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United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Johnson v. Unisys Limited  UKHL 13;  2 All ER 801;  2 WLR 1076 (22nd March, 2001)
Cite as:  1 AC 518,  ICR 480,  Emp LR 469,  IRLR 279,  2 WLR 1076,  UKHL 13,  AC 518,  2 All ER 801
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Lord Bingham of Cornhill Lord Nicholls of Birkenhead Lord Steyn Lord Hoffmann Lord Millett
ON 22 MARCH 2001
 UKHL 13
LORD BINGHAM OF CORNHILL
1. I have had the advantage of reading in draft the opinions of my noble and learned friends Lord Hoffmann and Lord Millett. I agree with them both and would dismiss this appeal for the reasons which they give.
LORD NICHOLLS OF BIRKENHEAD
2. On this appeal the appellant seeks damages for loss he claims he suffered as a result of the manner in which he was dismissed. He uses as his legal foundation the decision of the House in Mahmud v Bank of Credit and Commerce International SA  AC 20, although that was not a manner of dismissal case. In principle the appellant's argument has much to commend it. I said so, in my obiter observations in Mahmud's case, at pages 39-40. But there is an insuperable obstacle: the intervention of Parliament in the unfair dismissal legislation. Having heard full argument on the point, I am persuaded that a common law right embracing the manner in which an employee is dismissed cannot satisfactorily co-exist with the statutory right not to be unfairly dismissed. A newly developed common law right of this nature, covering the same ground as the statutory right, would fly in the face of the limits Parliament has already prescribed on matters such as the classes of employees who have the benefit of the statutory right, the amount of compensation payable and the short time limits for making claims. It would also defeat the intention of Parliament that claims of this nature should be decided by specialist tribunals, not the ordinary courts of law. I too would dismiss this appeal.
I. Addis's case
3. The head note of the decision of the House of Lords in Addis v Gramophone Co Ltd  AC 488 purports to state the ratio decidendi of that case as follows: where a servant is wrongfully dismissed from his employment the damages for the dismissal cannot include compensation for the manner of his dismissal, for his injured feelings, or for the loss he may sustain from the fact that the dismissal of itself makes it more difficult for him to obtain fresh employment. This statement of the law was based on an observation in the speech of Lord Loreburn LC. A majority of the Law Lords expressed agreement with this speech. On the other hand, only Lord Loreburn specifically referred to the unavailability of special damages for loss of employment prospects. The other Law Lords concentrated on the non-pecuniary aspects of the case. The headnote is arguably wrong insofar as it states that the House decided that a wrongfully dismissed employee can never sue for special damages for loss of employment prospects arising from the harsh and humiliating manner of the dismissal: see MacGregor on Damages, 16th ed, (1997), para 1242. Nevertheless, the statement of the law encapsulated in the controversial headnote has exercised an influence over this corner of the law for more than 90 years. It has had a restrictive impact on the damages which an employee may recover for financial loss actually suffered as a result of the manner of wrongful dismissal.
4. It is instructive to consider how this decision was viewed in 1909. Sir Frederic Pollock, the editor of the Law Quarterly Review, was not impressed. In a case note he contrasted "an artificial rule or mere authority" to "the rationale of the matter": (1910) 26 LQR, 1-2. Citing cases contrary to what was perceived to be the Addis rule, and "said to be exceptions," he plainly thought that as a matter of legal principle the decision was questionable. He said:
The supposed rule in Addis has been controversial for a long time. When the first edition of Treitel's classic book on contract was published some 40 years ago the author described the exclusion of any claim by an employee for financial loss to reputation as hard to justify: The Law of Contract, (1962), pp 606-607. In the 10th edition of the same work Sir Guenter Treitel QC, remained of the same view and was able to cite further decisions in which damages were awarded for financial loss of employment prospects or for injury to reputation resulting from a breach of contract: see pp 921-924.
5. During the course of the last century a fundamental alteration in the relationship between employer and employee has come about. And in the economic sphere that relationship has also drastically altered. This is the context in which the question of public importance now before the House is whether Addis's case precludes the recovery by an employee of special damages for financial loss in respect of damage to his employment prospects resulting from the manner of a wrongful dismissal. It was on this basis that the Appeal Committee granted leave to appeal rather than the particular features of the claim under consideration.
II. The background to the dispute
6. In outline the facts are as follows. The employee is now 52 years of age. With a gap of 3 years he was employed by the employers in the software computer industry from 1971 to 1994. In 1992 he became a director of the company. Over the years he suffered from work-related stress and the employers were aware of his particular psychological vulnerability. In January 1994 the employers made allegations against him regarding his conduct. On 17 January 1994 he was asked to attend a meeting. No specific allegations were put to him. Later that day he was summarily dismissed. He lodged an internal appeal. On 3 March 1994 his dismissal was confirmed. Shortly thereafter he made a complaint of unfair dismissal to an industrial tribunal (now called an employment tribunal). By decisions made on 20 February 1995 and 26 July 1995 the tribunal upheld his complaint and awarded him compensation, subject to a finding that he had contributed by 25% to his dismissal. Applying the statutory maximum the employee was awarded £11,691.88.
7. It is agreed that as "a result of the circumstances and the fact of his dismissal the [employee] suffered a major psychiatric illness, involving, inter alia, in-patient treatment from March to August 1994". In addition the employee had to undergo hypnotherapy every three weeks until January 1996; he was re-admitted twice in 1996 to hospital; thereafter he had to undergo intensive psychotherapy and visit a psychiatric nurse; and he had to take anti depressant drugs for depression, mood swings and alcohol dependency. His health has remained severely affected. Despite repeated applications for jobs he remains unemployed. The main obstacles facing him in seeking employment is the time he spent in hospital following his dismissal and the substantial period he has now been out of work in a rapidly developing industry.
III. The proceedings
8. In August 1997 the employee instituted proceedings in the County Court for breach of contract and negligence on the ground of the manner of his dismissal. He alleged that his employers never informed him of the complaints against him. He relied on an implied term of his contract that his employers would not without reasonable and proper cause conduct themselves in such a way so as to damage the relationship of trust and confidence between the parties. The employee further alleged that the manner of his dismissal and the circumstances leading up to it had caused his mental breakdown and inability to find work, with the result that he would suffer a loss of earnings in excess of £400,000.
IV. The decisions
9. The case came before a judge on an application to strike out the action. The judge viewed the case as in substance one seeking damages for unfair dismissal. He considered that the employee was seeking to circumvent the unfair dismissal legislation. He relied on the law as stated in the headnote in Addis's case. He held that an unfair dismissal could not by itself ground any action to recover financial loss caused by the manner of the employee's dismissal. He struck out the action.
10. The employee appealed. The Court of Appeal gave him an opportunity to amend his particulars of claim. Re-amended particulars of claim were produced. The Court of Appeal indicated that, if the appeal was successful, leave to amend would be given. But Lord Woolf MR, with whom Hutchison and Tuckey LJJ agreed, dismissed the appeal in a closely reasoned reserved judgment:  1 All E R 854. Lord Woolf expressed agreement with the views of the judge. Lord Woolf held that, despite the form of the re-cast pleading, the substance of the employee's complaint was as to the manner in which he had been dismissed. He proceeded on the basis that the headnote in Addis's case correctly stated the effect of that decision. That is not surprising for the contrary was not argued in the Court of Appeal. He examined in detail the impact of the speeches in Mahmud v Bank of Credit and Commerce International SA  AC 20 on the decision of the House in Addis's case and concluded that the House had merely distinguished Addis's case and had not departed from it. He observed, at p 861J, that Addis's case precluded the recovery of damages for the manner of dismissal of an employee while Mahmud's case was concerned with the recovery of damages for an anterior breach. He drew a distinction, at p 859D, between express and constructive dismissal. Applying the rule in Addis's case, Lord Woolf held that the employee had no sustainable claim. Lord Woolf further held that, having regard to the circumstances, the prospects of the plaintiff overcoming the issue of remoteness were unreal: p 862A-B.
