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Employment Law Landmark Inner House Decision

[2013] CSIH 102

McNeill v Aberdeen City Council

The decision of the Inner House of the Court of Session, delivered 28 November 2013, turns on a point of law that is peculiar to Scots law.  But the issue it addresses - the scope of constructive dismissal within the statutory law of unfair dismissal - is of wide significance.  Although the detailed reasoning of the court will not be applied in England, the outcome is likely to be important as and when similar facts come before the English courts.

Mr McNeill worked as a middle manager for Aberdeen City Council.  He claimed to have seen at work a sexual incident involving two colleagues who were having a relationship and he discussed with fellow employees the account he had given to management of what he had seen.  A complaint by one of the couple he said he had witnessed in flagrante followed, and Mr McNeill became the object of an investigation by his employer, with a view to establishing whether there was a basis for taking disciplinary action against him.  As the inquiry progressed it became more and more extensive and far-reaching and he was asked about incidents and aspects of his own behaviour in his job, going back over many years.  He was asked to answer allegations of a most serious nature, including claims that he had turned up drunk at work and had sexually harassed young girls who at the time were working for him in his department.  Eventually, after many months of an investigation he found increasingly intrusive and oppressive, he resigned, claiming a breach by his employer of trust and confidence and a loss of trust, on his part, in his employer, which provided his reason for leaving.  He brought and won a claim of unfair dismissal, based on an unfair constructive dismissal, but was found to have contributed to his dismissal by his own conduct.  He ended up with a compensatory award that was reduced by 50% - thus giving him £26,000.

On appeal to the EAT the decision of unfair dismissal was overturned.  The EAT (Lady Smith presiding) held that the effect of the misconduct which the investigation had uncovered was to prevent him from complaining of any breach by his employer of the duty of trust and confidence in the way it had carried out the investigation.  Thus there was no dismissal.  The Court invoked the ‘principle of mutuality of obligation’ which is a feature of Scots law (and the law of many other civilian systems) but which does not form part of English law.  Essentially, the EAT accepted the argument that the principle of mutuality meant that if the employee is in breach of his own contractual obligation to maintain trust and confidence, he cannot rely on a breach of the employer’s correlative duty.  Thus since Mr McNeill was in continuing breach of his duty to maintain trust and confidence by reason of his various acts of misconduct, he was unable to bring himself within the scope of constructive dismissal, as defined in s.95(1)(c) of the Employment Rights Act 1996.  Because he had broken his duty of trust and confidence by incidents of bad behaviour over a period of years, he had no right to complain of the employer’s breach of trust and confidence arising from how it had conducted the inquiry into his conduct.  It made no difference that these incidents of misconduct on his part were not known to the employer at the time, and had not emerged until the investigation that took place several years later.

While this ruling might at first sight have some basis in common sense and fairness, it is capable of producing very harsh results.   A single act of misconduct could in theory release an employer from his duty to behave reasonably and fairly towards the employee concerned years later.  Whatever the rights and wrongs of this as a matter of the (Scots) law of contract, it may be argued it is an inappropriate for this ‘principle of mutuality’ to be introduced into a statutory construct - the definition of constructive dismissal for the purposes of the law of unfair dismissal – especially where statute (s.123 of the ERA) allows for a reduction in compensation to reflect contributory fault.  The EAT’s decision was criticised because it opened up the prospect of employers faced with claims of constructive dismissal trawling through the past behaviour of employees in an attempt to find some incriminating actions that would defeat the claim.

One way of challenging the EAT’s ruling was to argue that in interpreting and applying the “statutory construct” of constructive dismissal, questions of contractual doctrine were not relevant.  This is an approach which has found favour recently at the level of the Supreme Court in Gisda Cyf v Barrett [2010] IRLR 1073, when their Lordships declined to interpret the statutory construct of “effective date of termination” (s.94 ERA) in a way that applied standard contractual rules, when that would have produced a result that was seen as wrong.  Lord Kerr in that case expressed the view that in this area of the law, contractual rules should only be taken as having any effect on the outcome when they “precisely reflected” the statutorily protected rights of employee.  But in McNeill their Lordships were not persuaded that a contract-based analysis was out of place.  They insisted that the meaning of constructive dismissal did remain governed by contractual doctrine and, further, that the contract law that applied was the law of the proper law of the contract - which of course in this case was Scots law.

But although this meant that the doctrine of mutuality of obligation was seen as applicable, it did not mean that the doctrine, when applied to the facts,  had the result that the EAT found it to have had.  The Inner House instead held that in Mr McNeill’s case, had his misconduct been known at the time, his employer might have withheld performance of their substantive obligations to provide work and pay salary, by suspending (without pay) until the appellant ceased to be in breach of his contractual duties.  But the court also held that what the employer could not do was to treat its own obligation to maintain trust and confidence as being at an end – and it was a “fundamental error” of the EAT to hold that Mr McNeill’s breach of contract disabled him from founding in any way on his employer’s breach of trust and confidence.

The minority judgment of Lord McGhie, while agreeing with the outcome and the view of the majority as to the operation of the doctrine of mutuality, favoured an analysis of s.95(1)(c) that was not limited to where there was shown to be a breach of contract.  That view does not sit easily with the classic definition of constructive dismissal given in Western Excavating Ltd. v Sharp [1978] ICR 221but it is substantially in line with the approach found in Gisda Cyf v Barrett (above), a decision that was cited and relied on by his Lordship.

The court’s analysis of the principle of mutuality (taken together with a finding that the EAT had also erred in substituting its views for those of the ET on the issue of whether the Council had been in breach of its duty to maintain trust and confidence) was enough for the appeal to succeed.  But the Inner House also expressed the view that the doctrine of mutuality gave remedies that were essentially equitable in nature and that, quite separately to the doctrinal arguments,  it would not have been equitable to apply it in the way the EAT had done on the facts of the present case.

There are two implications of wider import of the decision. In the first place the outcome reinforces the ruling by Slade J. in Vivian v Bournemouth Borough Council EAT/0254/10/JOJ that a breach of trust and confidence by an employer does not justify the employee in refusing further performance of contractual obligations, including the obligation to co-operate in a redeployment process.  That would certainly not be the law in Scotland after McNeill, and it would be unusual and undesirable for the law in England to be different on such a fundamental issue.  Secondly, the decision opens up the way to further contract-based arguments relevant to the exercise of statutory rights.  To take just one example, the employer who responds to a material (i.e. repudiatory) breach of contract by the employee by refusing to pay wages may well have (at least in Scotland) a defence to any claim for unlawful deduction from wages under s.13 of the Employment Rights Act 1996, on the basis that, by operation of the doctrine of mutuality, wages in these circumstances are not “properly payable.” 

Brian Napier QC