The rising star of the employment contract is undoubtedly the implied term
of mutual trust and confidence. Karen Seward and Sheila Fahy chart its meteoric
rise to fame
It is a product of our time. Just like the internet and DVDs, the implied
term of mutual trust and confidence was once a far-fetched concept. Now it is
seemingly used by everyone, everywhere, for everything.
The key to its ‘success’ is that it is framed in general terms, so it can be
applied to almost any situation. It has strengthened the position of employees
by filling gaps in the law not covered by legislation. Employers can no longer
rely on the absence of legal rules in any area to protect them if their conduct
is so bad it undermines the employment relationship.
One of the early appearances of the implied term of mutual trust and
confidence was in the late 1970s in the case of Courtaulds Northern Textiles
Ltd v Andrew  IRLR 84.
During the course of a heated argument, a manager told an employee:
"You can’t do the bloody job anyway." He responded by resigning and
claiming constructive dismissal.
Accepting that there was no truth in the manager’s comment, the EAT held the
employee was justified in claiming constructive dismissal. It said there was an
implied term in employment contracts that employers would not, without
reasonable and proper cause, conduct themselves in a manner calculated or
likely to destroy or seriously damage the relationship of confidence and trust
between the parties.
In United Bank v Akhtar  IRLR 507, the implied term of mutual
trust and confidence was used by the employee to override the express terms of
the employment contract. A mobility clause in Akhtar’s employment contract
permitted the bank to require him to transfer to anywhere in the UK where the
bank had a presence. The bank had discretion to pay relocation and other allowances.
Akhtar was asked to move from Leeds to Birmingham with less than one week’s
notice. When he asked for more notice to sell his house and so forth, the bank
refused. To make matters worse, it offered no financial assistance.
The difficulty for the tribunal was that, under normal principles of
contract law, an implied term cannot override the express terms of the
employment contract. Nevertheless, it manoeuvred its way around this problem to
find in the employee’s favour.
It held that while the implied term of mutual trust and confidence could not
override the express mobility provision, the latter had to be interpreted in
such a way that it included an implied requirement that reasonable notice would
be given, and that discretion concerning financial assistance be exercised in a
way that allowed the employee to comply with his contractual obligations. The
bank appealed – but to no avail.
Permanent health insurance
The same principles have been applied in the context of permanent health
insurance. The High Court held that – except where summary dismissal is
justified – the employer could not terminate the contract while the employee
was incapacitated for work if this would remove their entitlement to benefit
under the PHI scheme (Aspden v Webbs Poultry and Meat Group Holdings
 IRLR 521).
In TSB Bank v Harris  IRLR 157, the bank breached the implied
term of mutual trust and confidence by giving a reference to a prospective
employer which mentioned complaints against Harris of which she was unaware,
and which she had been given no opportunity to answer. This was despite the
fact the bank was required to make such disclosures under the rules governing
the regulation of the financial services industry.
The EAT pointed out the bank could have discussed the complaints with
Harris, giving her a chance to put her case, before making the disclosures.
Bonuses have also been touched by this troublesome term. In the case of Clark
v Nomura International plc  IRLR 766, the High Court held that
employers must not operate discretionary bonus schemes in an irrational or
The application of the term in Transco plc v O’Brien  ICR 721
was particularly tough on the employer. O’Brien was denied the opportunity to
enter into a revised contract of employment with enhanced redundancy terms,
which were offered to 75 other permanent workers.
Transco did not offer the terms to O’Brien because at the time, he was not
considered a permanent employee. But the Court of Appeal ruled that this was a
breach of the term of mutual trust and confidence. To deprive one member of a
large workforce of the same benefits as their colleagues is likely to seriously
damage the relationship of trust and confidence between employee and employer.
The widely publicised case of Malik v Bank of Credit and Commerce
International SA (in compulsory liquidation)  ICR 606 was also a
contractual claim for breach of the term of mutual trust and confidence.
The House of Lords held that the bank breached the term when it carried out
fraudulent business practices – the stigma of which prevented former employees
from obtaining work afterwards. The court’s groundbreaking decision ruled that
for the first time, it was possible for employees to recover damages for
ongoing financial loss. Damages had previously been limited to the notice
Damages for the manner of the dismissal
As the law stands, damages for the manner of a dismissal can be awarded in
cases brought under the statutory unfair dismissal scheme, but not in
contractual claims related to the term of mutual trust and confidence. What is
more, case law has thrown up a confusing distinction between cases where the
employee is dismissed, and those where they are suspended.
