Dunn & Anor v AAH Ltd

Summary dismissal for gross misconduct is justified where conduct so undermines the trust and confidence inherent in the employment contract that the employer should no longer be required to retain the employee. A mandatory group risk-management policy, incorporated through a contractual duty to obey lawful instructions, may require each board member to report serious risks immediately to group headquarters. A finance director cannot treat reporting to a managing director as sufficient where he knows the matter has not been escalated and the policy imposes a personal reporting obligation. Deliberate and persistent failure to report suspected fraud and substantial financial exposure was repudiatory conduct, rather than merely an error of judgment.

Mr Davidson was finance director of an operating subsidiary within a corporate group. His employment contract required compliance with lawful directions, and a group risk-management guideline required immediate reporting of matters of significant financial or operational risk to German headquarters.

After a supplier relationship generated substantial suspected fraud exposure, Davidson reported the matter to Mr Dunn, the managing director, but neither reported it to group headquarters for several months. Both employees were summarily dismissed. A disciplinary appeal upheld the dismissals, and McCombe J upheld them on proceedings in the Queen’s Bench Division. Mr Dunn did not appeal. Davidson appealed, arguing that his conduct was only an error of judgment and that reporting to Dunn discharged his duty. The central issue was whether his failure to report amounted to gross misconduct and repudiatory conduct.

1. Disposition. The appeal was dismissed. McCombe J was right to uphold the summary dismissal.
2. Applicable standard. It was common ground that contractual wilful neglect of duty did not alter the common-law test for gross misconduct. The authorities, including Laws v London Chronicle (Indicator Newspapers) Limited [1959] 1 WLR 698, Neary v Dean of Westminster [1999] IRLR 288 and Briscoe v Lubrizol [2002] IRLR 607, establish that conduct justifying summary dismissal must so undermine the trust and confidence inherent in the particular employment contract that the employer should no longer be required to retain the employee. Gross misconduct is essentially repudiatory conduct.
3. Contractual reporting duty. The risk-management guideline was mandatory for operational companies. Clause 4A of the employment contract required compliance with it. Paragraph 4.3.2 imposed an immediate reporting obligation on each board member where there was a matter of essential significance, including substantial financial risk, impending losses, or irregularities and criminal transgressions. Employees were not entitled to decide for themselves whether group headquarters could improve the position or whether the matter was sufficiently serious. Davidson, as finance director, had a particular responsibility for risk management and a personal duty to report. Because he knew Dunn had not escalated the matter, his report to Dunn did not discharge that duty.
4. Application. There might have been temporary justification for omitting the matter from the 11 May risk inventory while a commercial solution appeared possible. By 25 May, however, solicitors had advised that there was a significant risk of fraud. That was the critical date for ad hoc reporting. The subsequent discovery of the supplier’s principal’s fraud conviction and the former employee’s involvement made the obligation still clearer. The failure to report continued for about five months, despite the availability of immediate communication and knowledge that no report had been made.
5. The deliberate and persistent breach concerned a serious risk whose extent could not be assessed without group headquarters being informed. It undermined the trust and confidence at the heart of the employment contract and amounted to gross misconduct and repudiatory conduct entitling AAH to terminate summarily. Lord Justice Moses and Sir David Keene agreed with Lord Justice Rix.

• Court of Appeal (Civil Division): Davidson’s appeal was dismissed, upholding the decision below: [2010] EWCA Civ 183.
• Queen’s Bench Division, Birmingham District Registry: McCombe J upheld the summary dismissals of Dunn and Davidson.