the concept of an implied duty of mutual trust and confidence. It is from here that the nature and content of the implied duty of mutual trust and confidence is best understood in terms of the employment relationship. a. Unfair Dismissal Initially, unfair dismissal legislation only applied to express dismissal.19 Amendments culminating in the Employment Rights Act 1996 expanded the definition of unfair dismissal to include conduct on the part of the employer that conferred upon the employee the right to terminate the employment relationship.20 These legislative developments led to some controversy in the courts and among tribunals as to the proper test to be applied to an employer’s conduct in the context of constructive unfair dismissal. Essentially, what followed was a judicial process in which implied terms were formulated identifying what constituted “expulsive or repudiatory conduct” capable of being interpreted as constructive unfair dismissal on the part of the employer.21 It is against this background that the implied duty of trust and confidence emerged. In cases where the employer’s conduct was such that it was interpreted as constructive unfair dismissal, courts and tribunals would typically describe the conduct as a violation of the employee’s confidence in the working relationship. This line of thinking became a recurring theme in the context of constructive unfair dismissal cases.22 A preexisting principle in employment law was that the employee was under a specific duty of “co-operation and fidelity to employers”.23 However, that duty was reconstructed in Courtaulds Northern Textiles Ltd v Andrews [1979[ IRLR 84 to mean a mutual duty of trust and confidence. In this case the Employment Tribunal in determining a claim founded on unfair dismissal stated that: Employers would 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 the parties.24 The Court of Appeal confirmed the position taken by the Employment Appeal Tribunal in Courtaulds in its decision in Woods v WM Car Services (Peterborough) Ltd.[1982] ICR 193. It is argued that the implied duty of trust was formulated and developed as a means of providing employees with a remedy in cases where they have been unfairly dismissed. The rationale is that employees who have been “squeezed out” by employees would have a viable claim for constructive dismissal in circumstances where the employer breached an implied term and thereby repudiated the terms of the contract of employment.25 By formulating the implied duty of trust and confidence the employee could avail itself of legislative provisions pertaining to unfair dismissal.26 The House of Lords expounded upon the implied duty of mutual trust in Malik v Bank of Credit and Commerce International. This case was entirely significant for its reversal of the rule established in Addis v Gramophone Co. Ltd [1909] AC 488. The Addis case essentially established the rule that prohibited the recovery of damages in respect of the manner in which the wrongful dismissal occurred or against the recovery of damages for harm to the reputation as a result of unfair dismissal.27 Although the Malik case was primarily concerned with the employer’s conduct during the employment relationship, the House of Lords in obiter indicated that damages could be recovered on the basis of the manner in which dismissal occurred.28 By merely provided for damages for the manner in which an employer dismisses the employee, the common law is fortifying and strengthening the concept of the implied duty of trust within the scope and range of the employment relationship. The consequences of the Malik decision was a further expansion of the implied duty of trust. It rendered the duty particularly important to the issue of unfair dismissal. As a result of the implied duty of trust and confidence the employer’s conduct has become under increasing scrutiny. For example in Gunton v Richmond-Upon-Thames London Borough Council [1980] ICR 755 the implied duty of trust was extended to apply to the employer’s capricious conduct in the manner in which it conducted disciplinary proceedings.29 In Gogay v Hertfordshire County Council [2000] IRLR 703 the manner in which an employer suspended an employee was said to be a breach of the implied duty of trust.30 In Clark v Nomura International Plc [2000] IRLR 766, the implied duty of trust was also applied to the manner in which the employer exercised managerial decisions.31 It is therefore hardly surprising that there was an expectation that the common law would expand so as to confer upon employees the right to seek damages for not only the manner, but the grounds for dismissal.32 The emergence of the Johnson rule in Johnson v Unisys [2003] 1 AC 518 functioned to contain the damages recoverable for unfair dismissals, although it did not downplay the implied duty of trust in the employment relationship. In the Johnson case the employee attempted to recover damages on the basis of psychiatric injuries sustained in the aftermath of dismissal alleged to have occurred by virtue of unfair proceedings. Ultimately, the House of Lords ruled that it was not permitted to allow damages for the manner in which the unfair dismissal occurred on the basis of a breach of the implied duty of trust. Parliament had placed a cap on those damages and it was not up to the House of Lords to redefine the measure of damages.33 Even so, Lord Hoffman commented that: It has been recognized that a person’s employment is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identify and a sense of self-esteem. The law has changed to recognize this social reality. Most of the changes have been made by Parliament…And the common law has adapted itself to the new attitudes, proceeding sometimes by analogy with statutory rights.34 In explaining the employment relationship and the significance of the implied duty of trust, the House of Lords judgment explained that the current discourse on employment law required the balancing of the respective: Interests of the employers and the employees, with proper regard not only to the individual dignity