Administrative law – Health – Compensation – Compensation agreements

Rose Gibb v Maidstone and Tunbridge Wells NHS Trust: CA (Civ Div) (Lords Justices Laws, Sedley, Rimer): 23 June 2010

The appellant (G) appealed against a decision ([2009] EWHC 862 (QB)) dismissing her claim for money owed or, alternatively, damages pursuant to the terms of a compromise agreement entered into with the respondent NHS Trust (M), her former employer.

M’s leadership had been criticised by the Health Commission in a report concerning the outbreak of the ‘super bug’ clostridium difficile at hospitals managed by M. Consequently, G and M entered into a compromise agreement in which G agreed to step down from her role as M’s chief executive and ‘accountable officer’ in return for a payment of approximately £250,000, representing around £75,000 in lieu of notice and a compensation payment of around £175,000. However, M withheld G’s severance pay on the basis that the agreement was ultra vires. G was subsequently awarded the sum of £75,000 in respect of her six months’ notice period. G issued proceedings against M seeking to recover the £175,000 compensation element. A judge concluded that the agreement was ultra vires, determining, inter alia, that: (i) M had undertaken no proper financial analysis; (ii) absent an agreement, M would have dismissed G and settled with her at the maximum value of an employment claim, limiting its exposure to a broadly foreseeable amount well below its commitment under the agreement; (iii) in fixing the terms of the agreement M had had regard to two legally irrelevant considerations, namely G’s many earlier years of good service and the length of time that it would take her to find new employment. M contended that its undertakings in the agreement were irrationally generous and, therefore, beyond its powers.

Held: (1) Firstly, the importance attached by the judge to what, as he saw, was a want of financial rigour in M’s decision-making was an error of approach on his part. The judge was concerned to decide a Wednesbury question, not to reach his own conclusions as to what financial prudence might have required. That question was one that fell to be assessed by M and not the court, Newbold v Leicester City Council [1999] ICR 1182 CA (Civ Div) followed. To the extent that there was any scope for a range of opinions on the cost of not settling with G, M had to consider a series of matters, not all of which were clear cut or implied financially precise outcomes. Secondly, the position in relation to any anticipated saving of costs by the entering into of the agreement was by no means straightforward. Whatever the position might have been, the alternative to a compromise was not as clear cut as a more or less straightforward calculation of the cost of an employment claim at once conceded at full value. Moreover, an unfair dismissal claim could not, in all respects, be equated with a common law action to which a defendant could simply choose to settle by a monetary offer, Telephone Information Services v Wilkinson [1991] IRLR 148 EAT applied. It would be problematic to suppose that, in the instant case, M might have been prepared not only to offer the maximum amount recoverable through tribunal proceedings, but also to admit that G’s dismissal was unfair. Thirdly, matters such as previous good years of service and chances of re-employment could not be regarded as legally irrelevant. There was no reason why an employer such as M, faced in difficult and controversial circumstances with the need to terminate a longstanding employee’s contract, should be obliged, when settling terms of severance, to disregard past service and an employee’s future likely difficulties. In such cases, a reasonable employer was not limited to the replication of the statutory maximum available to the employee through legal redress. The constraint of rationality did not close the door on some degree of generosity for the sake of good relations and mutual respect between employer and employee: not only for the sake of the employee in question, but also for the sake of the employer’s reputation and standing. Accordingly, it had not been shown that the compensation package ­provided to G amounted to irrational generosity.

(2) Since the court’s conclusion on the ultra vires argument was dispositive of the appeal, it was not strictly necessary to reach a conclusion on G’s other grounds of appeal, namely restitution and breach of contract.

Appeal allowed.

Antony White QC, Oliver Segal (instructed by Thompsons) for the appellant; Jane McNeill QC, Michael Ford (instructed by Brachers) for the respondent.