V. The issues
11. It is necessary to explain the shape of the case. First, it must be assumed that as a result of the circumstances and fact of his dismissal the plaintiff suffered a major psychiatric illness, involving, inter alia, in patient treatment in a mental hospital from March to August 1994; that subsequently he was hospitalised and treated as I have set out; and that in consequence he has been unable to find a job. Secondly, the claim is brought in contract and, alternatively, in tort. Thirdly, the claim in contract is based on a term implied in contracts of employment, namely that an employer shall not, without reasonable and proper cause, conduct himself in a manner calculated and likely to destroy or seriously damage the relationship of trust and confidence between employer and employee: see Mahmud's case at p 45F-G. Fourthly, in the alternative, the re-amended particulars of claim put forward additional negative and positive implied terms. At the hearing of the appeal counsel for the employee explained that these implied terms were based on dicta in decided cases but he was content to regard these as instances of the application of the general obligation of mutual trust and confidence. The contractual claim is therefore squarely based on a breach of the implied obligation of mutual trust and confidence between employer and employee. The re-amended particulars of claim allege a breach of the implied obligation in that the employers failed:
The consequences of the breach allegedly involved the employee's mental breakdown and consequent total inability to find employment. Having regard to his previous earnings he claims a sum of the order of £400,000. Fifthly, it is important to note that the claim is solely for the recovery of special damages for financial loss. The separate question whether an employee may recover compensation for anxiety and mental stress arising from the manner of his dismissal was not raised before the judge or before the Court of Appeal. It is not an issue before the House and it would be wrong to express any view on it.
12. It will also be necessary to consider the issue of remoteness, namely whether the employee has any realistic prospect of establishing that his loss is not too remote.
13. As I have explained the claim is framed in contract and tort. Having regard to the particular circumstances of this case, if the claim in contract is held to be unsustainable the fate of the claim in tort must inevitably be the same. I propose therefore to concentrate on the potential sustainability of the claim in contract.
14. It is convenient to start by examining the following issues:(1)
What is the effect of the decision in Addis's case?(2)
Even if it is not part of the ratio decidendi of Addis's case does the observation of Lord Loreburn LC (and the headnote) correctly state the law?(3)
What was the impact of Mahmud's case on Addis's case?
Depending on the answer to these questions it will then be necessary to examine the further arguments in detail and to consider the impact of the conclusions on the disposal of the case.
VI. The effect of Addis's case
15. It is necessary to examine what was decided in Addis's case. The speeches in Addis's case are not easy to understand. Two of their Lordships spoke in terms of exemplary damages: see Lord James of Hereford, at p 492; and Lord Collins, diss, at p 497 and pp 500-501. That could not have been an issue. In English law such damages have never and cannot be awarded for breach of any contract. That part of the discussion in the speeches in Addis's case can safely be put to one side. The context of the dispute has often been described. For my part it is sufficient to adopt the description of the case by Sir Frederic Pollock that the plaintiff "was dismissed summarily from an important post in India, and the whole management taken out of his hands in a way which could not but import obloquy among the commercial community of India, and as a result permanent loss". The critical observation on the law of Lord Loreburn LC, at p 491, was undeniably to the effect stated in the headnote. On the other hand, MacGregor on Damages 16th ed, para 1242 has argued that the other Law Lords in the majority confined themselves to the non-pecuniary aspects of the case. Accordingly, it is said, the headnote may not reflect the ratio decidendi of the case. Lord James of Hereford in his substantive reasons discussed the availability of general damages for injury to feelings. But he did say, at p 492, that he agreed with "the entirety of the judgment delivered by my noble and learned friend on the Woolsack". In my view he endorsed the relevant part of the speech of Lord Loreburn LC. On the other hand, Lord Atkinson (at p 493), Lord Gorrell (at p 502) and Lord Shaw of Dunfermline (at p 505) at most expressed general concurrence. In Broome v Cassel & Co. Ltd  AC 1027, 1087B Lord Reid observed:
When one turns to the substantive reasons given by Lord Atkinson, Lord Gorrell and Lord Shaw of Dunfermline, one finds that they dealt exclusively with the non-pecuniary aspects of the case. Only one of the Law Lords who sat in the case can realistically be regarded as having evinced a clear endorsement of Lord Loreburn's observation so far as it ruled out special damages for loss of employment prospects flowing from the manner of a wrongful dismissal.
16. Given the apparently harsh and humiliating manner of the dismissal, it is surprising that the other Law Lords did not consider this aspect. Indeed Lord Atkinson expressly said it was not "necessary" to deal with it. The explanation may be the view taken of the pleadings: see Lord Atkinson's complaint, at p 493, about the "unscientific form" of the pleadings and "the loose manner in which the proceeding's at trial were conducted". Despite assumptions to the contrary (including in particular my assumption in Mahmud's case at pp 50D-51D) it is nevertheless tolerably clear that the ratio decidendi of Addis's case does not preclude the recovery of special damages flowing from the manner of a wrongful dismissal.
VII. The correctness of the observation of Lord Loreburn LC
17. It is still necessary to consider whether the observation of Lord Loreburn LC, although not reflecting the ratio decidendi of Addis's case, was nevertheless correct. This is so for two reasons. First my interpretation of Addis's case may not be correct. Secondly, the proposition of Lord Loreburn LC may be correct in all its constituent parts. As Sir Frederick Pollock explained in his case note in the Law Quarterly Review Lord Loreburn enunciated a special and restrictive rule precluding the recovery of special damages in respect of financial loss flowing from the manner of wrongful dismissal. It was viewed as contrary to legal principle in 1909. In modern times it has been widely criticised as being in conflict with general principles of contract law. In Mahmud's case Lord Nicholls of Birkenhead and I dealt with this point and it is unnecessary to cover the same ground again. But perhaps I may add that I am not aware of any modern academic writer, addressing the subject, who has tried to defend the relevant restrictive rule of Lord Loreburn LC. One is entitled to pose the question: Why was the contract of employment singled out for a special rule to the disadvantage of employees?18.
Addis's case was decided in the heyday of a judicial philosophy of market individualism in respect of what was then called the law of master and servant. The idea that in the eyes of the law the position of a servant was a subordinate one seemed natural and inevitable. And in Addis's case it may have been the background to the adoption of a special restrictive rule denying in all cases to employees the right to recover financial loss which naturally flowed from the manner of their wrongful dismissal. Since 1909 there has been a fundamental change in legal culture. A good illustration is the decision of the House in Scally v Southern Health and Social Services Board  1 AC 294. In Scally's case a contract negotiated by trade unions conferred on an employee a valuable right contingent on him taking up the right in a prescribed manner. He was unaware of the right. The House of Lords held that there was an obligation implied by law as an incident of a contract of employment, as opposed to implied in fact, to bring the term to the notice of the employee. Such a decision would have been unthinkable at the time of Addis's case. In Spring v Guardian Assurance Plc  2 AC 296, 335B, Lord Slynn of Hadley noted "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 or by judicial decision, to care for the physical, financial and even psychological welfare of the employee". One of the most important of those developments is the evolution since the mid seventies of the obligation of trust and confidence in contracts of employment and its unanimous and unequivocal endorsement in Mahmud's case. The orthodox view is that this implied obligation may be displaced or qualified but only by express agreement or necessary implication: compare, however, a different view in Brodie, "Beyond Exchange: The New Contract of Employment",(1998) 27 ICJ 79, 82-83.