In a recent trust and confidence case Johnson v Unisys  IRLR
279, the House of Lords confirmed the rule that those bringing a contractual
claim for wrongful dismissal cannot claim damages for the manner of that
dismissal. It pointed out that as the statutory unfair dismissal scheme pays
compensation for the manner of the dismissal, it was not necessary for the
courts to develop a common law remedy as well. The implied term of mutual trust
and confidence was concerned with the preservation of the employment
relationship, and therefore had no place in dismissal claims.
Then Gogay v Hertfordshire County Council  IRLR 703 muddied the
waters. This was a contractual claim for damages for clinical depression,
caused by the employee’s suspension and the employer’s failure to properly
investigate the allegations that led to it. The court found in the employee’s
favour and said the strict rules in the Johnson case did not apply as the Gogay
case related to a suspension, not a dismissal.
The upshot of these and other recent cases is that where the employer’s
breach of the term of mutual trust and confidence leads to the employee being
suspended, the employee can recover damages, but where it results in dismissal,
he cannot. Employers could be forgiven for thinking they would be better off
dismissing an employee at an early stage, rather than suspending the matter to
complete an investigation. Clearly, this cannot be right.
Hot off the press, meanwhile, is the latest Court of Appeal decision on
trust and confidence in McCabe v Cornwall County Council  EWCA Civ
1887. A number of schoolgirls complained of inappropriate sexual conduct by
their teacher, Mr McCabe. Five days after the complaints were received, McCabe
was suspended, without being given details of the allegations made against him.
It was not until four months later, while still under suspension, that McCabe
was finally made aware of the allegations.
From then on, he suffered from psychiatric illness. During the course of the
next three years there were three disciplinary hearings, each unfavourable to
McCabe. In the end he was dismissed, even though it was found that his original
conduct could have been described as relatively trivial.
The High Court dismissed the case – the Johnson principle barred the claim
because it related to the manner of the dismissal and Gogay only applied in
suspension cases falling short of dismissal. But the Court of Appeal took a
different view. It said that dismissal is not an automatic bar to a claim of
breach of the term of mutual trust and confidence; if an employer’s conduct
would have entitled the claimant to bring a claim had it not been for the
dismissal then there may be a case to answer. However, in some cases, the
conduct that the employee claims has breached the term, will be so closely
linked to the dismissal that the Johnson bar will still apply.
The difficulty is knowing where a distinction can be drawn. The Court of
Appeal indicated factors that may be relevant:
– Whether the employer has embarked on disciplinary proceedings with
dismissal already in mind
– Whether warnings have been issued and under what circumstances
– Whether there is a natural break in the disciplinary process before the dismissal
becomes a practical proposition
– Whether the injury complained of is attributable to the employer’s conduct
Implications for employers
Because trust and confidence claims can be brought in almost any area of
employment, it can be hard to see them coming. What do they look like? After
all, the cases described above appear to have little in common.
There is some comfort in the fact that what they do share are examples of
fairly extreme treatment of one form or another – treatment that is irrational
or perverse, wilfully high-handed, or seeks to gain advantage from the
employer’s position of power over the employee.
The abuse of managerial discretion is another possible target for this sort
of claim. Beware, for instance, of operating bonus and other incentive schemes
and appraisal processes in secrecy. Transparency in how bonuses are awarded and
the process underpinning the appraisal system will be key to avoiding claims.
In short, it seems there is potentially a risk attached to any decision that
puts the employee in a difficult or impossible position without giving them the
chance to put his case.
On the disciplinary and grievance side, there are things employers can do to
minimise exposure to potential claims. Ensure comprehensive disciplinary and
grievance procedures are in place, and that those responsible for operating
those procedures are adequately trained.
Delay in managing a problem will be a crucial element in mutual trust and
confidence claims, especially where it has an adverse effect on the employee.
There are likely to be more stress and psychological injury claims arising from
situations where the employer has dithered over a grievance, disciplinary
hearing or investigation. Employers must make sure they manage decisively.
Partner Karen Seward and professional support lawyer Sheila Fahy are members
of Allen & Overy’s employment, pensions and incentives department t