Dunn and another v AAH Ltd [2010] EWCA Civ 183 CA

breach of contract | lawful instruction from employer | implied term of trust and confidence

The Court of Appeal has held that the failure of two company directors to report evidence of serious fraud against their employer was a breach of the trust and confidence that is at the heart of the contract of employment and entitled the employer to treat their contracts as repudiated.

AAH Ltd is a subsidiary of Celesio AG, a large company based in Germany. Mr Dunn was the managing director and Mr Davidson was the finance director of AAH Ltd. Their contracts of employment provided that they could be summarily dismissed if they were found to be "guilty of dishonesty or incompetence or wilful neglect of duty".

Mr Dunn and Mr Davidson had manadatory risk management reporting responsibilities that were designed to help Celesio AG to comply with their obligations under German law. These were set out in risk management guidelines that required them to deliver a risk inventory twice a year and provide immediate imformation by telephone or fax in special cases. Mr Dunn and Mr Davidson failed to inform Celesio AG of a serious problem with goods that were meant to be provided by a supplier, Waypharm. Evidence emerged that the goods, which AAH Ltd had paid for by way of a letter of credit, may not have existed and that Waypharm may have been committing fraud. Mr Dunn and Mr Davidson failed to alert Celesio AG of the supply problem and they were dismissed.

The High Court found that the risk management guidelines constituted a lawful instruction to Mr Dunn and Mr Davidson and that they should have reported the potential fraud problem. They knew that there was a significant risk of fraud; there was an obligation to report; and there had been no adequate explanation of their failure to alert Celesio AG. The two employees had therefore committed gross misconduct justifying summary dismissal.

The Court of Appeal agreed. The High Court had been right to emphasise the clear mandatory nature of the instructions that had been given to Mr Dunn and Mr Davidson and their deliberate and persistent failure to follow those instructions. In circumstances where evidence of fraud was uncovered, it was imperative for Celesio AG to be made aware of the problem so that it could assess the risk for itself. In failing to inform Celesio AG of the problem, Mr Dunn and Mr Davidson had repudiated their contracts of employment. They had undermined the trust and confidence that is at the heart of the contract of employment and AAH Ltd was permitted to dismiss them.

Case transcript of Dunn and another v AAH Ltd (on the BAILII website)

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