Proprietary remedies, fiduciary bribes, and dishonest assistants: FHR and Novoship

October 2nd, 2014 by Rupert Paines

Directors and senior employees will often have wide-ranging managerial power over their companies: the ability to commit or disburse company assets, with significant autonomy and limited detailed oversight. Those in such positions will not always act responsibly, and will be attractive targets to others seeking a share of the potential spoils. In two important judgments from July, the Court of Appeal and Supreme Court significantly increased the remedies available against both bribed fiduciaries and those who bribe them. Read more »


Calculating Damages for a Lost Career: Sharan Griffin v Plymouth Hospital NHS Trust

September 25th, 2014 by Harini Iyengar

Harini Iyengar comments on the latest Court of Appeal case on the calculation of damages for a lost career


The Court of Appeal has conducted an interesting analysis of the proper approach towards calculating damages for a lost career, namely the assessment of future loss of earnings and of pension loss in a final salary scheme, in Griffin v Plymouth Hospital NHS Trust [2014] EWCA Civ 1240.  It rejected the challenge to the period of time for which future loss of earnings was compensated, but held that the failure to apply the substantial loss method of calculating pension losses had been an error of law in the circumstances of the case.

The Claimant was a specialist clinical technician in bone densitometry who had fallen ill with systemic lupus erythematosus in 2007 and had resigned in 2009 claiming that Plymouth Hospital NHS Trust had failed to make reasonable adjustments to facilitate her return to work.  She won her claims of constructive unfair dismissal and disability discrimination.  The Claimant’s salary had been £32,753 and, on the basis that she would now work a 25-hour week because of her disease, she was awarded compensation of £105,643.01, which increased on remission to £166,595, and which she appealed again.  The Claimant had very specialist skills for which the NHS provided the only real market in her local area.  Underhill LJ urged HMCTS and / or the Judicial College to give priority to producing an updated version of the 2003 Guidance “Compensation for Loss of Pension Rights – Employment Tribunals” (“the Pensions Guidance”) on the assessment of pension loss in the Employment Tribunal, to take account of important changes in pension law and practice.

The Appeals

The Claimant appealed to the Employment Appeal Tribunal arguing that the award of compensation by the Employment Tribunal (“the Tribunal”) was too low.  Supperstone J remitted the case to the Tribunal to make further findings and then reconsider its award.  The Tribunal increased the award on remission.  Again, the Claimant appealed that the compensation was too low.  HHJ McMullen dismissed that appeal.

Two findings of fact were critical to the Tribunal’s first assessment of financial loss: (1) with reasonable adjustments, Ms Griffin would have continued her employment indefinitely on a 25-hour week; (2) in the events which happened, her return to Plymouth Hospital was now impossible but she could find no other work because no other local employer needed her specialist skills.

The award of the entirety of her past loss of earnings until the date of the hearing on the basis of a 25-hour week was uncontroversial.  Future loss of earnings was more complex.  The original remedy judgment held that the Claimant was “likely” to obtain suitable alternative employment at 25 hours a week in a year’s time, and so awarded her £15,201.48.  It was just an estimate based on an assumption that she would continue to make reasonable efforts to mitigate her loss, and using a mid-point of the probabilities in accordance with Elias LJ’s remarks in Wardle v Credit Agricole Corporate and Investment Bank.  Nevertheless, the Tribunal was silent as to what sort of job it expected the Claimant to obtain and at what level of remuneration.  Supperstone J considered that that had been an error of law and remitted the case to the Tribunal to review its decision on continuing loss of earnings.

On remission, the Tribunal heard no further evidence but relied on the evidence and submissions which had been presented at the first hearing, supplemented by further written and oral submissions.  It noted that the Claimant had applied for positions with pro-rata salaries of £11,000-£22,000 and was satisfied that there were no other positions outside that range which were suitable for her.  She had transferable skills of administrative and clerical natures.  It went on to find that, despite the lack of any evidence as to how she could obtain promotion in an administrative role, she would impress a future employer with her intelligence, capability and determination, she would have obtained a job at £18,000 pro rata, but have progressed to management and earned £25,000 pro rata after five years and £30,000 pro rata after another five years, and after a further two years she would have achieved parity with her job for the Respondent.  This gave a total of £43,196.51 in loss of future earnings.

As for pension loss, the Claimant had been a member of the final salary NHS pension scheme.  At the first remedy hearing, both parties had relied on the Pensions Guidance although – as typically happens – the Claimant had contended for the substantial loss approach and the Respondent for the simplified approach.  Using the simplified approach, the Tribunal assessed pension loss at £32,827.69, based on a finding that the Claimant would be able to join a final salary pension scheme again after four years. On remission, the Tribunal again decided to adopt the simplified loss approach.

Therefore, the issues for the Court of Appeal were: (1) the lawfulness of the Tribunal’s decision to limit her period of future loss to 12 years; and (2) the use of the simplified approach to the assessment of pension loss.

The Period of Loss

The first issue pertaining to the period of loss was whether the Tribunal had been right, on remission, to exclude evidence of subsequent developments.  The second issue was the lawfulness of the finding that she would regain her previous level of earnings after 12 years.

By the date of the remitted remedy hearing, several months had passed since the date on which the first remedy hearing had found that the Claimant would have found work, but she had not.  Instead, she had accepted advice from the Job Centre to take a National Vocational Qualification in Business Administration, which required a work or voluntary placement, and so she had begun a voluntary year-long placement.  She had been refused permission to present documentary evidence to establish these facts.

Before the Court of Appeal, the Claimant relied on Curwen v James and NCP Services Ltd v Topliss to argue that it had been an error of law for the Tribunal to speculate about that which it already knows.  The Respondent contended that Supperstone J had remitted only the issue of what level of earnings the Claimant should expect from the date at which she obtained paid employment, and not the settled finding as to when that date would be.

Admission of New Evidence as to Period of Loss

Underhill LJ distinguished between the situation in which a court or tribunal at first instance is conducting its primary assessment of compensation and the situation in which an appellate court is asked to admit evidence of events occurring subsequent to the primary assessment of compensation.  He said that the principle in Bwalfa and Merthyr Dare Steam Collieries (1891) v Pontypridd Waterworks Co – that in assessing compensation the decision maker must avail himself of all the information at hand, not listen to conjecture on a matter which has become established fact, and not guess when he can calculate – must apply just as much when a tribunal is reconsidering damages as a result of remittal.  The second situation was essentially different, however, as the appellate court approached a case in which a valid final award had been made.  The general approach is that because of the important interest in the finality of litigation, neither party should be able to re-open a final award simply because things had turned out differently from what had been expected.  Nevertheless, Underhill LJ pointed out, that approach was not applied with absolute rigour.  He said the best guidance was that provided by Lord Wilberforce in Mitchell v Mulholland, that “the matter is one of discretion and degree”.  New evidence was likely to be admissible where basic assumptions had been falsified by subsequent events, or where a refusal would affront common sense or a sense of justice, or on other grounds which “must be left to the Court of Appeal”.

The Finding as to the Date on which the Claimant would Obtain New Employment

The Court considered that it was clear from Supperstone J’s judgment that the remitted question pertained to the Claimant’s rate of remuneration in the employment which the Tribunal had found that she would obtain after a year, and that there had been no challenge before Supperstone J as to the date on which she would obtain it.  Whether the Claimant should be allowed to take advantage of the adventitious opportunity of the appeal to adduce fresh evidence was a matter for the discretion of the Tribunal in accordance with the guidance given in Mitchell v Mulholland.  Underhill LJ considered that the documents about the Claimant’s NVQ placement added nothing of significance in regard to the level of job she might in due course hope to obtain or her rate of pay, and the Tribunal had already had a wealth of information from the first hearing about the type of work she might do.  Further, the Claimant had never in fact tried to rely on the documents to challenge the finding as to the date on which she would obtain employment.  The Court of Appeal made clear, however, that even if the Claimant had sought to have the new evidence admitted in order to try and change the finding as to the date on which she would obtain new employment, the question of the date which had been found at the original remedy hearing was a good example of the type of matter falling within a field of uncertainty in which the trial judge’s estimate had been made, which should not be tampered afterwards, in the interests of finality.