19. Since 1909 our knowledge of the incidence of stress related psychiatric and psychological problems of employees, albeit still imperfect, has greatly increased. What could in the early part of the last century dismissively be treated as mere "injured feelings" is now sometimes accepted as a recognisable psychiatric illness. The outlines of the gradual development of the law in this area are well known: see, for example, McLoughlin v O'Brian  1 AC 410; Frost v Chief Constable of South Yorkshire Police  2 AC 455. Nowadays courts generally accept that they must act on the best medical insight of the day. Specifically, this realism has taken root in the field of employment law: Walker v Northumberland County Council  ICR 702 HC; Gogay v Hertfordshire County Council  IRLR 703. These considerations are testimony to the need for implied terms in contracts of employment protecting employees from harsh and unacceptable employment practices. This is particularly important in the light of the greater pressures on employees due to the progressive deregulation of the labour market, the privatisation of public services, and the globalisation of product and financial markets: see Brendan J. Burchell and others, "Job Insecurity and Work Intensification", (1999), a report published for the Joseph Rowntree Foundation, at pp 60-61. This report documents a phenomenon during the last two decades "of an extraordinary intensification of work pressures". The report states as a major cause the fact that the "quantity of work required of individuals has increased because of under-staffing so that hours of work have lengthened and, more importantly, the pace of work has intensified". Inevitably, the incidence of psychiatric injury due to excessive stress has increased. The need for protection of employees through their contractual rights, express and implied by law, is markedly greater than in the past.
20. It is no longer right to equate a contract of employment with commercial contracts. One possible way of describing a contract of employment in modern terms is as a relational contract. If (contrary to my view) the headnote of Addis's case correctly states the ratio decidendi of Addis's case I would now be willing to depart from it. That is not a particularly bold step. Indeed, in Mahmud's case the House took that step.VIII.
The impact of Mahmud's case on Addis's case
21. It is necessary to return to the analysis by Lord Woolf of the difference between Addis's case and Mahmud's case. Lord Woolf held that the relevant part of the rule in Addis's case deals with the consequences of wrongful dismissal whereas Mahmud's case concerned a breach of the obligation of mutual trust and confidence during the subsistence of a contract. It is, noteworthy that the implied obligation of mutual trust and confidence was developed in a series of constructive dismissal cases: see Hepple & O'Higgins, Employment Law, 4th ed (1981) pp 134-135, paras 291-292. It cannot therefore be confined to breaches during the subsistence of the contract. The development of the implied obligation of mutual trust and confidence as it has evolved was unanimously endorsed by the House as "workable" and "sound" in Mahmud's case: see Lord Nicholls, at p 35A, and in my speech at p 46. It was held in Mahmud's case that the employees in that case would have been entitled to accept a breach of such an obligation as repudiatory and to claim damages: Lord Nicholls, at p 38B-D and my speech at p 48. If the employees had discovered the corrupt conduct of employers during the subsistence of the contract, they would on the law as stated in Mahmud's case have been entitled to terminate the contract and sue for damages. Not only is this an inevitable result of the logic of the decision in Mahmud's case but it had the express unanimous endorsement of the House. "Pecuniary loss brought about by a loss of reputation caused by a breach of contract [does not] preclude the plaintiffs from recovering in respect of that pecuniary loss" (Foaminol Laboratories Ltd v British Artid Plastics Ltd  2 All ER 393, 400): Lord Nicholls, at p 40F-G; my speech at p 52C-H. Damages for wrongful dismissal are governed not by a special rule applicable to employment contracts but by ordinary principles of contract law: see Mahmud's case, at p 39D; and also informative comment in two major new publications, namely English Private Law, ed Professor Birks (2000), vol 2, para 1860-1861, per Professor Burrows; Butterworths Common Law Series, The Law of Contract, ed Professor Furmston (1999), para 8.59. The consequence is that "[c]ases previously regarded as exceptional can now be seen as examples of the general rule": Anson's Law of Contract, 27th ed (1998) ed J Beatson, pp 562-563. In Mahmud's case the House embarked on a process of synthesis. To this extent therefore the observation of Lord Loreburn LC, which rules out in all cases a claim for financial loss resulting from the manner of a wrongful dismissal, is qualified by the unanimous decision of the House in Mahmud's case. In my respectful view the reasoning of the Court of Appeal is not correct.
IX. The contrary arguments of the employers
22. The statutory dimension. Counsel for the employers argued that Addis's case has been a cornerstone of the law of employment for nearly a century. He submitted that the law as stated in Addis's case was the background against which Parliament introduced the unfair dismissal legislation in its original form by the Industrial Relations Act 1971: see the Employment Protection Act 1975 and the Employment Rights Act 1996 for subsequent reforms of the system. In support of this submission he pointed to paragraph 522 of the Report of the Royal Commission on Trade Unions and Employers Associations (1965-1968), Cmnd 3623, June 1968, commonly described as the Donovan Report. It reads as follows:
He argued further that, even if it would otherwise be right to depart from Addis's case in the respect under consideration, it would be wrong to do so in the face of the elaborate statutory scheme governing unfair dismissal created by Parliament. In my opinion this argument ought not to prevail. In West Midland Baptist (Trust) Association (Inc) v Birmingham Corporation  AC 874, Lord Reid put such arguments in context. He said, at p 898F:
It cannot be said that the unfair dismissal legislation would be unworkable if the House departs from Addis's case.
23. The unfair dismissal legislation must be put in context. At the time of the Donovan Report collective bargaining was seen as the main form of protection of individuals. It apparently covered about 83% of the workforce in 1980. It has, however, been contracting steadily. It fell to 35% in 1998. In the result individual legal rights have now become the main source of protection of employees: see Brown, Deakin, Nash and Oxenbridge, "The Employment Contract: From Collective Procedures to Individual Rights" (2000) 38, British Journal of Industrial Relations, 611, 613-616. At the time of the Donovan Report reinstatement was envisaged as a major remedy: paras 551-552. In practice, however, only about 3% of applicants are reinstated: see Davies and Friedland, Labour Legislation and Public Policy, (1993), p 210, citing statistics dating from 1987/8. My understanding is that about 3% still represents the reinstatement figure. Not surprisingly, the award of compensation by a tribunal has to be the primary remedy. The 1971 Act in section 116 adopted the formula, which appears with minor changes in the current law, that the compensation should be "such amount as the . . . tribunal considers just and equitable in all the circumstances, having regard to the loss sustained by the aggrieved party in consequence of the matters to which the complaint relates, in so far as the loss was attributable to action taken by or on behalf of the party in default". Hugh Collins, Justice in Dismissal, (1992), pp 218-223 has shown how the award of compensation, by reason of artificial limits, has markedly failed to meet the aim of corrective justice in accordance with the employee's contractual rights. One of those limits was the requirement of the unfair dismissal system that such cases had to be resolved in accordance with a very expeditious timetable. Initially, the claim had generally to be lodged within four weeks, that being a period within which the seriousness of damage to employment prospects would often not have become clear: see sections 22, 106(4) and (5) read with schedule 6, para 5 of the Industrial Relations Act 1971. Even now section 111(2) of the Employment Rights Act 1996 provides that such claims must generally be lodged within 3 months, that still being a period within which the seriousness of damage to employment prospects may not have become clear. More importantly, the low statutory limit on the award of compensation made the attainment of corrective justice impossible. At the inception of the statutory regime section 118(1) of the Industrial Relations Act 1971 placed a limit on the maximum amount of compensation of two years pay or £4,160 (whichever was the lesser). In 1975 the alternative way of expressing the limit was abolished. The monetary limit was from time to time increased. In April 1998 it reached £12,000. In October 1999 the maximum was increased to £50,000. It is now index-linked. It has been pointed out that allowing for inflation, £4,160 in 1971 is now worth about £50,000: HC Research Paper 98/99. The statutory system was therefore always only capable of meeting the requirements of cases at the lower end of seriousness. Manifestly, it was always incapable, for example, of affording any significant financial compensation to employees with substantial salaries and pension entitlements in cases where they suffered a serious loss of employment prospects due to the manner of their dismissal. In such cases, inter alia, the artificial statutory limits from the inception inhibited significant compensation. If Parliament is deemed to have been aware of the Addis decision, one must also deem Parliament to have been aware that the system it was creating was only capable of dealing effectively and justly with less serious cases where the threshold of a breach of contract was not necessarily established. Moreover, the changing nature of the relationship between employer and employee, and numerous judicial inroads in case law on Addis's case were already well documented before 1971. The third edition of Treitel, The Law of Contract, was published in 1970. Treitel observed, at p 813, that "the rule may be that general damages cannot be recovered for injury to reputation by a non-trader, but that special damages can be recovered for actual loss resulting from such injury" (author's emphasis). In my view the headnote in Addis's case (and its recitation in the Donovan Report) in respect of special damages is based on a misconception. But at the very least the relevant part of the rule in Addis's case was controversial. In all these circumstances it is unrealistic to say that Parliament would have assumed the common law as reflected in the headnote in Addis's case to be set in stone and incapable of principled development. I would therefore reject this argument.
