Thorny issue - legal costs in Employment Tribunals

6 January 2011

In a judgment that will interest employers facing vexatious employment tribunal claims from employees, ex-employees, prospective employees or just about anyone else with a grievance, in the case of Yerrakalva v Barnsley MBC the Employment Appeal Tribunal (EAT) has dealt with the thorny issue of legal costs in the Employment Tribunal (ET).

Unlike claims in the county courts and High Court, where normally the losing party bears the winning party’s costs, in Employment Tribunal cases each party usually only pays its own legal costs, whether it wins or loses. Many employers have long complained that this encourages claims made in bad faith, as bogus claimants have no disincentive against bringing hopeless claims, and employers have to pay their own legal costs defending completely unmeritorious proceedings.

There are some exceptions to the normal rule on legal costs in the employment tribunal though. One party may be ordered to pay some or all of the other party’s costs where the offending party or its representative has behaved “vexatiously, abusively, disruptively or otherwise unreasonably” or where “the bringing or conducting of the proceedings by the paying party has been misconceived". A recent line of cases beginning with Daleside Nursing Home Ltd. v Matthew has held that a litigant who lies can expect to have a costs award made against them. However, in Yerrakalva it has now been held that the lie has to have some sort of adverse effect on the opposing side before legal costs can be awarded.

In August 2005 Ms Yerrakalva launched proceedings against Barnsley Council in the Sheffield Employment Tribunal under the Race Relations Act 1976 and the Disability Discrimination Act 1995. The proceedings were somewhat protracted. Following a pre-hearing review (PHR) at the Sheffield ET Ms Yerrakalva withdrew her claim against the Council. The Employment Tribunal ruled that she had lied during the PHR on two occasions and, as a result of those lies, awarded a proportion of the Council’s legal costs against her.

The Employment Appeal Tribunal (EAT), though, allowed Ms Yerrakalva’s appeal against the ET’s decision to award costs and reversed it. The EAT held that, while the that while there does not necessarily have to be a link between unreasonable conduct before the employment tribunal and the legal costs claimed, any award of legal costs against a party must, at least broadly, reflect the effect of the conduct in question on the other party. So if the lie told did not have an effect on the other side’s legal costs then no costs should be awarded. Here it was held that the lie would not necessarily have been fatal to her claim and the Council would, therefore, have had to expend legal costs in any event.

The EAT emphasised that there should be no general that a simple withdrawal of a claim is an acknowledgment that the claim was misconceived. The EAT held that although lying was unreasonable conduct, it was necessary for the Employment Judge to take into account "the nature, gravity and effect" of that conduct in deciding (1) whether to make a costs award at all; and if so (2) what the amount of the award should be, which the ET failed to do. The Employment Appeal Tribunal said that in this case, as opposed to the situation in the Daleside Nursing Home Ltd. case, the lies in this case did not necessarily mean that the claim was wholly misconceived from the start. This meant that the Council would not get its legal costs from Ms. Yerrakalva.

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