Dismissal of an employee who has undermined the trust and confidence at the heart of a contract of employment

17 March 2010

The Court of Appeal recently held that an employer is entitled to terminate the contract of an employee who is deemed to have undermined the trust and confidence at the heart of his/her contract of employment. The case was that of Dunn v AAH Ltd which involved two Directors who were dismissed having failed to comply with formal instructions to report all risks that could be a potential threat to the company’s profit situation.

The Directors’ contracts included a clause to the effect that they must comply with all lawful directions of their employer’s parent company. Furthermore, the parent company could summarily dismiss the Directors for breach of contract. In 2004, the parent company sent an email to all Managing and Finance Directors informing them that it was necessary to identify all corporate and local risks. A Risk Management Report was attached to the email which demanded twice-yearly Risk Inventories and the reporting of any losses from transactions as and when they occurred.

Shortly after, the subsidiary began to experience difficulties with one of its regular suppliers: goods were not provided on payment and reimbursement was proposed for stock that could not be delivered. The Directors failed to report these issues to the parent company in the next Risk Inventory. Chaos followed when investigations revealed that the principal of the supplier had been convicted in France of fraud. Legal advice was taken and the possibility of freezing orders explored.

Unfortunately, there was a delay of some five months before the situation was reported to the parent company. In fact, the parent company became aware of the potential fraud only after the subsidiary company had paid out £26 million to the supplier in return for a small amount of cash and stock. The Directors were summarily dismissed for their failure to report sooner to the parent company.

It was felt that the Directors had undermined the importance of the guidelines which had been sent to them by the parent company. Despite the guidelines being clear and mandatory in nature, the Directors had persistently failed to follow them. In essence, their contracts of employment were repudiated by the damage that they had caused to the trust and confidence in their employment relationship. There was no distinction between gross misconduct and repudiatory conduct and the employer was no longer required to maintain them in employment.

Comment
The duty to maintain trust and confidence is implied in every contract of employment. It binds both employer and employee but is rarely cited against employees. This case provides an avenue by which employers can use the implied term to justify the dismissal of an employee. However, this authority should be treated with caution as the facts of this particular case involved fraudulent issues, employees at Director-level and a significant sum of money being lost. We wait with anticipation to see how this case is applied to other factual scenarios going forward. Watch this space…