24. Conflict with express terms. Counsel for the employers was asked to place the employment contract of the employee before the House. It was done. It revealed that either party was able to terminate the contract by giving four weeks' notice. This proved to be a platform for an argument for striking out the claim which was not considered by the judge or by the Court of Appeal. It was also not raised in the agreed statement of facts and issues or in the written cases. Nevertheless, relying on the notice provision, counsel for the employers submitted that to apply the implied obligation of mutual trust and confidence in relation to a dismissal is to bring it into conflict with the express terms of the contract. He said orthodox contract law does not permit such a result. His argument approached the matter as if one was dealing with the question whether a term can be implied in fact in the light of the express terms of the contract. This submission loses sight of the particular nature of the implied obligation of mutual trust and confidence. It is not a term implied in fact. It is an overarching obligation implied by law as an incident of the contract of employment. It can also be described as a legal duty imposed by law: Treitel, The Law of Contract, 10th ed, p 190. It requires at least express words or a necessary implication to displace it or to cut down its scope. Prima facie it must be read consistently with the express terms of the contract. This emerges from the seminal judgment of Sir Nicolas Browne-Wilkinson V-C, in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd  ICR 524. It related to an employer's express contractual right to refuse amendments under a pension scheme. The Vice Chancellor held that the employer's express rights were subject to the implied obligation that they should not be exercised so as to destroy or seriously damage the relationship of trust and confidence between the company and its employees and former employees. The employer's blanket refusal was unlawful. The decision did not involve trust law and the employer was not treated as a fiduciary. It was decided on principles of contract law. The Vice Chancellor described the implied obligation of trust and confidence as "the implied obligation of good faith". It could also be described as an employer's obligation of fair dealing. In the same way an employer's express right to transfer an employee may be qualified by the obligation of mutual trust and confidence: see United Bank v Akhtar  IRLR 507, Sweet & Maxwell's Encyclopaedia of Employment Law, vol 1 paras 1.5101 and 1.5107. The interaction of the implied obligation of trust and confidence and express terms of the contract can be compared with the relationship between duties of good faith or fair dealing with the express terms of notice in a contract. They can live together. In any event, the argument of counsel for the employers misses the real point. The notice provision in the contract is valid and effective. Nobody suggests the contrary. On the other hand, the employer may become liable in damages if he acts in breach of the independent implied obligation by dismissing the employee in a harsh and humiliating manner. There is no conflict between the express and implied terms. I would therefore dismiss this argument.
25. Unfair dismissal. Counsel for the employers further argued that in substance the claim, based on a failure to follow disciplinary procedures, is one for unfair dismissal. This is a misdescription of the claim. It is not a claim for unfair dismissal but one based on allegations of breach of the obligation of mutual trust and confidence. Counsel also said that a tribunal's award may include compensation for a breach in respect of the manner of a wrongful dismissal. That is so. But it is equally obvious that as at 1971, and afterwards, such amount would have been fairly nominal. Of course, an employee must not be allowed to recover the same damages twice. But such adjustments in common law damages can be and are often made.
26. Inapplicability to termination. Counsel for the employers also argued that the implied obligation of trust and confidence is restricted to unacceptable conduct by the employer during the relationship. It is a legalistic point. It ignores the purpose of the obligation. The implied obligation aims to ensure fair dealing between employer and employee, and that is as important in respect of disciplinary proceedings, suspension of an employee and dismissal as at any other stage of the employment relationship. In my view this argument ought not to be accepted.
27. Floodgates. Counsel for the employers further submitted that in virtually every case there could be a claim based on the manner of dismissal. He said there would be an enormous proliferation of claims in the County Court. These predictions are too alarmist. In Mahmud's case it was held, at p 39H, that the mere fact of dismissal could not of itself handicap an employee in the labour market. On the other hand, if the employer acts in a harsh and oppressive manner that inflicts unnecessary and substantial financial damage on the employee there is no principled reason why an employee should not put forward a claim for such loss. I would therefore reject the floodgates argument.
X. The cause of action
28. In my view the employee has a reasonable cause of action based on a breach of the implied obligation of trust and confidence.
29. Leaving aside legal objections, there are formidable evidential difficulties in the way of the employee. It was suggested at the hearing that the claim would at trial inevitably fail on causation. The difficulty is real: How would the employee prove that his psychiatric condition was caused by the manner of his dismissal rather than the fact of his dismissal? On the facts, which must be assumed to be correct, I am however inclined to think that it would not be right to strike out the claim on this ground. But remoteness presents an even more formidable difficulty for the employee even at this stage. This issue must be judged at the date of the re-employment of the employee in 1990. The allegations of the knowledge of the employers before that date are set out in the pleadings as follows:
Taking into account what the employer is alleged to have known, as well as the lapse of time, I would not dissent from the view of Lord Woolf MR that there is no realistic prospect that the employee will be able to overcome this obstacle.
30. For the reasons I have given I would dismiss the appeal.
31. Mr Johnson has spent his working life in the computer industry. In 1971, at the age of 23, he started work for Unisys Ltd, a multinational software service company. In 1987 he was made redundant but in 1990 Unisys re-employed him. In January 1994, however, he was summarily dismissed for some alleged irregularity. The company paid him a month's salary in lieu of notice. He complained to an industrial tribunal of unfair dismissal and the tribunal upheld his claim. It found that the company had not given him a fair opportunity to defend himself and had not complied with its disciplinary procedure. On 26 July 1995 it ordered Unisys to pay him £11,691.88 compensation.
