Cook v MSHK Ltd and anor

If an employee commits a breach of contract, the employer can either accept the breach and end the contract or waive the breach and affirm the contract. In Cook v MSHK Ltd and anor (IDS 886), the Court of Appeal said that the company lost the right to dismiss the employee when it affirmed the contract by failing to take any disciplinary action.

Basic facts

Mr Cook started work for MSHK Limited in November 2001. His contract, which was terminable by six months' notice, imposed post-termination restrictions which prevented him from undertaking any activities that competed with MSHK.

In January 2007 MSHK agreed to lend Mr Cook £100,000 interest free to buy a flat through a holding company called Nimbus Holdings Ltd, in order to secure his loyalty to the company.

In March, however, Mr Cook was offered a very senior job at Warner Music UK and on 18 May, he gave MSHK Ltd six months notice. MSHK accepted Mr Cook’s assurances that he would not be competing directly with them in his new job.

On 22 May, a senior manager for MSHK spoke with Warner and found out that Mr Cook would be working in direct competition with them. An argument then ensued and Mr Cook went off sick until 4 July.

While he was still on sick leave, Mr Cook accepted the terms of the loan agreement, and the company wrote to him reminding him of his continuing contractual obligations, including those of fidelity, during his notice period and saying they expected him to return to work. It also said that the company “reserved its position” in respect of the loan which would not now be made available to him. The letter did not mention that disciplinary action might be taken against him or that his conduct warranted dismissal.

When Mr Cook returned to work he was charged with a number of offences, including a breach of the implied term of trust and confidence, and was summarily dismissed. MSHK then made an application for damages and a declaration of the lawfulness of his dismissal.

High Court decision

The High Court said that as MSHK had not mentioned the allegation that Mr Cook had misled them in any of its correspondence with him, it had affirmed the contract in respect of this breach and could not, therefore, justify a lawful dismissal.

However, it agreed that Mr Cook had a duty to tell MSHK Ltd of his “settled intention” to compete with them; and that in accepting the loan Mr Cook was in breach of his fiduciary duty to the company by putting his own interests first.

Court of Appeal decision

The Court rejected the company’s appeal that it had been justified in dismissing Mr Cook on the ground of dishonesty. It said that MSHK had instead affirmed his contract in the period between the time it realised Mr Cook had been dishonest and the time it summoned him to a disciplinary hearing by paying him full salary, by trying to persuade him to return to work and by failing to take any disciplinary action for several weeks.

It disagreed, however, with the High Court that it was a breach of the implied term of trust and confidence for Mr Cook not to have told the company of his “settled intention” to work for a competitor. As MSKH had been aware of this breach before he went off sick, it had had to decide what to do about it and it clearly decided to affirm the contract.

Finally, the Court said that the allegation of breach of fiduciary duty in respect of the loan should be heard as the company had made its position clear when it wrote to him on 25 June.

Comment

The employer’s failure to inform Mr Cook of its intention to discipline him when he returned from sick leave for alleged breaches of contract was perhaps understandable. That is not after all the best way to encourage an employee to return to work. But as a consequence if its decision, the company was unable to pursue Mr Cook for damages for losses allegedly arising from those breaches.

It is important to note that the dismissal for those alleged breaches was not an issue in the case. Clearly, the company was entitled to fairly dismiss Mr Cook on the facts. What it could not do was then pursue him for damages.

Further, this decision cuts both ways. In constructive dismissal cases, it is common for an employer’s representative to argue that the employee has waived the right to resign in response to alleged repudiatory breaches of contract. Whilst it is important not to overstate the position in relation to waivers (and there are a number of helpful EAT decisions on that point), the issue of waiver remains a potential obstacle to constructive dismissal claims. Employees who are determined to resign in response to alleged repudiatory breaches still need to give notice of resignation as soon as possible thereafter.