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To what extent will the Court interfere when an employer is exercising its discretion? Will they do so, only where the employer has acted in bad faith, or irrationally, or where they have breached the implied term of mutual trust and confidence? And if it is to interfere, will the Court focus just on the "outcome" of the decision, or will it also look at the "approach" the employer has taken?
These are the questions the Supreme Court has recently had to consider (in Braganza v BP Shipping Limited). The case concerned a chief engineer working for BP on an oil tanker. The ship needed work to its main engine and to one of its cooling water jackets. At midnight on one particular day, it was agreed the repair work would begin the next day, subject to the prevailing weather conditions. Mr Braganza then went to bed and was never seen alive again.
Ostensibly Mr Braganza's widow was entitled to death-in-service benefit, in this case worth more than a quarter of a million dollars. But there was a specific clause in Mr Braganza's contract of employment, which provided that benefit would not be payable "if, in the opinion of the Company or its insurers the death resulted from the Officer's wilful act".
BP's legal department carried out an investigation and concluded the most likely reason for Mr Braganza’s death was that he committed suicide.
So to claim the benefit, Mrs Braganza had to take her case all the way to the Supreme Court, where she won, by a majority (three to two).
All the 5 Supreme Court judges took the view that when considering the employer's exercise of discretion, they had to consider the way the employer had approached the decision in question. That could appropriately be assessed in accordance with principles which in the past have traditionally been confined, mostly to the arena of public law, and the judicial review of cases involving public bodies, not, as here, where it involved a private or public company.
It followed that there were two important questions for the Court to consider. Did the Company take into account matters they should not have taken into account, or fail to take into account matters that they should have taken into account, and secondly, did BP come to a conclusion so unreasonable, no reasonable company could have come to it.
For three out of the five judges (and therefore the majority), when dealing specifically with employment contracts (as against commercial contracts) any exercise of discretion had also to be consistent with the implied obligation of trust and confidence. Here they concluded that whilst BP's decision was neither arbitrary, nor perverse, it was nonetheless unreasonable, having regard to the public law principles they said were equally applicable in (private law) cases of this kind. In their view the Company in this case had taken their decision to deny death-in-service benefit without taking relevant matters into account. As a result Mrs Braganza was able to win her case.
In practical terms this now means that whenever employers are taking an important decision in the exercise of their discretion, they should do so extremely carefully. A decision may subsequently be reviewed, to check that it is neither arbitrary nor perverse, and quite possibly to see whether it is in breach of the implied term of mutual trust and confidence. Although it used to be felt that this may be the extent of the review, it would now appear the Court may go even further, and check the approach the employer has taken, to see what matters it did or did not take into account, and whether the decision they reached was so unreasonable, no reasonable company could have come to the same conclusion.
There will be on-going debate as to how far this new principle will be taken. It may not, for example, apply in bonus cases, where the circumstances in which discretion comes to be exercised, arise in a different way. Nonetheless, when deciding issues such as the award of a particular benefit, and discretionary sick pay may be another relevant example, as well as death-in-service benefit, then the ambit of the Court's enquiry may now be wider than we have been used to.
And as a further sting in the tail, the Supreme Court took a hard line on employers in terms of the rigour to which they will be held in exercising their discretion. In their view it was perfectly reasonable to expect employers to inform themselves of the relevant principles which apply to their decision making, and it was reasonable to expect employers to understand employment law, even if it is complicated and demanding.
Bearing in mind employment law is such a dynamic and ever changing area of practice, that is quite a standard for employers to live up to.
If you need advice in relation to an employment claim or dispute, please contact Richard Fox.
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