The Finding that the Loss would End after Twelve Years

Before the Court of Appeal, the Claimant criticised the Tribunal’s approach to her medical evidence, in particular that it had found she would eventually take on a management role despite the greater stress which that would involve.  Underhill LJ, however, firmly stated that in fact there was nothing in any of the medical evidence which would justify a conclusion that the stress of a management role might mean that the Claimant was incapable of fulfilling such a role.  He accepted a criticism that the Tribunal, whilst refusing the Claimant permission to adduce documentary evidence, had commented on her submission that she was doing a voluntary placement which it inferred was in a stressful environment, but held that this error did not vitiate the Tribunal’s second remedy judgment as a whole.  The Court rejected a submission that the finding of a twelve-year period was perverse and /or inadequately reasoned, because the exercise was inherently based on speculation about the Claimant’s attitude and abilities and the local job market.  Underhill LJ condemned as “hopeless” a submission that the Tribunal had erred in placing too much reliance on the Claimant’s performance as a witness and as an advocate when assessing her abilities and attitudes.  Likewise, a point that the Tribunal had erred by failing to take account of the possibility that the Claimant might have been promoted had she remained at the Respondent failed because she had made no submission on those lines to the Tribunal.

Finally, the Court of Appeal rejected an argument that the Tribunal had erred in law by omitting to use the Ogden Tables to calculate the Claimant’s future loss of earnings.  The point did not arise for determination, because the Court had already held that the Tribunal had lawfully found that she had not suffered a career-long loss.

Whilst expressing sympathy for the Claimant’s serious long-term debilitating disease, Underhill LJ said that the Tribunal was under no obligation to take a pessimistic if not indeed rather demeaning view that her disease prevented her, as a woman of ability and determination, from ever again undertaking a job with some degree of responsibility, particularly once she was freed from the toils of litigation.

Pension Loss

As to pension loss, the Court of Appeal was careful to state that the only issue for them was whether it had been an error of law to use the simplified approach to pension loss instead of the substantial loss approach, and that the judgment should not be treated as an attempt at a comprehensive summary of the Pensions Guidance nor used as a short-cut where different issues arise.  Underhill LJ then reminded himself that in a final salary scheme the employee’s entitlement is simply to the benefits and there is no entitlement to the employer’s pension contributions.  The loss takes the form of loss of enhancement to accrued pension rights and loss of acquisition of future rights.  For loss of enhancement, actuarial tables are provided in the Pensions Guidance.  Only the latter head of loss should be affected by the choice between the simplified and substantial loss approaches.  The essential difference between the two approaches is that when assessing pension losses arising in the period after termination of employment, the simplified approach measures loss by reference to the employer’s pension contributions, regardless of the fact that it was a final salary pension scheme.  The substantial loss approach requires the use of actuarial tables comparable to the Ogden Tables.  After using the tables, the Tribunal generally has to apply withdrawal factors to reflect the probability that the particular employee before it would have left employment before retirement age other than for the usual risks of mortality and disability.

Underhill LJ noted in passing that he respectfully agreed with Elias P’s criticism of the Pensions Guidance in Network Rail Infrastructure Ltd v Booth, that, where an employee had lost employment with a final salary pension scheme but obtained new employment with a money purchase pension scheme, it was unnatural to take account of the new employer’s pension contributions when assessing loss of earnings, but to disregard them when calculating pension loss, as the Pensions Guidance required.

For Underhill LJ, the tendency of the Pensions Guidance to limit the use of the substantial loss approach to cases, in which the employment had continued for a long time, the employment was very stable, and the employee had reached a certain age where she was less likely to move on, was explained by the fact that those three factors increased the likelihood of the employee still being an active member of the pension scheme at retirement – which would justify an assumption of “whole-career loss”.  Such an employee was to be contrasted with an employee who probably would have changed jobs anyway after a couple of years.

Pragmatically, the Court of Appeal pointed out that if the substantial loss approach were taken and then a massive, intuitive, withdrawal factor had to be applied, the level of uncertainty would beg the question whether there had been any point in attempting to assess whole-career loss in the first place.

Underhill LJ confessed to finding that section of the Pensions Guidance “a little opaque” but considered it clear that the substantial loss approach was recommended only where there was a sufficiently firm basis for the necessary assumptions, eg where the employee had already found new employment, or it had been determined that the employee would never find new employment, or a date had been found by which the employee would have found new employment.

Underhill LJ criticised the Tribunal for rejecting the substantial loss approach solely on the basis that, when considering whether the Claimant had been in the Respondent’s employment “for a considerable time” it said that that factor did not apply where the Claimant, aged 34, was still a long way from retirement.  The Tribunal had failed to address the question of how likely the Claimant had been to stay in that employment until retirement.  On the facts of the particular case, he pointed out, the Claimant was an employee with a specialist skill for which the principal, if not indeed the only, market was in the NHS, so she was likely to remain in the NHS for her entire career despite being 34.  Furthermore, her medical condition made her cautious about embarking on a major career change.

Noting that the Tribunal had applied a withdrawal factor of 20% to the calculation of loss of enhancement, the Court of Appeal said that that finding, even though made for a different purpose, was inconsistent with the finding that the uncertainties of the Claimant’s continued NHS employment were so great as to rule out the substantial loss approach to loss of future pension rights.  Underhill LJ relied on the Network Rail case to back up his views.

The Court of Appeal further criticised the Tribunal for assessing the likelihood of the Claimant eventually regaining her pre-dismissal earnings after 12 years instead of doing its proper task of calculating her pension losses.

Underhill LJ observed that the Tribunal had found that the Claimant would have obtained employment with the benefit of a final salary pension scheme after four years, but had not relied on that factor when rejecting the substantial loss approach.  The Court of Appeal considered that the Tribunal had had no proper basis for rejecting the expert’s unchallenged evidence that it had been unlikely that any future employer would offer a final salary scheme as most of these are closed to new entrants.

The Court of Appeal held that the Tribunal misdirected itself in the reasons it gave for applying the simplified loss approach and that in the particular circumstances of the case and in the light of other findings, the only correct conclusion was to apply the substantial loss approach.

The Pensions Guidance

In conclusion, Underhill LJ pointed out that although the Pensions Guidance was extremely valuable, it had no statutory force and its recommendations are “not gospel”.  Further, there have been several important changes in pension law since 2003, other changes are forthcoming, and the current Pensions Guidance is out of date.  He urged HMCTS and the Judicial College to review and update the Pensions Guidance as a priority.


As fewer and fewer new employees are able to join final salary pension schemes, public sector employees are becoming more and more aware of the very valuable pension rights which they enjoy, which they simply cannot replicate elsewhere.  Therefore, there are many incentives for public sector employees to litigate aggressively on pensions issues.

The current cap on compensation for unfair dismissal is £76,574, although, for dismissals after 29 July 2013, a Tribunal may not award a successful Claimant more than one year’s gross earnings.  This case, involving disability discrimination, illustrates the increasing discrepancy between compensation for unfair dismissal claims and compensation for discrimination or whistleblowing claims.

Nevertheless, in practice, the cap on unfair dismissal compensation has created a dangerous tendency for parties in employment litigation to start with a rough and ready, and rather short-term, approach towards the analysis of the future losses caused by a statutory tort.  Given the current high rate of settlement in employment disputes, it is unsurprising that parties are slow to expend time and costs on a very detailed schedule of loss at an early stage in proceedings.  Likewise, given the fact that many cases do settle in the period between the liability and the remedy hearing, parties, for good reasons, often dally in preparing and sharing their rigorous calculations of loss of future earnings and pension loss.