and worth of the employees but also to the general economic interest.35 Lord Hoffman went on to explain that the preexisting rule in the Addis case did not compromise the implied duty of trust and confidence in the context of dismissals.36 From a policy perspective, Lord Hoffman argued that permitting recovery of damages for the manner in which an employer dismissed an employee under the umbrella of the implied duty of trust would only be “overly intrusive and inconsistent with established principles of employment law”.37 Obviously these policy considerations had in mind the well established principle of employment law that the employer was and remains at liberty to dismiss any employee at will. Lord Hoffman went on to state that by opening up the possibility of recovering damages for the manner in which an employee was dismissed would open up the floodgates, exposing the employer to a liability that “might be grossly disproportionate to the employer’s degree of fault”. 38 The Johnson rule appeared to have placed considerable restraints on the interpretation of the implied duty of trust. Collins reaction to the Johnson decision reflected disappointment in the extent to which the implied duty of trust could be recognized and enforced. Collins noted: Any hopes that that the common law of wrongful dismissal will be adjusted to reflect modern perceptions of how employees should be treated fairly and with dignity must be thrown on the bonfire of innocent carcasses.39 At is turns out however, the Johnson rule was not the decisive authority. Subsequent cases suggested a greater reliance on the implied duty of trust in the context of unfair dismissal, lending weight to the serious nature of the implied duty of trust. In Eastwood v Magnox Electric Plc [2005] 1 AC 503 the House of Lords considered the difference between the ability to recover damages for the manner in which dismissal was conducted and the ability to recover damages in respect of the conduct that gave way to the dismissal. In this case, the House of Lords conferred upon the employees the right to pursue a claim for psychiatric harm that arose out of the employer’s failing to follow protocol in the implementation of the disciplinary process.40 Even so, the House of Lords ruled that such damages would only be permitted in extraordinary cases where the economic loss was a direct result of the conduct leading up to the dismissal. In other words the claimant could recover loss as a result of suspension prior to the dismissal and losses associated with psychiatric harm sustained by virtue of conduct leading up to the dismissal.41 The House of Lords went on to note that the distinction between damages for dismissal which was fixed by statute and the common law provision for damages arising prior to but related to the dismissal made little or no sense. The House of Lords stated: It makes little sense, for instance, that the implied obligation to act fairly should apply when an employer is considering whether to suspend an employee but not when the employer is proposing to take the more drastic step of dismissing him.42 Lord Nicholls recommended that the implied duty of trust and confidence should also apply to dismissals regardless of how “desirable it may be”, the implied duty of trust and confidence could not be applied to dismissal cases directly because of an unfortunate overlap with the legislative provisions for unfair dismissals.43 The overlap was inconvenient because ultimately it permitted the operation of the implied duty of trust and confidence under the common law to ensure that damages were discretionary in respect of pre-dismissal conduct, whereas, the more drastic conduct of unfair dismissal was subject to a statutory ceiling.44 Lord Steyn was highly critical of the Johnson decision claiming it was entirely inhibiting and did no more than prevent “the natural and sensible evolution of our employment law in a critical area”.45 Lord Steyn went further to call upon Parliament to revise the matter particularly since the Johnson case focused too sharply on the employer’s right to a ceiling and virtually ignored the employee’s right to rely on the implied duty of trust and confidence. In Lords Steyn’s view, the position taken by the Johnson court was particularly unsettling since it did not reflect a specific Parliamentary intention to deny employees the right to rely on the implied duty of trust and confidence.46 IV. The Implied Duty of Trust and the Principle of Good Faith The principle of good faith, which is as difficult to define as the implied duty of trust and confidence has been linked to the implied duty of trust. In the Eastwood case, Lord Nicholls opined that: The trust and confidence implied term means, in short, that an employer must treat his employees fairly. In his conduct of this business, and in his treatment of his employees, an employer must act responsibly and in good faith.47 Browne-Wilkinson J in Imperial Pension Trust v Imperial Tabacco Ltd. referenced the implied duty of trust and confidence as the implied duty to act in good faith.48 The concept of good faith has been said to have contributed to the development of the concept of the implied duty of trust and confidence. As Douglas Brodie explains: The obligation of mutual trust and confidence has evolved and flourished in an environment where there have been both moves towards good faith playing a greater role in contract law and where employer prerogative has been constrained by employment protection legislation.49 Good faith arises by necessary implication under the implied duty of mutual trust and confidence. Neither party is required to compromise their respective interests under the employment contract in favour of the interests of the other. While both parties are required to take into consideration the interests of the other, that concern is not superior to the concern for individual interests. In this regard, good faith arises to ensure that some semblance of a fair balance exists. The fair balance is finding a medium between the employer’s interest in managing