32. On 11 August 1997 Mr Johnson commenced an action in the Milton Keynes County Court against Unisys for damages at common law. He claimed alternatively for breach of contract or negligence. In his re-amended particulars of claim, he alleged that his dismissal was in breach of various implied terms of his contract of employment. The main one was that the employer would not without reasonable cause conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of trust and confidence between itself and the employee. The existence of this implied term in a contract of employment has recently been affirmed by the House of Lords in Mahmud v Bank of Credit and Commerce International SA  AC 20. It is commonly called the implied term of trust and confidence. He also pleaded various other implied terms; for example, that the company would not, without reasonable cause, do anything which would injure his physical or mental health, harm his professional development and so forth. But the alleged breach of all these terms lies in the fact that he was dismissed without a fair hearing and in breach of the company's disciplinary procedure.
33. Mr Johnson says that in consequence of the manner and the fact of his dismissal, he suffered a mental breakdown. He became depressed, attempted suicide and started to drink heavily. In 1994 he spent five months in a mental hospital and since then has occasionally had to be re-admitted. His family life has suffered and despite over 100 applications, he has been unable to find work. He is 52 and considers it unlikely that he will find remunerated work again. He says that severe damage of this kind was reasonably foreseeable by Unisys because during the period before his redundancy in 1987 it was known to persons whose knowledge should be attributed to the company that he was under stress and at risk of suffering psychological injury. The alternative claim in tort is based upon the allegation that Unisys owed him a duty of care because it ought reasonably to have foreseen that such injury was likely to result from dismissing him in the way it did.
34. Unisys applied to Judge Ansell in the Milton Keynes County Court to strike out the particulars of claim on the ground that the alleged facts disclosed no cause of action at common law. The judge did so. Mr Johnson appealed to the Court of Appeal (Lord Woolf MR, Hutchison and Tuckey LJJ) which affirmed the judge's decision. Mr Johnson now appeals to your Lordships' House.
35. My Lords, the first question is whether the implied term of trust and confidence upon which Mr Johnson relies, and about which in a general way there is no real dispute, or any of the other implied terms, applies to a dismissal. At common law the contract of employment was regarded by the courts as a contract like any other. The parties were free to negotiate whatever terms they liked and no terms would be implied unless they satisfied the strict test of necessity applied to a commercial contract. Freedom of contract meant that the stronger party, usually the employer, was free to impose his terms upon the weaker. But over the last 30 years or so, the nature of the contract of employment has been transformed. It has been recognised 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 identity and a sense of self-esteem. The law has changed to recognise this social reality. Most of the changes have been made by Parliament. The Employment Rights Act 1996 consolidates numerous statutes which have conferred rights upon employees. European law has made a substantial contribution. And the common law has adapted itself to the new attitudes, proceeding sometimes by analogy with statutory rights.
36. The contribution of the common law to the employment revolution has been by the evolution of implied terms in the contract of employment. The most far reaching is the implied term of trust and confidence. But there have been others. For example, in W A Goold (Pearmak) Ltd v McConnell  IRLR 516, Morison J (sitting in the Employment Appeal Tribunal) said that it was an implied term of the contract of employment that an employer would reasonably and promptly afford employees an opportunity to obtain redress of grievances. He inferred such a term from what is now section 3 of the Employment Rights Act 1996, which requires that an employee be provided with a written statement of the particulars of his employment, including a note of how he may apply if he has any grievances. So statute and common law have proceeded hand in hand.
37. The problem lies in extending or adapting any of these implied terms to dismissal. There are two reasons why dismissal presents special problems. The first is that any terms which the courts imply into a contract must be consistent with the express terms. Implied terms may supplement the express terms of the contract but cannot contradict them. Only Parliament may actually override what the parties have agreed. The second reason is that judges, in developing the law, must have regard to the policies expressed by Parliament in legislation. Employment law requires a balancing of the interests of employers and employees, with proper regard not only to the individual dignity and worth of the employees but also to the general economic interest. Subject to observance of fundamental human rights, the point at which this balance should be struck is a matter for democratic decision. The development of the common law by the judges plays a subsidiary role. Their traditional function is to adapt and modernise the common law. But such developments must be consistent with legislative policy as expressed in statutes. The courts may proceed in harmony with Parliament but there should be no discord.
38. My Lords, I shall consider first the problem posed by the express terms of the contract. In developing the implied term of trust and confidence and other similar terms applicable to the continuing employment relationship, the courts were advancing across open country. No express provision that BCCI would be entitled to conduct a fraudulent business, or that the employer in W A Goold (Pearmak) Ltd v McConnell would have no grievance procedure, stood in their way. But the employer's right to dismiss the employee is strongly defended by the terms of the contract. In the present case, Mr Johnson's contract provided:
39. The effect of such a provision at common law was stated with great clarity by McLachlin J of the Supreme Court of Canada in Wallace v United Grain Growers Ltd (1997) 152 DLR (4th) 1, 39:
40. Likewise in Malloch v Aberdeen Corporation  1 WLR 1578, 1581 Lord Reid said:
41. The action for wrongful dismissal could therefore yield no more than the salary which should have been paid during the contractual period of notice. In the present case Mr Johnson's letter of engagement referred to Terms and Conditions of Employment contained in the company's Employee Handbook, which stipulated expressly that "The company reserves the right to make payment in lieu of notice". Unisys exercised that right.
42. My Lords, in the face of this express provision that Unisys was entitled to terminate Mr Johnson's employment on four weeks notice without any reason, I think it is very difficult to imply a term that the company should not do so except for some good cause and after giving him a reasonable opportunity to demonstrate that no such cause existed.
43. On the other hand, I do not say that there is nothing which, consistently with such an express term, judicial creativity could do to provide a remedy in a case like this. In Wallace v United Grain Growers Ltd (1997) 152 DLR (4th) 1, 44-48, McLachlin J (in a minority judgment) said that the courts could imply an obligation to exercise the power of dismissal in good faith. That did not mean that the employer could not dismiss without cause. The contract entitled him to do so. But in so doing, he should be honest with the employee and refrain from untruthful, unfair or insensitive conduct. He should recognise that an employee losing his or her job was exceptionally vulnerable and behave accordingly. For breach of this implied obligation, McLachlin J would have awarded the employee, who had been dismissed in brutal circumstances, damages for mental distress and loss of reputation and prestige.
44. My Lords, such an approach would in this country have to circumvent or overcome the obstacle of Addis v Gramophone Co Ltd  AC 488, in which it was decided that an employee cannot recover damages for injured feelings, mental distress or damage to his reputation, arising out of the manner of his dismissal. Speaking for myself, I think that, if this task was one which I felt called upon to perform, I would be able to do so. In Mahmud v Bank of Credit and Commerce International SA  AC 20, 51 Lord Steyn said that the true ratio of Addis's case was the damages were recoverable only for loss caused by a breach of contract, not for loss caused by the manner of its breach. As McLachlin J said in the passage I have quoted, the only loss caused by a wrongful dismissal flows from a failure to give proper notice or make payment in lieu. Therefore, if wrongful dismissal is the only cause of action, nothing can be recovered for mental distress or damage to reputation. On the other hand, if such damage is loss flowing from a breach of another implied term of the contract, Addis's case does not stand in the way. That is why in Mahmud's case itself, damages were recoverable for financial loss flowing from damage to reputation caused by a breach of the implied term of trust and confidence.
45. In this case, Mr Johnson says likewise that his psychiatric injury is a consequence of a breach of the implied term of trust and confidence, which required Unisys to treat him fairly in the procedures for dismissal. He says that implied term now fills the gap which Lord Shaw of Dunfermline perceived and regretted in Addis's case (at pp 504-505) by creating a breach of contract additional to the dismissal itself.