The assessment of future loss of earnings and of pension loss is a complicated and time-consuming matter, which requires the careful collection of relevant evidence, its analysis, an attempt to speculate about the future in a logical and rational manner, and a series of precise mathematical calculations.  It is refreshing to the see the Court of Appeal grappling with the outdated and awkward Pensions Guidance, which practitioners have found so difficult to apply in practice over the years.  As Underhill LJ points out, an updated version of the Pensions Guidance is overdue and will be very helpful to the Employment Tribunals, employers, employees, and their advisers.

As with any interesting appellate judgment, the implications of this case are limited by its specific facts, and other questions remain unanswered – in particular whether it would be an error of law not to use the Ogden Tables when assessing compensation in a case of lifetime career loss.


Updated UK Corporate Governance Code: Remuneration Changes

September 17th, 2014 by Tom Ogg

The Financial Reporting Council (FRC) has today released an updated version of the UK Corporate Governance Code, which will apply to accounting periods beginning on or after 1 October 2014.  As promised by the consultation, the new Code attempts to ensure that the financial interests of board members are aligned with the long-term interests of the company.  Companies should “comply or explain”, i.e., if they are not following the Code, they should explain why.

Section D concerns remuneration.  The key provision is D.1.1: “Schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so.”  In other words, directors’ contracts should include malus or clawback provisions – concepts which will be familiar to those working in the financial services sector (see SYSC 19A of the FCA Handbook).

As regards non-executive directors: “They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning” (see A.4).  D.1.2 provides:  “Where a company releases an executive director to serve as a non-executive director elsewhere, the remuneration report should include a statement as to whether or not the director will retain such earnings and, if so, what the remuneration is.”  D.1.3 provides that non-executive members of the board should not normally receive share options or other performance-related elements.  They may do so with shareholder pre-approval, but there are dark warnings about independence, and the Code provides options should not be realised for at least a year after a non-executive director leaves his or her post.

On early termination, D.1.4 provides: “The aim should be to avoid rewarding poor performance. They [the remuneration committee] should take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss.”  Finally, D.1.5 states that notice periods should be a year or less.  There are provisions in respect of the process for making remuneration decisions in section D.2.

Thomas Ogg




The new conduct and remuneration regime for bankers: “Making individual accountability a reality”

July 30th, 2014 by Tom Ogg


On Wednesday 30 July 2014, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) released consultation papers relating to individual accountability and remuneration in the banking industry.  The changes apply, broadly speaking, to banks, building societies, credit unions and the nine investment firms designated by the PRA.

The proposed changes are detailed and wide-ranging.  This post concentrates on what is ‘new’: was revealed by the consultation paper, rather than setting out the framework that was set out in the Banking Reform Act and the Parliamentary Commission on Banking Standards.

The headlines are as follows:


  • The regulators have proposed new deferral and vesting periods for variable remuneration.  The minimum deferral period for Code Staff is increased from three to five years, and for senior managers (see below) the minimum deferral period is increased to seven years.  In both cases vesting must be no faster than pro rata.  The first vesting event must be delayed by a year for Code Staff, and by three years for senior managers.
  • Clawback, where a firm requires repayment back to the firm of remuneration already paid to employees, is proposed to be applied to the remuneration of both FCA and PRA-regulated firms currently within the Remuneration Code’s scope.  Clawback must be possible for a period of at least seven years from the date of the award of the remuneration.  For senior managers, firms must ensure that there is an option in employee contracts for the deferral period to be extended by three years (i.e. to ten years) where a firm has commenced an internal investigation (or a regulator has commenced an investigation) that could potentially lead to the application of clawback.
  • Buy-outs.  The PRA and FCA are consulting on four potential approaches to controlling the impact of firms buying out the variable remuneration lost by employees when they move positions, on account of ‘bad leaver’ clauses.  The options include: (1) banning buy-outs; (2) banning bad leaver clauses, for the purpose of ensuring that malus rules would continue to apply; (3) in effect, the regulator applying malus to buy-out awards; (4) relying only on clawback to control buy-outs.
  • Metrics.  The regulators are consulting on imposing a uniform rule for the calculation of profit, and for performance metrics, in relation to the calculation of bonus pools overall and for individual bonuses.

Conduct Rules

  • The FCA has stated that it intends to apply the Conduct Rules to all bank staff, except those in generic roles (such as receptionists or catering staff) “whose role would be fundamentally the same as it would be if they worked in a non-financial services firm”.  In other words, a far, far wider population of bank employees may now be disciplined by the FCA for misconduct.  The PRA has adopted a far narrower approach in accordance with its (prudential) objectives.  The rules under APER will continue to apply to non-banks.
  • The content of the proposed Conduct Rules is much the same as under the current approved persons regime (APER).  However, there is one new proposed rule for SMFs that is of note: “You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversea the discharge of the delegated responsibility effectively”.
  • Notification of disciplinary matters.  Firms are proposed to be required to report breaches or suspected breaches of the Conduct Rules by a SMF within seven days of the firm becoming aware of the matter.  In relation to other staff, firms will be required to produce a quarterly report only to the FCA.
  • The PRA has elected not to provide detailed guidance as to the effect of the new Conduct rules.  The FCA, however, has produced guidance.  This accords with the regulators’ differing approaches to producing policy material.

Senior Managers Regime

  • PRA-specified senior management functions (SMFs), who are the most senior individuals in a bank, are relatively small in number.  Only 11 specific positions are specified in the consultation paper.  The FCA-specified SMFs are far more numerous, including all non-PRA-specified board members, and certain functions currently specified under APER (e.g. the compliance and money laundering functions).
  • Banks will be required to produce a ‘responsibilities map’ which sets out how management and governance arrangements are allocated throughout the firm.  The responsibilities map should designed so that there are no gaps in accountabilities, and the firm’s board will be required to confirm annually that the map has no such gaps.
  • The PRA and FCA have taken slightly different approaches to the allocation of responsibilities amongst senior managers.  The PRA allocates specific responsibilities to each type of SMF – e.g. the chief finance function is responsible for finance.  In addition, the PRA has set out 18 ‘prescribed responsibilities’ that must be allocated to SMFs in the firm (whether PRA- or FCA-specified SMFs).
  • By contrast, the FCA will require the first 8 of the PRA’s prescribed responsibilities to be allocated to SMFs, but otherwise has a more flexible regime of ‘key functions’ that the FCA expects ought in most circumstances to be allocated to an individual SMF.  However, the consultation paper is relatively curt as regards the expected approach to handover certificates, and the content of statements of responsibilities.

Certification regime

  • The core of the certification regime is that banks rather than the regulators should assess the fitness and propriety of employees within the scope of the regime (which includes employees who could cause the bank ‘significant harm’, but are not SMFs).  However, the FCA does not propose to set out detailed rules for firms to apply.  Rather, it will amend the FIT section of the FCA Handbook “so that its application and relevance for firms’ assessments is readily apparent”.  By contrast, the PRA proposes to make general rules in due course.
  • Although the regulators differ slightly on their approach to general guidance, both regulators will require firms to (1) undertake a criminal records check before appointing a person to a certification function or a SMF and (2) take up references covering the last five years of the individual’s employment history for the same purpose.  Firms providing references will be required to disclose whether an individual breached a Conduct Rule, the basis for the firm’s conclusions, and any disciplinary action taken as a result.  This is a further expansion in the importance of references for individuals applying for jobs in the financial service industry.
  • The FCA’s proposed scope for individuals subject to the certification regime includes ‘material risk takers’ (i.e. individuals subject to the remuneration code); anyone who would have been a ‘significant influence function’ under APER but is not a SMF; customer-facing roles that have qualification requirements, as set out the Training and Competence Sourcebook section of the FCA Handbook; and anyone who supervises or manages another certified person.  However, only ‘material risk takers’ will be certified persons within the PRA certification regime, with certain exceptions.
  • If a firm refuses to renew the certificate of an individual, it will be required to “take reasonable care to ensure the individual ceases to perform the certification function in question”.  Clearly, the reasonableness of the removal of the certification will be key for the purposes of any unfair dismissal claims arising.

