Chief Executive’s agreed payoff overturned

28 April 2009

The High Court today finds that a Compromise Agreement agreed between Maidstone and Tunbridge Wells NHS Trust and its former chief executive is unlawful.

Summary
In a Judgment announced today, the Maidstone and Tunbridge Wells NHS Trust (“the Trust”) has successfully defended a claim for breach of contract brought by its former chief executive, Rose Gibb. The Trust was entitled to withhold the payment it had promised to make to Ms Gibb under a Compromise Agreement (the Agreement) entered into when the employment ended. The Agreement was found to be unlawful and unenforceable and.

Facts
A Healthcare Commission report (“Report”) into the spread of clostridium difficile (C Difficile) on the Trust’s wards concluded that the Trust and its management team had failed to protect the interests of patients. 90 patients died as a result of the C Difficile infection. Ms Gibb’s management style, as well as her leadership of the Trust, was highly criticised in the Report as contributing to the spread of the infection. After considering the contents of the draft report, the Trust board decided that Ms Gibb’s employment must be terminated before the report was published, whether by dismissal or by agreement.

Ms Gibb and the Trust agreed to enter into the Agreement which provided for a payment of approximately £250,000, representing £75,427 in lieu of notice and a compensation payment of £174,573, to her. In the Agreement, Ms Gibb accepted the termination of her employment and agreed not to pursue any grievance or bring any contractual or statutory claim against the Trust. The Trust was advised in reaching this arrangement.

After the Agreement was concluded, the Department of Health (DoH) instructed the Trust’s officers to withhold the severance payment to Ms Gibb. The DoH subsequently authorised the Trust to make a payment to Ms Gibb in respect of her six months’ notice period in the sum of approximately £75,000, which it did. The DoH believed that the compensation element of the Agreement had been too generous and the Trust had insufficient powers to pay the amount it had agreed. As a consequence, the Trust refused to make any further payment relying on the fact that its Agreement with Ms Gibb was “ultra vires” (unlawful) notwithstanding the processes it had undertaken before agreeing it.

Ms Gibb sued the Trust for breach of contract and also claimed that in not paying her the agreed amount, the Trust had unjustly enriched itself by keeping the additional £175,000 it had agreed to pay her.

Held
In deciding in favour of the Trust, the High Court stated that the Agreement was ultra vires. Under the Agreement, the Trust had agreed to pay approximately £100,000 more than it was lawfully entitled to do. The Court had regard to the Wednesbury principles and noted that the exercise of a Trust’s powers as a public body must be done reasonably and properly. The Court found that the following elements were reasonably and properly included:

(a) contractual payment she would have received in lieu of notice; and the

(b) maximum award that an Employment Tribunal could make in her case.

The High Court stated that paying the additional £100,000, which it found to be “irrationally generous” could not be justified by referring to Ms Gibb's past good performance, her lengthy and good previous NHS service and the possibility it would take her up to 18 months to find other employment.

Ms Gibb’s Counsel claimed that even if the Agreement was ultra vires, an equitable remedy might be available. In particular he argued that the claim for unjust enrichment should succeed in respect of the benefits the Trust received under the Agreement without having compensated her. These were the costs saved by not pursuing the potential legal proceedings and internal grievances and the benefit of the “gagging” clause. This argument was rejected. In particular, it was found that Ms Gibb failed to instigate proceedings to recover the possible unfair dismissal compensation, despite being aware that the DoH had instructed the Trust to withhold the compensatory element of the payment. Accordingly, she has not been able to recover any payment in respect of unfair dismissal compensation.

The High Court Judge ordered Ms Gibb to pay the Trust’s costs and he refused her permission to appeal.

Comment
This case reinforces that NHS bodies are limited to their powers and that only reasonable payments might be made. Despite a formal agreement being concluded following the Trust’s processes, including taking advice, the Agreement was overturned as it was seen as unjustifiable in these circumstances. The Trust had taken into account things it should not and had evaluated the potential costs of alternative action wrongly. It is also notable that although the Treasury guidance had been referred to in terms of seeking approval it had not been followed. This should have been done.

In analysing the impact of this case, the effect in terms of limiting the expectations of staff who might have to leave should not be underestimated. Additionally (and also as a result of current conditions in terms of financial restraint) the option for employers to take needful action, dismiss and stand by the consequence notwithstanding the risks of litigation should always be borne in mind.