the company efficiently and the employee’s interest in being accorded fair treatment.50 V. The Diversity of the Implied Duty of Trust and Confidence Although originating as a means of providing a remedy against employers whose conduct amounts to constructive dismissal, the implied duty of trust and confidence has been applied to a number of diverse situations. Ultimately, the implied duty of trust and confidence makes it possible for the employer’s conduct to be held up under scrutiny and to determine whether or not the employer acted in good faith, fairly or without “reasonable or proper cause”.51 In O’Brien v Transco Plc, a two-tier test was devised for the purpose of determining whether or not the implied duty of trust was breached. The Court of Appeal ruled that in the event the conduct complained of was such that it could destroy or damage with some degree of seriousness the trust and confidence between the employee and the employer, there was a prima facie breach of the implied duty of trust and confidence. Once this prima facie breach had been determined, the second inquiry was whether or not the employer’s conduct was without “reasonable or proper cause.52 The two-tier test is calculated to determine the extent to which the employer’s conduct was a breach of the implied duty of trust and confidence. The rationale is therefore that, whether or not the employer had reasonable cause to act as it did is the key to determining whether or not it impacted the elements of trust and confidence. Ultimately, if the employer had reasonable grounds for acting as he/she did to the detriment of the trust and confidence relationship, there is no breach of the implied duty. Likewise, if the employer operated on reasonable and proper grounds, the impact must be taken into account so that the employer’s conduct is proportionate to the infraction that he or she is responding to.53 As Lord Steyn explained in the Malik case that for the purpose of determining if the employer acted in breach of the implied duty of trust: It seems clear that what is significant is the impact of the employer’s behaviour on the employee rather than what the employer intended. Moreover, the impact will be assessed objectively.54 As Brodie maintains the objective test does not take into account the subjective nature of the employer’s intent and the reasons for his conduct. Such an approach is consistent with the concept of contractual principles.55 Moreover, reliance on the subjective nature of the employer’s intent and specific motivations would only serve to introduce into the discourse of employment law a “great deal of uncertainty.”56 VI. Conclusion The creation and development of the implied duty of trust and confidence in the context of the employment contract and relationship serves a number of important purposes. First it exists to fill gaps in the common law and the statutory provisions where an employee is treated unfairly and unjustly and there is no specific remedy for the resulting damages arising out of that conduct. The concept of the implied duty of trust was specifically devised to deal with those situations in which an employer’s conduct is such that it forces an employee to terminate the contract of employment. In such circumstances, the duty of implied trust provided the employee with a cause of action for what essentially amounted to unfair dismissal. Otherwise the employee would be treated as having voluntarily terminated the contract leaving him/her with essentially little if any remedy. Secondly, the implied duty of trust was expanded to ensure that the employee was treated fairly and his/her livelihood would be taken into account by employers in the management of the business. The idea is to ensure that employers make management decisions and decisions that impact employees in good faith and for proper purposes and with proper and reasonable cause. Ultimately, the implied duty of trust and confidence ensures that employers treat employees fairly at all times and this includes the manner in which they are dismissed and the manner in which they are treated during their tenure. Bibliography Arup, C. Labour Law and Labour Market Regulation. (Federation Press 2007). Beale, H.; Bishop, W. and Furmston, M. Contract: Cases and Material. (Oxford University Press 2008). Boyle, M. ‘Employers’ Liability at Common Law: Two Competing Paradigms.’ (2008)12 Edinburgh Law Review, 231-258. Brodie, D. ‘Legal Coherence and the Employment Revolution’. (2001) Law Quarterly Review 604-625. Brodie, D. ‘The Heart of the Matter: Mutual Trust and Confidence.’ (1996) 25 Industrial Law Journal 121. Cabrelli, D. ‘The Implied Duty of Mutual Trust and Confidence: An Emerging Overarching Principle?’ (2005) 34(4) Industrial Law Journal, 284-307. Collins, H. ‘Claim for Unfair Dismissal’ (2001) 30 Industrial Law Journal 305. Freedland, M. The Personal Employment Contract. (Oxford University Press, 2003). Selwyn, N. Selwyn’s Law of Employment. (Oxford University Press 2006). Smith, I. and Thomas, G. Smith and Thomas’ Employment Law. (Oxford University Press 2008). Towers, B. The Handbook of Employment Relations: Law and Practice. (Kogan Page Publishers, 2004). Vettori,S. The Employment Contract and the Changed World of Work. (Ashgate Publishing Ltd. 2007). Table of Cases Addis v Gramophone Co. Ltd [1909] AC 488. Clark v Nomura International Plc [2000] IRLR 766. Courtaulds Northern Textiles Ltd v Andrews [1979[ IRLR 84. Eastwood v Magnox Electric Plc [2005] 1 AC 503. Gogay v Hertfordshire County Council [2000] IRLR 703. Gunton v Richmond-Upon-Thames London Borough Council [1980] ICR 755. Imperial Pension Trust v Imperial Tabacco Ltd [1991] IRLR 66. Johnson v Unisys [2003] 1 AC 518. Malik v Bank of Credit and Commerce International [1997] IRLR 462. O’Brien v Transco Plc (formerly BG Plc) [2002] IRLR 444. SA (in liq) v Ali (No.2) [1999] 4 All ER 83. Scally v Southern Health and Social Services Board [1992] 1 AC 294. Spring v Guardian Assurance Plc [1995] 2 AC 196. Table of Statutes Employment Rights Act 1996. Trade Union and Labour Relations Act 1974 Read More