Impact on non-banks

  • Prior to the release of the consultation paper, the FCA had indicated that it was considering the changes that it would make to the approved persons regime for non-banks in the light of the changes for banks set out in the Banking Reform Act.  It would appear, at first sight, that those changes for non-banks are relatively limited.  Footnote 2 of the CP on accountability states: “Other regulated firms are not affected by the changes“.  As a result, the regulatory systems for individuals in respect of banks and non-banks will be quite different for the foreseeable future.

The deadline for responses to the two consultations is 31 October 2014.

Thomas Ogg


Remuneration Code: Clawback and the Bonus Cap

July 28th, 2014 by Tom Ogg

In recent days, two pieces of news related to the most controversial elements of the Remuneration Code have emerged: clawback, and the bonus cap.  The Remuneration Code applies to the variable remuneration (i.e. bonus) of certain employees of banks, building societies, investment firms, and some overseas firms of a similar nature.


Following the conclusion of the PRA’s consultation on “clawback”, the final instrument amending SYSC 19A (the Remuneration Code section of the PRA and FCA Handbooks) has been published by the PRA.  It is available here.

Clawback is a contractual mechanism whereby a firm may require repayment of remuneration already paid to an employee.  Under the proposals, variable remuneration (only) must be subject to clawback for a period of at least seven years from the date on which it was awarded.

The rules will only apply to PRA-regulated firms, which is a smaller group that to which the Remuneration Code applies generally.  For example, although the Code applies to all investment firms, only nine of the biggest investment firms are PRA-regulated. 

The key rule will be SYSC 19A.3.51B R (see the instrument):

A firm must make all reasonable efforts to recover an appropriate amount corresponding to some or all vested variable remuneration where either of the following circumstances arise during the period in which clawback applies:

(a)  there is reasonable evidence of employee misbehaviour or material error; or

(b)  the firm or the relevant business unit suffers a material failure of risk management.

A firm must take into account all relevant factors (including, where the circumstances described in (b) arise, the proximity of the employee to the failure of risk-management in question and the employee’s level of responsibility) in deciding whether and to what extent it is reasonable to seek recovery of any or all of their vested variable remuneration. 

Clearly, firms will struggle with phrases such as ‘all reasonable efforts’, ‘reasonable evidence’, ‘all relevant factors’ and ‘to what extent it is reasonable’.  For an in-depth discussion of the issues relating to clawback (including some of those terms), see Richard Leiper’s excellent article in the ELA Briefing (£).   The PRA’s instrument comes into force from 1 January 2015, and applies only to remuneration awarded after that date.

The Bonus Cap

At present, employees subject to the Remuneration Code may only be awarded a bonus that is no more than 100% of salary: see SYSC 19A.3.44 R.  However, a firm may award bonuses of 200% of salary, so long as the shareholders of the firm consent in accordance with the procedure set out in SYSC 19A.3.44B R.  The procedure requires, among other things, that 66% of the shareholders agree to the higher cap, or 75% if less than 50% of the shareholders are represented at the vote (as measured by voting power, rather than the number of shareholders).  The procedure is transposed from article 94(1)(g)(ii) of CRD4.

The European Banking Authority has now issued a Q&A on the precise mechanisms to be adopted at such a shareholder meeting.  It should be stressed, however, that the Q&As do not have the force of law, nor do they have ‘comply or explain’ status.  However, they may be of persuasive value in any future proceedings, and the Commission has a role in the drafting of the Q&As.   Two issues are usefully fleshed out by the Q&As:

First, there are points as to the specific procedure to be adopted at a shareholder meeting:

…without prejudice to national law, it should be noted that to determine what proportion of the share/ownership rights is “represented” as required by CRD, a poll vote should actually take place at the relevant shareholder meeting (even if the outcome of such a vote may appear obvious from a show of hands and/or any proxies received). In line with the applicable company law, firms should make it clear to shareholders/owners how each form of conduct (voting for or against, sending a proxy, abstaining, attending but not voting etc.) will be treated for the purpose of being represented. The meaning of being “represented” is the same for the threshold test (i.e. the 50% test) as for the majority test (i.e. the 66% or 75% test).

Voting results should be duly documented and disclosed.

Second, the issue of what to do with the votes of employees whose remuneration is at stake in the vote is addressed.  CRD4 and SYSC 19A.3.44B R (4) make clear that those employees are not to be permitted to participate in the vote on the bonus cap.  Helpfully, the Q&A states that the voting rights of those employees should not be counted in relation to the denominator, either.  In other words, when calculating whether a 50%, 66% or 75% threshold has been reached, the voting rights of those employees should be ignored entirely. 

Thomas Ogg


Company boards and equality laws

July 23rd, 2014 by Tom Ogg

The Equality and Human Rights Commission has today released guidance entitled Appointments to Boards and Equality Law, written to help companies and others understand what steps are permitted in order to increase the representation of women at board level.

The most important points to note:

  • Companies may select on grounds of sex if two candidates for a position are assessed to be of equal merit and where only one has a protected characteristics (e.g. gender) which is underrepresented in the company: section 159 of the Equality Act 2010.  Otherwise, positive discrimination is unlawful.
  • Companies may also take positive action to promote participation by women (and persons with other protected characteristics) if the (a) participation in a particular activity (such as holding a directorship in a particular company) is particularly low amongst persons sharing a certain protected characteristic, and (b) the aim of the positive action is to enable or encourage persons with that protected characteristic to take up that activity.

Examples of lawful positive action provided by the EHRC are (page 8 of the guidance):

  • reserving places for women on training courses in board leadership
  • targeting networking opportunities for women
  • providing mentoring and sponsor programmes, which assist in the development of female talent.
  • offering opportunities to women to shadow existing board members and/or observe board proceedings
  • placing advertisements where women are likely to read them and encouraging a pipeline of applicants, and
  • setting aspirational targets for increasing the number of women on boards within a particular timescale.

Finally, the guidance notes the provisions of the proposed EU Directive on improving the gender balance amongst non-executive directors of companies listed on stock exchanges (Directive 2012/0299).  It is a time-limited directive, ceasing to operate in 2028, that includes provision for Member States to impose financial penalties on firms for breach of its provisions.   The following measures are required by the Directive:

  • Unsuccessful candidates would be able to request information on the selection criteria relating to non-executive board positions, on the company’s comparative assessment of the candidates for the job, and on the company’s reasons for selecting candidates.
  • Companies would be required to publish information on the gender composition of their boards, and submit yearly progress reports describing the measures used and proposed in order to reach the 40 per cent target. Those failing to meet the target would be required to explain the reasons for their failure, the measures taken thus far and those planned for the future.

Note that the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 already imposes a requirement on certain companies to publish an annual report containing information about the gender composition of their boards.

The guidance does not have the status of a Code of Practice issued under section 14 of the Equality Act 2006 (possibly for political reasons).  Courts and tribunals must, under section 15(4) of the 2006 Act, take into account any part of a Code of Practice that appears relevant to them to any questions that arise in proceedings.  However, although only guidance and not a Code of Practice, the fact that it is issued by the EHRC will usually be enough to ensure that a court seized of a matter to which the guidance is relevant will almost take it into account.

The guidance should therefore be helpful to companies and other bodies who worry about falling foul of equalities legislation, which is easily done.  See, for example, the prominent political blogger Guido Fawkes, who it appears was diligent enough to read page 10 of the guidance, which notes that all-women shortlists are unlawful under equalities legislation – and excitedly wrote a post on the guidance.  He failed, however, to reach page 11 of the EHRC guidance, which outlines the special provisions for political parties (until 2030) which permit the use of all-women shortlists by registered political parties in relation to elections to government (see sections 104 and 105 of the Equality Act 2010).