46. It may be a matter of words, but I rather doubt whether the term of trust and confidence should be pressed so far. In the way it has always been formulated, it is concerned with preserving the continuing relationship which should subsist between employer and employee. So it does not seem altogether appropriate for use in connection with the way that relationship is terminated. If one is looking for an implied term, I think a more elegant solution is McLachlin J's implication of a separate term that the power of dismissal will be exercised fairly and in good faith. But the result would be the same as that for which Mr Johnson contends by invoking the implied term of trust and confidence. As I have said, I think it would be possible to reach such a conclusion without contradicting the express term that the employer is entitled to dismiss without cause.
47. I must however make it clear that, although in my opinion it would be jurisprudentially possible to imply a term which gave a remedy in this case, I do not think that even if the courts were free of legislative constraint (a point to which I shall return in a moment) it would necessarily be wise to do so. It is not simply an incremental step from the duty of trust and confidence implied in Mahmud v Bank of Credit and Commerce International SA  AC 20. The close association between the acts alleged to be in breach of the implied term and the irremovable and lawful fact of dismissal give rise to special problems. So, in Wallace v United Grain Growers Ltd (1997) 152 DLR (4th) 1, the majority rejected an implied duty to exercise the power of dismissal in good faith. Iacobucci J said, at p 28, that such a step was better left to the legislature. It would be "overly intrusive and inconsistent with established principles of employment law".
48. Some of the potential problems can be illustrated by the facts of this case, in which Mr Johnson claims some £400,000 damages for the financial consequences of psychiatric damage. This form of damage notoriously gives rise at the best of times to extremely difficult questions of causation. But the difficulties are made greater when the expert witnesses are required to perform the task of distinguishing between the psychiatric consequences of the fact of dismissal (for which no damages are recoverable) and the unfair circumstances in which the dismissal took place, which constituted a breach of the implied term. The agreed statement of facts records that for the purposes of this appeal against a strike-out it is accepted that Mr Johnson's psychiatric illness was caused by "the circumstances and the fact" of his dismissal. At a trial, however, it would be necessary to decide what was caused by what.
49. Another difficulty is the open-ended nature of liability. Mr Johnson's case is that Unisys had knowledge of his psychological fragility by reason of facts lodged in the corporate memory in 1985-87 and therefore should have foreseen when he was engaged that a failure to comply with proper disciplinary procedures on dismissal might result in injury which deprived him of the ability ever to work again. On general common law principles it seems to me that if the necessary term is implied and these facts are made out, the claim should succeed. It may be that such liability would be grossly disproportionate to the employer's degree of fault. It may be likely to inhibit the future engagement of psychologically fragile personnel. But the common law decides cases according to principle and cannot impose arbitrary limitations on liability because of the circumstances of the particular case. Only statute can lay down limiting rules based upon policy rather than principle. In this connection it is interesting to notice that although the majority in Wallace v United Grain Growers Ltd were unwilling to accept an implied term as to the manner of dismissal, they treated it as relevant to the period of notice which should reasonably have been given. McLachlin J said that this was illogical and so perhaps it is. But one can understand a desire to place some limit upon the employer's potential liability under this head.
50. It follows, my Lords, that if there was no relevant legislation in this area, I would regard the question of whether judges should develop the law by implying a suitable term into the contract of employment as finely balanced. But now I must consider the statutory background against which your Lordships are invited to create such a cause of action.
51. In 1968 the Royal Commission on Trade Unions and Employers' Associations under Lord Donovan recommended a statutory system of remedies for unfair dismissal. The recommendation was accepted by the government and given effect in the Industrial Relations Act 1971. Unfair dismissal was a wholly new statutory concept with new statutory remedies. Exclusive jurisdiction to hear complaints and give remedies was conferred upon the newly created National Industrial Relations Court. Although the 1971 Act was repealed by the Trade Union and Labour Relations Act 1974, the unfair dismissal provisions were re-enacted and, as subsequently amended, are consolidated in Part X of the Employment Rights Act 1996. The jurisdiction is now exercised by employment tribunals and forms part of the fabric of Enlish employment law.
52. Section 94(1) of the 1996 Act provides that "an employee has the right not to be unfairly dismissed by his employer". The Act contains elaborate provisions dealing with what counts as dismissal and with the concept of unfairness, which may relate to the substantive reason for dismissal or (as in this case) the procedure adopted. Over the past 30 years, the appellate courts have developed a substantial body of case law on these matters. Certain classes of employees are altogether excluded from the protection of the Act. Section 108 excludes those who have not had one year's continuous service and section 109 excludes those over normal retiring age or 65. The tribunal may make an order for reinstatement, re-engagement or compensation. The latter consists of a basic award and a compensatory award. The basic award is related to the period of service but, by section 122(2), may be reduced by such amount as the tribunal considers just and equitable on account of the complainant's conduct before dismissal. A compensatory award under section 123(1) shall be, subject to qualifications:
53. By subsection (6), the tribunal may reduce the compensatory award by such amount as it considers just and equitable to take into account a finding that the complainant himself caused or contributed to his dismissal. These were the provisions applied by the tribunal in the present case to reduce Mr Johnson's award by 25%. Finally, section 124(1) limits a compensatory award to £50,000. This figure was substituted by section 34(4) of the Employment Relations Act 1999 with effect from 25 October 1999. Previously the maximum had been £12,000 and the applicable figure at the time of the award to Mr Johnson was £11,000.
54. My Lords, this statutory system for dealing with unfair dismissals was set up by Parliament to deal with the recognised deficiencies of the law as it stood at the time of Malloch v Aberdeen Corporation  1 WLR 1581. The remedy adopted by Parliament was not to build upon the common law by creating a statutory implied term that the power of dismissal should be exercised fairly or in good faith, leaving the courts to give a remedy on general principles of contractual damages. Instead, it set up an entirely new system outside the ordinary courts, with tribunals staffed by a majority of lay members, applying new statutory concepts and offering statutory remedies. Many of the new rules, such as the exclusion of certain classes of employees and the limit on the amount of the compensatory award, were not based upon any principle which it would have been open to the courts to apply. They were based upon policy and represented an attempt to balance fairness to employees against the general economic interests of the community. And I should imagine that Parliament also had in mind the practical difficulties I have mentioned about causation and proportionality which would arise if the remedy was unlimited. So Parliament adopted the practical solution of giving the tribunals a very broad jurisdiction to award what they considered just and equitable but subject to a limit on the amount.
55. In my opinion, all the matters of which Mr Johnson complains in these proceedings were within the jurisdiction of the industrial tribunal. His most substantial complaint is of financial loss flowing from his psychiatric injury which he says was a consequence of the unfair manner of his dismissal. Such loss is a consequence of the dismissal which may form the subject-matter of a compensatory award. The only doubtful question is whether it would have been open to the tribunal to include a sum by way of compensation for his distress, damage to family life and similar matters. As the award, even reduced by 25%, exceeded the statutory maximum and had to be reduced to £11,000, the point would have been academic. But perhaps I may be allowed a comment all the same. I know that in the early days of the National Industrial Relations Court it was laid down that only financial loss could be compensated: see Norton Tool Co Ltd v Tewson  ICR 45; Wellman Alloys Ltd v Russell  ICR 616. It was said that the word "loss" can only mean financial loss. But I think that is too narrow a construction. The emphasis is upon the tribunal awarding such compensation as it thinks just and equitable. So I see no reason why in an appropriate case it should not include compensation for distress, humiliation, damage to reputation in the community or to family life.
