Pay-off lines

The remuneration of civil servants – from BBC senior management to Whitehall mandarins – is under the microscope like never before, with the public and media clamouring for details of where their taxes are being spent. With cutbacks being made left, right and centre, Nick Siddall says public bodies’ legal departments need to be careful how they defend the inevitable disputes over compensation packages. The recent Court of Appeal case of Gibb v Maidstone and Tunbridge Wells NHS Trust, in which the trust argued it was acting beyond its own powers in promising Rose Gibb a £250k payoff, shows that the courts will not accept weapons designed purely to avoid golden goodbyes.

It is difficult not to feel a measure of sympathy for Maidstone and Tunbridge Wells NHS Trust. It had been rocked by the outbreaks of the 'super bug' C.difficile at hospitals managed by the Trust, closely followed by a Health Care Commission report damning its management. Amidst a storm of negative publicity it reached the view that its then chief executive (Rose Gibb) could not be permitted to remain in post. It sensibly sought the advice of solicitors as to the best means of terminating the employment of Ms Gibb as a result of campaigns both internal and external to the Trust. It agreed to pay her a compensation package at the top end, but within the range of, sums which it had been advised to consider.

All appeared to be progressing to an amicable parting of ways between the Trust and Ms Gibb when the Director General of NHS Finance wrote, prohibiting the Trust from paying a penny more than the contractual sum to which Ms Gibb was entitled. It appeared to everyone that the motivation for this prohibition was the then Health Minister’s desire to state publically that he did not “reward failure” and that he had blocked the payment.

Therefore the Trust was forced to refuse to pay the sums in excess of Ms Gibb’s contractual notice pay and to argue before the courts that its own decision to pay circa £170,000 additionally by way of compensation was irrationally generous, unlawful and thus void under Wednesbury principles.

At first instance before Mr Justice Treacy, the Trust won and it was held that the compensation payment was indeed irrationally generous and that Ms Gibb’s alternative claims in restitution and/or breach of contract failed. However in a judgment handed down in June the Court of Appeal overturned the decision of the High Court. The essential basis of the Court of Appeal’s decision was (1) a public body faces a high hurdle indeed when it seeks to claim that a decision is unlawful as a result of its own irrationality and (2) Treacy J had wrongly adopted his own view of the financial sense of the Trust’s decision. Thus he had acted as a financial auditor and wrongly applied his own view of the financial sense of the agreement.

The Court of Appeal also expressed the common law doctrine that the breach of relevant Treasury guidelines as to the level of the settlement was irrelevant to the irrationality of the payment. It finally suggested (but did not decide) that if the compromise agreement had been void that Ms Gibb would have a remedy in restitution allowing her to mount a claim in any event as the Trust would have been unjustly enriched by obtaining the termination of her employment without paying for the obvious benefits that it gained. One appeal judge (Laws LJ) went even further and stated that he considered that Ms Gibb would also have a claim in breach of contract in the event that the payment was void.

In the absence of a successful appeal to the Supreme Court by the Trust it is clear that statutory bodies should pay careful attention and act with care in assessing the level of all compromise payments paid on the termination of employment. Relevant Treasury or statutory guidance should be considered and weighed when agreeing to the level of any payment. It would seem wise that the advice of lawyers should be sought as to the likely costs of and potential awards flowing from any envisaged litigation. It may well be wise that advice external to the statutory body is sought to avoid suggestions of partiality.

If a statutory body follows this approach, it will be protected against being caught between the rock and hard place in which the Trust in Gibb found itself.  Such steps ought to allow justification of its decision to the eventual auditor/paymaster as being a sensible and reasoned compromise of the risks of potential litigation.

Nevertheless there is a clear theme running through the judgment of the Court of Appeal that statutory bodies cannot have their cake and eat it. Even if the assessment process suggested above has not been completed by the statutory body, the judgment makes clear that the courts will be extremely unwilling to allow a body which has been careless or whimsical in agreeing a compensation package to rely on its own default to get out of deal which it no longer likes.

The principle is perhaps best seen in the words of Sedley LJ. The judge said: “This is not only because public bodies, with access to competent legal advice, can be expected not to act on whims and, when accused of doing so, are generally found not to have done so. It is because if a public body can denounce its own commercial agreements as having been excessively generous – in other words can invite the court to recalculate its liability – it will not be only at the authority's own instance that this can happen...What matters is that the autonomy of statutory bodies like the Trust will be irrevocably compromised: the enlargement of what counts as a public law wrong will mean that every financial decision of a public body is open to scrutiny by the courts on the motion of anyone with a sufficient interest. Only the legal profession would regard such a development as desirable.”

Therefore if a statutory body had felt that Treacy J’s judgment at first instance gave it a “get out of jail free” card as regards a compromise by which it no longer wished to be bound, those days are definitely over. Budget cuts or no budget cuts statutory bodies and Whitehall Mandarins (just like private individuals) need to bear in mind the mantra “let he who compromises beware!”

Nick Siddall is a barrister at Kings Chambers in Manchester and Leeds.