Thomas Ogg


Guido Fawkes has gamely updated his blog post to reflect the legal position set out above.  This blog was referred to as being written by  “people who seem to know what they are talking about“, which is as good an epithet for this blog as we could hope for.



Wrotham Park damages for breach of restrictive covenants and illegitimate competition? The Court says yes in One Step (Support) Ltd –v- Morris-Gardner & Anor [2014] EWHC 2213

July 15th, 2014 by Simon Devonshire QC

In Wrotham Park v Parkside Homes [1974] 1 WLR 798, the Court declined to order a land-owner to destroy a property he had built on his land in breach of a covenant in favour of his neighbour.  Instead, it awarded the neighbour damages in lieu of an injunction under Lord Cairns’ Act, in such sum “as might reasonably have been demanded by the [covenantee] … as the quid pro quo for relaxing the covenant” (815).  The Court assessed the damages as a modest percentage of the profit anticipated (“with the benefit of foresight”) by the contract breaker.

Employment lawyers have sought to exploit Wrotham Park for some time now, particularly following the seminal judgments of the House of Lords in AG v Blake [2001] 1 AC 268, where it was held that in exceptional circumstances (where conventional remedies had no value) the contract breacher could be required to account for the fruits of his breach of contract.  The implications of both decisions were considered in WWF-World Wide Fund for Nature v World Wrestling Federation [2007] EWCA Civ 286, a claim by the Fund that the Federation had breached contractual restrictions agreed between them on the use the Federation could make of the WWF initials.  The Court held that in light of the judgment in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830, it had to be regarded as settled that, on a claim by a covenantee for an injunction and damages against a covenantor who had acted in breach of a restrictive covenant, the Court might, in addition to granting an injunction to restrain further breaches, award damages in respect of past breaches notwithstanding that the covenantee could not establish actual financial loss (para 48), in the sum it would have been reasonable for the covenantor to pay and the covenantee to accept for the hypothetical release of the covenant. 

Much of the debate in the WWF case focused on the power to award damages in lieu of an injunction under Lord Cairns’ Act, and the cases decided under that jurisdiction (and in particular Wrotham Park).  However, the Court accepted (obiter) that such damages were available at common law (whether or not an injunction was sought).  As Chadwick LJ put it at para 54 “the power to award damages on the basis of what it would have been reasonable for the covenantor to pay for a hypothetical release does not depend on the covenantee establishing (as a factual premise) that, absent a release, the covenant could have been enforced by injunction …”.    The Court also said that it was wrong to regard this as a “gain-based” remedy.  Rather (para 55) “… that formula … was informed by the view … that the circumstances led inexorably to the conclusion that – had there been any negotiated release from the restrictions imposed by the settlement agreement – it would have been ‘on terms requiring payment of a royalty’.  The formula reflected the Court’s view as to the basis upon which the hypothetical bargain between the parties, acting reasonably, would have been made.”

Up to now attempts to apply that reasoning to breaches of post-termination employment covenants have met with resistance.    Conventional wisdom leant against the award of such damages in the paradigm employee defection case.  Wrotham Park damages are not available to the victim of a (contractual) breach as of right.  They “are available in broadly two situations: … where it is impossible to compute the loss or where compensatory damages would be inadequate”; Lighthouse Carrwood Ltd v Luckett [2007] EWHC 2866 at para 58.  The modern judicial development of Wrotham Park springs out of the House of Lords’ judgment in AG v Blake [2001] 1 AC 268, and the development of remedies “for innocent parties who will suffer loss from breaches of contract which are not adequately remediable by an award of damages” (per Lord Nicholls).  They will only be awarded where the Court is satisfied that they are “a just response to circumstances in which the compensation which is the Claimant’s due cannot be measured (or measured solely) by reference to identifiable financial loss”; per Chadwick LJ in World Wide Fund for Nature v World Wrestling Foundation Inc [2008] 1 WLR 455.  On even the more expansionist views of the availability of such damages, the Court has to proceed cautiously and incrementally, so as not to subvert the ordinary (expectation loss) principles governing the assessment of damages; van der Gaarde v Force India [2010] EWHC 2373 (QB) esp at paras 503, 505, 507 and 538.  It must be “manifestly unjust” to leave the Claimant with no award (para 538).  Such damages will not be appropriate at all where they provide relief “out of proportion to the real extent of the Claimant’s interest in proper performance”.

In BGC –v- Rees & Anor [2011] EWHC 2009 (QB) Jack J gave short shrift to a claim for Wrotham Park or transfer fee damages for the alleged breaches by individual brokers of their notice periods and PTRCs.  The claims posited a hypothetical negotiation between the recruiter and the employer from whom the employee had been (allegedly) poached. Tullett Prebon (i) argued that Wrotham Park could not be used as a panacea where the loss could be conventionally assessed, but where the alleged breach had not in fact harmed the victim’s economic interest, and (ii) pointed to the fact that there was no decided case where such damages had been awarded for breach of an employment contract.  Jack J. agreed (at para 97): “I have concluded that in the present situation release payment damages are not  available …  In English law three cases are of particular relevance: AG v Blake [2001] 1 AC 268, World Wide Fund for Nature v World Wrestling Foundation [2008] 1 WLR 455 and van der Gaarde v Force India [2010] EWHC 2373 QB.  The situation in the present case is one in which the court will ordinarily assess the loss of profit as best it may and award a figure.  The assessment may be difficult depending on the evidence which is available.  But the court is used to that, and can arrive at a figure just as it can, for example, in the difficult situation where it has to assess the loss of future earnings of a seriously injured teenager.  The intended function of the claim here is to avoid BGC’s problem that it cannot show that it has suffered any loss because it has not in fact done so.  In my judgment the award of release payment damages is not available as a substitute for conventional damages to compensate a claimant for damage he has not suffered.  Nor should it be used to award a larger sum than a conventional calculation of loss provides. [Emphasis Supplied]

There were signs in subsequent cases that other decisions of the High Court might take a less restrictive approach.  An attempt was made to claim Wrotham Park damages for breach of a confidentiality agreement in Jones –v- IOS (RUK) Ltd & Anor [2012] EWHC 348 (Ch).   Whilst the Judge found that (on the facts) a hypothetical negotiation would have yielded no (or at most a nominal) licence release fee, he did not suggests that this sort of case was per se inappropriate for such an approach to the assessment of loss.   On the contrary, he regarded it as “now well established that in an appropriate case damages for breach of contract may be measured by the benefit gained by the contract breaker from the breach … the court may award damages to the claimant to represent the price he could reasonably have extracted for requiring a licence payment in return for permitting the defendant to do what he has done” (para 97).  However, the consideration of the hypothetical negotiation had to be “founded upon the underlying realities of the situation against which it falls to be undertaken” (para 108) and would only be appropriate where it was manifestly unjust to leave the claimant with no award (para 109).    More recently, in Force India –v- I Malaysia Racing Team & Ors [2012] EWHC 616 (Ch) Arnold J concluded that what he called “negotiating damages” were available for breaches of both contractual and equitable obligations of confidence, although only where the claimant could not prove that he had suffered loss in any of the more conventional ways (para 424).