56. Part X of the Employment Rights Act 1996 therefore gives a remedy for exactly the conduct of which Mr Johnson complains. But Parliament had restricted that remedy to a maximum of £11,000, whereas Mr Johnson wants to claim a good deal more. The question is whether the courts should develop the common law to give a parallel remedy which is not subject to any such limit.
57. My Lords, I do not think that it is a proper exercise of the judicial function of the House to take such a step. Judge Ansell, to whose unreserved judgment I would pay respectful tribute, went in my opinion to the heart of the matter when he said:
58. I can see no answer to these questions. For the judiciary to construct a general common law remedy for unfair circumstances attending dismissal would be to go contrary to the evident intention of Parliament that there should be such a remedy but that it should be limited in application and extent.
59. The same reason is in my opinion fatal to the claim based upon a duty of care. It is of course true that a duty of care can exist independently of the contractual relationship. But the grounds upon which I think it would be wrong to impose an implied contractual duty would make it equally wrong to achieve the same result by the imposition of a duty of care.
60. There is one further point. During the argument there was some discussion of whether the provisions for disciplinary hearings were express terms of Mr Johnson's contract and what the consequences would be if they were. No such express terms were pleaded and Mr Faulks QC, who appeared for Mr Johnson, was not enthusiastic about doing so. Nevertheless, it may be useful to examine the matter in a little more detail.
61. Section 1(1) of the 1996 Act provides that upon commencing employment, an employee shall be provided with "a written statement of particulars of employment". This includes, but is not limited to, the "terms and conditions" of employment concerning various matters, including "the length of notice which the employee is obliged to give and entitled to receive to terminate his contract of employment" (section 1(4)(e)). Section 3(1) then provides that a statement under section 1 shall include a "note...specifying any disciplinary rules applicable to the employee or referring the employee to the provisions of a document specifying such rules which is reasonably accessible to the employee"
62. Consistently with these provisions, Mr Johnson was written a letter of engagement which stated his salary and summarised the terms and conditions of his employment, including the notice period. Apart from the statement that in the event of gross misconduct, the company could terminate his employment without notice, it made no reference to disciplinary matters. It was however accompanied by the Employee Handbook, which the letter of engagement said "outlines all the terms and conditions of employment". This was divided into various sections, the first being headed "Employment terms and conditions". These made no reference to the disciplinary procedure, which appeared in a subsequent section under the heading "Other procedures". There one could find the various stages of the disciplinary procedure: formal verbal warning, written warning, final written warning, culminating in dismissal, as well as the separate procedure for summary dismissal in cases of serious misconduct.
63. So did the disciplinary procedures constitute express terms of the contract of employment? Perhaps for some purposes they did. But the Employee Handbook has to be construed against the relevant background and the background which fairly looms over the disciplinary procedure is Part X of the 1996 Act. The whole disciplinary procedure is designed to ensure that an employee is not unfairly dismissed. So the question is whether the provisions about disciplinary procedure which (to use a neutral phrase) applied to Mr Johnson's employment were intended to operate within the scope of the law of unfair dismissal or whether they were intended also to be actionable at common law, giving rise to claims for damages in the ordinary courts.
64. Section 199(1) of the Trade Union and Labour Relations (Consolidation) Act 1992 gives ACAS power to issue "Codes of Practice containing such practical guidance as it thinks fit for the purpose of promoting the improvement of industrial relations". By section 207, a failure to comply with any provision of a Code is not in itself actionable but in any proceedings before an industrial tribunal "any provision of the Code which appears…relevant to any question arising in the proceedings shall be taken into account in determining that question." In 1977 ACAS issued a Code of Practice entitled "Disciplinary Practice and Procedures in Employment". It explained why it was important to have disciplinary rules and procedures which were in writing and readily available to management and employees. It said in paragraph 4:
65. In paragraph 10 it listed what disciplinary procedures should include. The Unisys procedures have clearly been framed with regard to the Code of Practice.
66. My Lords, given this background to the disciplinary procedures, I find it impossible to believe that Parliament, when it provided in section 3(1) of the 1996 Act that the statement of particulars of employment was to contain a note of any applicable disciplinary rules, or the parties themselves, intended that the inclusion of those rules should give rise to a common law action in damages which would create the means of circumventing the restrictions and limits which Parliament had imposed on compensation for unfair dismissal. The whole of the reasoning which led me to the conclusion that the courts should not imply a term which has this result also in my opinion supports the view that the disciplinary procedures do not do so either. It is I suppose possible that they may have contractual effect in determining whether the employer can dismiss summarily in the sense of not having to give four weeks' notice or payment in lieu. But I do not think that they can have been intended to qualify the employer's common law power to dismiss without cause on giving such notice, or to create contractual duties which are independently actionable.
67. I would dismiss the appeal.
68. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann, with which I am in full agreement. I add some words of my own in order to explain why I consider that the present is not an appropriate occasion in which to revisit the decision of your Lordships' House in Addis v Gramophone Co Ltd  AC 488.
69. That case established the principle that damages are awarded for breach of contract and not for the manner of the breach; accordingly nothing can be recovered for mental distress, anxiety, injury to feelings or (so it is said) damage to reputation. The case was concerned with a contract of employment and the actual decision was that damages for wrongful dismissal are limited to compensation for the financial loss arising from the premature determination of the contract where proper notice of dismissal has not been given: they cannot include compensation for the employee's injured feelings because he has been dismissed in an offensive and humiliating manner. The principle, however, is not limited to contracts of employment but is of general application in the law of contract.
70. The supposed rule that damages are not recoverable for financial loss arising from injury to reputation (or in a case of wrongful dismissal for making it more difficult for the plaintiff to find employment) is not easy to defend and may no longer be the law after Mahmud v Bank of Credit and Commerce International SA  AC 20. My noble and learned friend Lord Steyn has argued powerfully that it never was the law, being derived from a faulty headnote which misrepresented the true ratio decidendi of the case. Subject to this caveat, however, the general rule would seem to be a sound one, at least in relation to ordinary commercial contracts entered into by both parties with a view of profit. In such cases non-pecuniary loss such as mental suffering consequent on breach is not within the contemplation of the parties and is accordingly too remote. (The ordinary feelings of anxiety, frustration and disappointment caused by any breach of contract are also excluded, but seemingly for the opposite reason: they are so commonly a consequence of a breach of contract that the parties must be regarded not only as having foreseen it but as having agreed to take the risk of its occurrence: see Treitel, The Law of Contract 10th ed, p 923. Contracts which are not purely commercial but which have as their object the provision of enjoyment, comfort, peace of mind or other non-pecuniary personal or family benefits (as in Jarvis v Swans Tours Ltd  QB 233 and similar cases) are usually treated as exceptions to the general rule, though in truth they would seem to fall outside its rationale. Such injury is not only within the contemplation of the parties but is the direct result of the breach itself and not the manner of the breach. Indeed the avoidance of just such non-pecuniary injury can be said to be a principal object of the contract.
71. In Addis's case the House of Lords treated a contract of employment as an ordinary commercial contract terminable at will by either party provided only that sufficient notice was given in accordance with the terms of the contract. This was the classical approach to such contracts which the House of Lords was content to confirm more than half a century later. In Ridge v Baldwin  AC 40, 65 Lord Reid observed that an employer can terminate the contract of employment at any time and for any reason or for none. It follows that the question whether damages are recoverable does not depend on whether the employer had a good reason for dismissing the employee, or had heard him in his own defence, or had acted fairly towards him: it depends on whether the dismissal was in breach of contract. In Malloch v Aberdeen Corporation  1 WLR 1578, 1581 Lord Reid restated the position:
72. The common law, which is premised on party autonomy, treated the employer and the employee as free and equal parties to the contract of employment. Each had the right, granted by the contract itself, to bring the contract to an end in accordance with its terms. But by 1971 there was a widespread feeling, shared by both sides of industry, that the legal position was unsatisfactory. In reality there was no comparison between the consequences for an employer if the employee terminated his employment and the consequences for an employee if he was dismissed. Many people build their lives round their jobs and plan their future in the expectation that they will continue. For many workers dismissal is a disaster. In 1964 the Government announced that it would discuss with representatives of employers and trade unions the provision of procedures to give employees effective safeguards against arbitrary dismissal. In 1968 the Royal Commission on Trade Unions and Employers' Associations under the Chairmanship of Lord Donovan reported that it was urgently necessary for employees to be given better protection against unfair dismissal and recommended the establishment of statutory machinery to achieve this.
73. The recommendations of the Royal Commission were given effect by the Industrial Relations Act 1971. This left the common law and the contract of employment itself unaffected. It did not import implied terms into the contract. Instead it created a new statutory right not to be unfairly dismissed, enforceable in the newly established National Industrial Relations Court. The 1971 Act was replaced by the Employment Protection Act 1975 and its provisions as amended are now contained in the Employment Rights Act 1996. The National Industrial Relations Court was short lived and the jurisdiction in respect of unfair dismissal has for many years been exercised by industrial tribunals (now known as employment tribunals). These consist of a legally qualified chairman sitting with two lay members, one being a representative of the trade unions and the other of employers.
74. For the first time the 1971 Act enabled an employee to challenge his employer's conduct in exercising his legal rights on the ground that it was unreasonable. The Act contained elaborate provisions which defined the concept and scope of unfair dismissal and provided for compensation to be awarded or reinstatement or re-engagement to be ordered. It set an upper limit to the amount of compensation which could be awarded, which has since been increased from time to time, and allowed the tribunal to reduce the amount of an award if it considered that the employee had caused or contributed to his own dismissal. It provided for an upper age limit and a qualifying period of employment (which has since been reduced but not abrogated) thereby excluding certain categories of employees from its scope altogether.
75. During the past 30 years an extensive jurisprudence has been developed in relation to unfair dismissal. Employers have responded to the existence of the statutory right, as the Royal Commission intended that they should, by introducing elaborate procedures of complaint and warning before eventual dismissal which, whether or not contractually binding, are designed to ensure that employees are not unfairly dismissed. Since the right not to be unfairly dismissed is a statutory right which is not derived from contract, however, it is still open to an employee to claim that he has been unfairly dismissed even if his employer has faithfully complied with the contractual procedures.
76. Section 205 of the 1996 Act provides that some claims under the Act (including a claim in respect of unfair dismissal) must be brought by way of complaint to an industrial tribunal and not otherwise. This is a new provision made necessary because the 1996 Act (unlike its predecessor) gives industrial tribunals a limited jurisdiction in respect of some common law claims. The 1971 Act did not expressly provide that the jurisdiction of the industrial tribunals was exclusive, but it did not need to. It was clearly predicated on the existing state of the law as established in Addis's case and confirmed in Malloch's case. There would have been no point (for example) in excluding certain categories of employee from obtaining compensation for unfair dismissal if they could obtain a remedy by way of damages at common law; or for enabling the industrial tribunal to reduce the amount of compensation by reference to the employee's own conduct if the employee could obtain damages at common law without any such reduction. Prior to 1996, therefore, the jurisdiction of the industrial tribunals to award compensation for unfair dismissal was exclusive in practice, not because it was made so by statute, but because it was premised on the absence of a corresponding remedy at common law.
77. But the common law does not stand still. It is in a state of continuous judicial development in order to reflect the changing perceptions of the community. Contracts of employment are no longer regarded as purely commercial contracts entered into between free and equal agents. It is generally recognised today that "work is one of the defining features of people's lives"; that "loss of one's job is always a traumatic event"; and that it can be "especially devastating" when dismissal is accompanied by bad faith: see Wallace v United Grain Growers Ltd (1997) 152 DLR (4th) 1, 33 per Iacobucci J. This change of perception is, of course, partly due to the creation by Parliament of the statutory right not to be unfairly dismissed. If this right had not existed, however, it is possible that the courts would have fashioned a similar remedy at common law, though they would have proceeded by implying appropriate terms into the contract of employment. It would have been a major step to subject the employer's right to terminate the relationship on proper notice to an obligation not to exercise the right in bad faith, and a still greater step to subject it to an obligation not to exercise it without reasonable cause: (a difficult distinction, but one drawn by McLachlin J in Wallace's case, at p 44). Even so, these are steps which, in the absence of the statutory right, the courts might have been prepared to take, though there would have been a powerful argument for leaving the reform to Parliament. If the courts had taken the step themselves, they could have awarded common law damages for unfair dismissal consistently with Addis's case  AC 488, because such damages would be awarded for the breach of an implied but independently actionable term (as in Mahmud's case  AC 20) and not for wrongful dismissal. But the courts would have been faced with the difficult task of distinguishing between the mental distress and other non-pecuniary injury consequent upon the unfairness of the dismissal (for which the employer would be liable) and the similar injury consequent upon the dismissal itself (for which he would not). In practice, they would probably have been reduced to awarding conventional sums by way of general damages much as the industrial tribunals do.
78. I agree with Lord Hoffmann that it would not have been appropriate to found the right on the implied term of trust and confidence which is now generally imported into the contract of employment. This is usually expressed as an obligation binding on both parties not to do anything which would damage or destroy the relationship of trust and confidence which should exist between them. But this is an inherent feature of the relationship of employer and employee which does not survive the ending of the relationship. The implied obligation cannot sensibly be used to extend the relationship beyond its agreed duration. Moreover, manipulating it for such a purpose would be unrealistic. An employer who summarily dismisses an employee usually does so because, rightly or wrongly, he no longer has any trust or confidence in him, and the real issue is: whose fault is that? That is why reinstatement or re-engagement is effected in only a tiny proportion of the cases that come before the industrial tribunals.
79. But the courts might well have developed the law in a different way by imposing a more general obligation upon an employer to treat his employee fairly even in the manner of his dismissal. They could not, of course, have overridden any express terms of the contract or have held the dismissal itself to be invalid. As in the case of the statutory right, employers would probably have responded by introducing their own procedures of complaint and warning before eventual dismissal. But there would have been this difference; they would surely have taken care to incorporate such procedures into the contract of employment so that an employee who was dismissed in accordance with the procedure laid down in his contract could not claim damages for breach of an implied term.
80. But the creation of the statutory right has made any such development of the common law both unnecessary and undesirable. In the great majority of cases the new common law right would merely replicate the statutory right; and it is obviously unnecessary to imply a term into a contract to give one of the contracting parties a remedy which he already has without it. In other cases, where the common law would be giving a remedy in excess of the statutory limits or to excluded categories of employees, it would be inconsistent with the declared policy of Parliament. In all cases it would allow claims to be entertained by the ordinary courts when it was the policy of Parliament that they should be heard by specialist tribunals with members drawn from both sides of industry. And, even more importantly, the co-existence of two systems, overlapping but varying in matters of detail and heard by different tribunals, would be a recipe for chaos. All coherence in our employment laws would be lost.
81. For these reasons it is a step which, for one, I am not prepared to take. For the same reasons I am satisfied that it would not be appropriate to attempt to achieve the same result by taking the novel course of subjecting the employer's contractual rights to a tortious duty of care.
82. I would dismiss the appeal.