Which brings us to One Step (Support) Ltd –v- Morris-Gardner & Anor[2014] EWHC 2213.    The claimant (a company providing supported living services to children leaving care and to vulnerable adults) alleged that the defendants (a former director and manager) had breached non-compete covenants and obligations of confidentiality by setting up and operating a rival business.   The Court found the claim well founded.   It declined a claim for an account of profits for breach of contract (on the basis that such a remedy was only available exceptionally following AG –v- Blake, and on the facts the breaches were relatively straightforward and unremarkable).   However, the Court concluded that there was no need to find “exceptional circumstances for there to be an award of Wrotham Park damages, which might be considered to be simply one form of compensatory damages” (para 104), and that this was “a prime example” of a case in which such damages should be available – “[t[he defendants have breached straightforward restrictive covenants in circumstances where it will be difficult for One Step to identify the financial loss it has suffered by reason of the … wrongful competition, not least because there was a degree of secrecy in the establishment of [the defendant’s] business which has not been fully reversed by the disclosure process” (para 106).   The Judge buttressed the conclusion that negotiating damages were available because “the covenants provided that the restraint was subject to consent, not to be unreasonably withheld”.    He awarded Wrotham Park or ordinary damages, at the Claimant’s election (para 108) 

This judgment (if followed) seems to show a significant relaxation of the circumstances in which Wrotham Park damages might be appropriate.    Indeed, the judgment doesn’t recognise any of the notes of caution or restriction sounded in earlier cases (perhaps because they weren’t cited or relied upon), and suggests that such damages are available on an either/or basis at the claimant’s election (presumably depending upon the option that yields the greatest return).    There was indeed nothing unusual about the facts of One Step – where ex-employees set up a competing business, their actions are almost always secretive and surreptitious.    Even where a covenant does not recite that it may be relaxed by agreement, this is always possible by negotiation and it is hard to see this as a potent independent justification for the Court’s order.   Will One Step be regarded as a case on its own facts?   Alternatively, if the approach on One Step takes firmer root, will parties start seeking to resist interim injunction applications on the basis that damages are (now) an adequate remedy for the employer?     This judgment gives food for thought on many different levels.

Simon Devonshire QC


Jessemy v Rowstock Ltd: post-termination victimisation and the limits of judicial reasoning

March 7th, 2014 by Harini Iyengar

Harini Iyengar explains the Court of Appeal’s conclusion in Jessemy v Rowstock Ltd [2014] EWCA Civ 185 that victimisation of former employees remains unlawful even though “on any natural reading of the relevant provisions of the [Equality Act 2010], taken on their own and without reference to any contextual material, post-termination victimisation is not proscribed”.


The Court of Appeal (“CA”) has held that post-termination victimisation is unlawful, by adopting an ingenious interpretation of section 108(7) of the Equality Act 2010.  Whilst the outcome is clearly correct according to the coterie of right-minded employment lawyers (amongst whom I would aspire to class myself), the case provides an intriguing example of a court concluding that what the law says is in fact exactly what it does not say.  Does the type of judicial reasoning which the CA has deployed in Jessemy v Rowstock Ltd give discrimination law a bad name?

The Judgment

The judgment of the CA was given by Underhill LJ, former President of the Employment Appeal Tribunal (“EAT”), (with whom Ryder and Maurice Kay LJJ agreed) and upheld the judgment which his successor, Langstaff J, had given on the same issue in the EAT in Onu v Akwiwu, whilst overruling Mr Recorder Luba QC in Jessamy v Rowstock Ltd in the EAT.

As Underhill LJ stated, “the issue is one of pure law”, so, in regard to the facts, it is sufficient to relate simply that the claim of post-termination victimisation which the Employment Tribunal (“ET”) and then the EAT dismissed concerned a Claimant who was subjected to a detriment in the form of a poor reference from a former employer because he had brought proceedings for unfair dismissal and age discrimination.

The First-Generation Discrimination Statutes

The CA first considered the law on victimisation under the “first-generation” discrimination statutes (the Sex Discrimination Act 1975, the Race Relations Act 1976, and the Disability Discrimination Act 1995) which prohibited discrimination by an employer against a worker “employed by him” or “whom he employs”.  In Post Office v Adekeye the CA held in 1997 that the natural meaning of these phrases confined the protection against discrimination to workers employed at the time of the act complained of, however, in Coote v Granada Hospitality Ltd in 1999 the European Court of Justice (“ECJ”) held that since sex discrimination was proscribed under the Equal Treatment Directive, the “principle of effectiveness” meant that employees complaining of sex discrimination had to be protected against victimisation on that account, whether the victimisation occurred during employment or after termination.  On remission, the EAT held in Coote that “employed by him” should be construed as including a former employee who had complained of sex discrimination, and that Adekeye should not be followed.

Then, in Rhys-Harper v Relaxion Group plc in 2003, the House of Lords authoritatively determined that in regard to all three first-generation discrimination statutes, “employed by him” and “whom he employs” (despite the use of the present tense) could and should be read as applying to former employees.  According to Underhill LJ, “The essential point is that it was regarded as extremely unlikely that Parliament had intended to exclude all claims for post-employment discrimination.”  The majority reached those conclusions by applying ordinary domestic principles of construction, rather than the ECJ decision in Coote.

The Second-Generation Discrimination Provisions

In 2003, in regard to sexual orientation and religion or belief, and in 2006 in regard to age, the second-generation discrimination rights were brought in through statutory instruments which expressly rendered unlawful any discrimination or harassment which arose out of and was closely connected to “relationships which have come to an end”.  Equivalent provisions were inserted by regulation at the same time into the first-generation discrimination statutes.

This analysis brought Underhill LJ to the bedrock of his argument: “The upshot of all that is that at the time that the 2010 Act was drafted it was well-established that post-employment discrimination – which included victimisation – was unlawful.”

The Equality Act 2010

He went on to analyse the structure of the Equality Act 2010.  Part 2 sets out key concepts on equality, Chapter 1 giving the protected characteristics and Chapter 2 explaining “Prohibited Conduct” in the form of direct and indirect discrimination, ancillary matters, and then “Other Prohibited Conduct” in sections 26 and 27 defining harassment and victimisation respectively.  Unlike the first- and second-generation anti-discrimination rules, under the Equality Act 2010 rules, discrimination, harassment and victimisation are separated out as distinct forms of prohibited conduct.

It is only in Parts 5 and 8 that the relevant prohibited conduct is made unlawful.  In Part 5, sub-sections 39(3) and (4) make it unlawful to victimise an employee by subjecting him or her to any other detriment (such as providing a bad reference).  Section 83 contains the definition of “employee” as someone who is employed under a contract of employment, a contract of apprenticeship or a contract personally to do work.  Part 8 covers “Prohibited Conduct: Ancillary” and includes section 108:

(1)   A person (A) must not discriminate against another (B) if –

(a)   the discrimination arises out of and is closely connected to a relationship which used to exist between them, and

(b)   conduct of a description constituting the discrimination would, if it occurred during the relationship, contravene this Act.

(2)   A person (A) must not harass another (B) if –

(a)   the harassment arises out of and is closely connected to a relationship which used to exist between them, and

(b)   conduct of a description constituting the harassment would, if it occurred during the relationship, contravene this Act.

(3)   It does not matter whether the relationship ends before or after the commencement of this Act.



(6)   For the purposes of Part 9 (enforcement), a contravention of this section relates to the Part of this Act that would have been contravened if the relationship had not ended.

(7)   But conduct is not a contravention of this section in so far as it also amounts to victimisation of B by A.

The CA plainly identified “the problem” about section 108 as being that it explicitly proscribes post-termination discrimination and harassment, but contains no equivalent provisions as to victimisation.  Underhill LJ politely said of section 108(7) that its “intended effect is far from clear”.

The New Generation Directives

Underhill LJ next moved on to European Union (“EU”) law, in the form of the Race Directive of 2000, the Framework Directive of 2000 on religion or belief, disability, age and sexual orientation, and the Recast Directive on sex discrimination of 2006, which he categorised as the new generation directives, structured differently from the Equal Treatment Directive which was in force at the time of the claims in Coote and Rhys-Harper.  The new generation directives all contain a prohibition on victimisation which is worded in a broadly similar way, requiring Member States to introduce into their national legal systems such measures as are necessary to protect employees against dismissal or other adverse treatment by the employer as a reaction to a complaint within the undertaking or to any legal proceedings aimed at enforcing compliance with the principle of equal treatment.

Reaching the same conclusion in regard to EU law as he had in regard to domestic law, he said, “It is clear from the decision of the ECJ in Coote that that provision must apply equally to acts done after as well as during the currency of the employment relationship.”

The Straightforward Reasoning of the ET and the Luba EAT in Jessamy

The CA described the reasoning of the ET and the EAT in Jessamy as “straightforward”.  Mr Recorder Luba QC’s EAT regarded it as “highly unlikely” that Parliament had intended with the Equality Act 2010 to legislate away any redress for post-employment victimisation, given both the domestic law in Rhys-Harper and the UK’s obligations under EU law.  The EAT fully acknowledged the “flexible interpretative approach” required by EU law, and cited Attridge LLP v Coleman and Ghaidan v Godin-Mendoza, but concluded that to read section 108(7) as prohibiting post-termination victimisation would “fly directly in the face of what Parliament has actually enacted.”


The Wholly Domestic Interpretation of the Langstaff EAT in Onu

In contrast, Langstaff J’s EAT in Onu took an approach based on interpretative principles of domestic law, as in Rhys-Harper,  to conclude that the reference to “an employee of A’s” in section 39(4), could be stretched to include former employees.

The Reasoning of the Court of Appeal

Underhill LJ considered that it was “clear that on a natural reading of the relevant provisions of the 2010 Act, taken on their own and without reference to any contextual material, post-termination victimisation is not proscribed”.  How then did he manage to reach the opposite conclusion through deft judicial reasoning?

To start with, he acknowledged the shortcomings in Langstaff J’s approach in the EAT.  Although, in isolation, “an employee of A’s” can be read as referring to a former employee, that is not consistent with the scheme of the Equality Act 2010, in which prohibited conduct arising out of a past relationship will be proscribed, if at all, by the ancillary provisions in Part 8, and in particular by section 108.  There, discrimination and harassment post-termination are prohibited but not victimisation.

He then stated that when the contextual materials were considered, it was clear that the provision in the statute was “not the result which the draftsman intended”, pointing out that Langstaff J, Mr Recorder Luba QC, and the barristers in the case all shared that view.

The contextual materials on which Underhill LJ relied were (i) Rhys-Harper and the second-generation discrimination provisions which expressly made post-termination victimisation unlawful; (ii) the absence of any indication from the Government that the Equality Act 2010 was intended to change the law by removing protection against post-termination victimisation; (iii) the Explanatory Notes on section 108 which referred to claims being “dealt with under the victimisation provisions and not under this section”; (iv) the fact that if post-termination victimisation were not proscribed then the UK would be in breach of its obligations under EU law; and (v) the absence of any rational basis for treating post-termination victimisation differently  from post-termination discrimination and harassment.

Taken together, these five matters led him to conclude, “It follows that the apparent failure of the statute to proscribe post-termination victimisation is a drafting error.   …  In the end, it is unnecessary to be able to show how the error arose as long as it is clear that it was indeed an error.”

The key issue for Underhill LJ was therefore, “… how far is it right to go to correct what is an undoubted drafting error: would that, as the EAT put it, involve crossing the Rubicon?”  Underhill LJ reasoned that since the Equality Act 2010 gives effect to the UK’s equality obligations in EU law, the Court must adopt “the Ghaidan approach” which empowered it more widely to “depart from the natural reading of the language of the statute, including by the implication of words which alter its effect as drafted” than would be possible on a conventional domestic approach to statutory construction.  He considered that the “flexible interpretative” Ghaidan approach “unquestionably” applied here.  After a detailed analysis, he concluded that “the only question is whether it is “possible” … to imply words into the 2010 Act which achieve that result” of proscribing post-termination victimisation, that it plainly was possible, and that the implication of such words “in fact represents what the draftsman intended.”  According to Underhill LJ, the Luba EAT erred in failing to appreciate just how flexible the Ghaidan approach was.  Yet, while making this criticism, he acknowledged that “the effect of section 108(7) is decidedly opaque”.  After bravely attempting to find meaning in the sub-section, Underhill LJ concluded that the first possible meaning (that post-termination was not intended to be proscribed and therefore was also not proscribed where it happened also to constitute post-termination discrimination) was one which would have “no rational reason … for having that effect, and it would have perverse results”, and the second possible meaning (that post-termination victimisation was proscribed elsewhere in the statute but for some reason cases of overlapping post-termination victimisation and discrimination claims should only be complained of under those other provisions) was “unconvincing” because cases of overlapping claims are common and do not in practice give rise to double recovery.  Ultimately, Underhill LJ did accept that “it is indeed impossible to see the point of sub-section (7)”.  He considered that “the draftsman may rather have lost his way in his treatment of section 108”, noting that in Schedule 28 “discrimination” was said to be defined in, amongst others, section 108, whereas in fact that section proscribed it.

From this position, that the draftsman must have lost his way, made an error, and drafted a meaningless sub-section, Underhill LJ reached the view that the section 108(7) contained “no clear indication of an intention that post-termination victimisation should be lawful”.  Therefore, he reasoned, there was “no obstacle” to implying that section 108 gave effect to the EU obligation to proscribe post-employment victimisation.  Perhaps intending to guide the lost draftsman, the Court of Appeal suggested either an amendment to section 108(1) to add:

In this sub-section discrimination includes victimisation,

or a new sub-section 2A to add:

A person (A) must not victimise another (B) if –

(a) the victimisation arises out of and is closely connected to a relationship which used to exist between them, and

(b) conduct of a description constituting the harassment would, if it occurred during the relationship, contravene this Act.

Having determined that it was meaningless, Underhill LJ was “not sure that anything needs to be done about sub-section (7)”.  He was, however, careful to state that the meaningless sub-section “can have no meaning which is inconsistent with post-termination victimisation being unlawful.”

Then, at the request of the Equality and Human Rights Commission, which was concerned about discrimination in the provision of goods and services, not all of which is proscribed by EU law, Underhill LJ also considered whether the domestic approach to statutory construction would lead to a different result.  He accepted a “more straightforward domestic route to the same result, by way of a “rectifying construction” of the kind adopted by the House of Lords in Inco,” involving a “plain case of drafting error”.  For Underhill LJ, where there is a drafting error through omission, there is “no real difference” between the Ghaidan and the Inco approaches. 

In Inco the court concluded that “the draftsman slipped up” and “the court must be able to correct obvious drafting errors”: the court held that the words “from any decision of the High Court under that Part” were to be read as meaning “from any decision of the High Court under a section in that Part which provides for an appeal from such decision.”  According to Lord Nicholls in Inco, a court could adopt such a course only if “abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed.”  Lord Nicholls went on to say, however, that the third condition was of crucial importance, because otherwise the court would be crossing the boundary between construction and legislation.

No doubt recognising the dramatic nature of his interpretation, Underhill LJ said, “It would be different in a case where no such intention is established and the argument is simply that the implication sought is necessary in order to comply with EU law or the requirements of the Convention.”


Through sophisticated reasoning, the CA has achieved a result which is fair in the minds of the coterie of employment lawyers, and which will be of practical service to many litigants (be they workers, employers, or those giving or receiving goods and services) by ending legal uncertainty.  Is it right, however, for a court to respond to a statutory provision which has no satisfactory meaning by implying into the statute words which make conduct unlawful?  The CA did not hold that sub-section 108(7) must be deleted as meaningless, but left it to “some other court” to “cudgel its brains about what real effect, if any, it has”.  In spite of its hesitation to delete the sub-section, the CA felt confident in asserting that, whatever it might mean, the sub-section was definitely inconsistent with post-termination victimisation being permitted.

It seems to me that the CA has turned a statutory provision, which is, at best, meaningless, and is, at worst, ambiguous and inconsistent with the UK’s equality obligations under EU law, into a provision which renders conduct unlawful.  Can the position really be said to be analogous to Inco?  The Equality Act 2010 separated out harassment and victimisation into different claims, after decades of being aspects of discrimination.  In my view, the difficulty is that, whilst the draftsman clearly drafted poorly, exactly what he was up to in terms of tinkering with the law on discrimination, harassment and victimisation and how they should interrelate, remains very unclear, yet, I feel sure that he was up to something. 

Our clever judges know how to achieve the result which right-minded employment lawyers desire, through the deployment of deft judicial reasoning, but is it right to develop principles of judicial interpretation which permit a statutory provision to mean that conduct which is stated to be lawful is held to be unlawful? 

Access to justice in general is a matter of acute concern to barristers right now.  Within the field of employment law, the introduction of ET fees is having a profound effect on discrimination litigation, a part of the legal system which is intended to protect the most marginalised and disadvantaged groups of workers.  Is it idealistic and unrealistic for me to long for judicial reasoning which makes sense to those outside the inner circle of employment lawyers, in regard to what the major discrimination statute means?  Does the type of judicial reasoning which the CA has deployed in Jessemy v Rowstock Ltd give discrimination law a bad name?

Harini Iyengar


Fair deal

March 5th, 2014 by James Goudie QC

The Teachers’ Pensions (Amendment) Regulations 2014, SI 2014/424, amend the Teachers’ Pensions Regulations 2010, SI 2010/990, as previously amended, which govern the Teachers’ Pension Scheme (“the TPS”).  The 2014 amendments facilitate the implementation of the new Fair Deal – a non-statutory policy issued by HM Treasury in October 2013 (and provide for the third and final year of increased employee contribution rates, as recommended by Lord Hutton as part of his review into the affordability and sustainability of public sector pension schemes).   Amendments are made to existing arrangements to allow for access to the TPS for a new type of employee. 

Regulations 3 to 7 amend the 2010 Regulations so as to implement new Fair Deal.  Access to the TPS is expanded to allow a previously excluded type of employee (one who has been out-sourced from the public sector to an independent provider delivering public services) to retain their membership of the scheme.  Individual members continue to have access to the TPS while they remain employed on the out-sourced contract, and their access will continue following any subsequent compulsory transfers, so long as it is in respect of that same public service contract.



Staff restructuring and efficiency savings

February 7th, 2014 by James Goudie QC

In  Hazel and Huggins v Manchester College [2014] EWCA Civ 72 the Court of Appeal has dismissed the College’s appeal against a majority Employment Tribunal decision that the dismissals of two lecturers at HMP Elmley in Kent, Mrs Hazel and Mrs Huggins (“H&H”) were not for an “economic technical or organisational” (ETO) reason that entailed a change in the workforce, but were because they refused to agree to new, reduced terms, and this was connected to a TUPE transfer, making their dismissals automatically unfair.  Regulation 7 of TUPE provides that where, either before or after a “relevant transfer”, any employee (of the transferor or transferee employer) is dismissed, that employee shall be treated, for unfair dismissal purposes, as unfairly dismissed if the sole or principal reason for dismissal is the transfer itself  or “a reason connected with the transfer” that is not an ETO reason “entailing changes in the workforce”.

The College is a provider of further and higher education courses and vocational skills-based training. Among other things it provides offender learning in prisons. In 2009 it successfully bid for contracts to provide services in six regions of the Prison Service. In August 2009 it took over, under TUPE, the employment contracts of about 1,500 staff, including H&H,  in addition to about 2,000 already employed in offender learning and about 3,000 in the rest of the organisation.

A few months later the College’s Board agreed to a package of proposals set out in two reports from its Principal for what were described as “staff restructuring and efficiency savings” and “contract change for Offender Learning and other related staff’. The impetus for the proposals came from a number of factors. The general economic situation facing the further education sector was challenging.  There had also been changes in the funding allocation machinery.  Moreover, there were particular problems in Offender Learning.  Hidden costs had been encountered following the bid. In addition, employees in Offender Learning were on very disparate terms and conditions of employment, as a result of the College having built up this part of the business by absorbing a large number of different entities whose staff brought their previous terms with them.  Apparently they had to deal with no fewer than 37 sets of terms. Such a state of affairs was plainly very undesirable from the point of view both of effective management and of staff relations.  There was no doubt also a risk of equal pay claims. The total costs saving which it was planned to achieve from all aspects of the package was £5million.

Against this background, the package had a number of different elements.  These includedg redundancies and other restructuring of roles, efficiency savings, and the proposed standardisation of contractual terms, including a single pay-scale for all staff in Offender Learning. The number of potential redundancies notified to the DWP was 300. As regards the changes in terms and conditions, the plan was to ask staff to sign new contracts of employment.  If they did not agree they would be dismissed and offered re-engagement on the new terms.  The various elements in the package were in practice inter-related. The College made the point in the course of the process that the introduction of the standard terms and conditions which it was offering would produce costs savings which would reduce the number of redundancies required.

The process of implementation of the proposals was complex. It required much negotiation and consultation both with the University and College Union and with individual employees. H&H were initially warned that they were at risk of redundancy or a reduction in contractual hours, but in due course it became clear that they would retain their existing jobs. Both were sent letters explaining the new terms being offered and enclosing contracts for their signature. It was explained that they were at risk of dismissal if they did not sign. The proposed salaries were 18.5% less than the current level for Mrs Hazel and 13.2% less for Mrs Huggins, though there would be a one-year period of protected pay. That was not acceptable to either of them. There was a period of further consultation, during which they in due course confirmed that they would agree to all the proposed changes except those affecting pay. Eventually they were sent notices of dismissal, but before those took effect they accepted the new terms, albeit under protest and expressly “without prejudice”. On that basis they continued to work for the College, but they were paid only at the reduced level. They then brought their proceedings in the Employment Tribunal complaining that they had been unfairly dismissed.

Underhill LJ said (para 22) that in a case where Regulation 7 of TUPE, and, more particularly “the ETO defence” is in play, three questions (the last with two sub-questions) arise: (1) What is the reason, or principal reason for the employee’s dismissal? (2) Is that reason the TUPE transfer itself, in which case the dismissal will be automatically unfair, or a reason “connected with the transfer” or neither? (3) If it is “connected with the transfer”, (i) is the reason ETO and (ii) does it “entail changes in the workforce”?

As to the second question, it was common ground that the dismissals were connected with the TUPE transfer.  The Court concluded that the answer to the first question was that the reason for their dismissals was that H&H had refused to agree to the new pay terms, and that the answer to the third question followed (as will generally be the case) from the first, namely that the refusal to agree to new terms and conditions was not a reason which entailed changes in the workforce, applying the Court of Appeal decision in Berriman v Delabole Slate Ltd [1985] ICR 546.

The College had argued with respect to the first question that the reason for the dismissals was the entirety of the package of proposals agreed by the College’s Board and that the package incorporated proposed redundancies that did “entail changes in the workforce”.  The Court of Appeal accepted that the proposed harmonisation of terms was “in a general sense” related to the proposal for redundancies. They were adopted as part of the same package of proposals. Both were intended to contribute to the required costs savings.  The achievement of the standardisation of terms would reduce the number of redundancies needed.

However, said Underhill LJ (para 23) “the fact that there was a relationship of this kind has no bearing on the statutory question” of what was the reason for the dismissals.  It is trite law that what matters is the factors that operate on the employer’s mind as to cause him to dismiss the employees.  The College’s need for redundancies played no part in its reason for giving H&H notices of dismissal.  Their dismissals had nothing to do with the other elements of the package or the fact that some other employees had been, or were proposed to be, made redundant.  The Employment Tribunal had adopted the correct approach and had been entitled to find as a matter of fact that in the sequence of events the principal, indeed the only, reason why H&H were dismissed was that they had refused to agree to the new terms of pay.

James Goudie QC