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Following the introduction of a fee charging regime in the employment tribunal, the new cap on compensation for unfair dismissal and the Jackson reforms in the Civil Courts, it is an appropriate time to re-assess the utility of the well-known but arguably under-used ability of an employer to lodge a contractual counterclaim in employment tribunal proceedings, as Julian Allsop explains.
Renewed utility of the employer counterclaim
A significant proportion of tribunal counterclaims are brought as a mechanism to diminish or defeat the contract claims that prompted them. However, with the anticipated changes to the law that will impose a cap on a compensatory award to the lower of £72,300 or 52 weeks' pay, it will soon be the case that a counterclaim of up to £25,000 could have the effect of amounting to an entire offset of the maximum value of the employee's claim.
In addition, as the Jackson reforms to the practice in the Civil Courts have raised the financial limit on a small claims track claim from £5,000 to £10,000, a greater proportion of those cases will fall within that quasi-costs neutral regime, making it unlikely that costs will be recovered as a matter of course. In those cases, it will be more cost effective to pursue the counterclaim in the Employment Tribunal so as to avoid the duplication of cost. There may also be a dividend to that approach due to the possibility of an uplift on damages by up to 25% as a result of s.207A TULR(C)A 1992 due to a relevant failure on the part of the employee to comply with the ACAS Code of Practice 1, such as by refusing to take part in related disciplinary proceedings.
The basic ingredients
The ability for an employer to bring a counterclaim is the corollary of the right of an employee to bring a contractual claim in the Employment Tribunal pursuant to the Employment Tribunals Extension of Jurisdiction (England and Wales) Order 1994 and its Scottish equivalent.
Article 4 sets out the prerequisites of a counterclaim, which are in essence that the claim must be a contractual claim against the employee that the Courts would also have jurisdiction to determine, that it is a claim which arises or is outstanding on the termination of the employment of the employee against whom it is made, the employee has brought a breach of contract claim in the same proceedings against the employer and it is not a claim of a type that falls within the scope of Article 5.
Article 5 excludes certain types of breach of contract claims from consideration by the Employment Tribunal. These are:
a term requiring the employer to provide living accommodation for the employee;
a term imposing an obligation on the employer or the employee in connection with the provision of living accommodation;
a term relating to intellectual property (which is expressed to include copyright, rights in performances, moral rights, design right, registered design, patents and trade marks);
a term imposing an obligation of confidence; and
a term which is a covenant in restraint of trade.
Article 8 requires that the employer must lodge its counterclaim within six weeks of receipt of the employee's contract claim (which has not been settled or withdrawn). There is provision for an extension of time if it was not reasonably practicable to present a timely counterclaim. The Employment Tribunal cannot order more than £25,000.00 in respect of the counterclaim or in relation to a counterclaim comprising a number of contract claims relating to the same contract.
If the employer has validly lodged its counterclaim in accordance with Article 4 and in time per Article 8, then it will be able to pursue the counterclaim before the Employment Tribunal, regardless of the fate of the employee's contract claim, see Patel v RCMS Ltd  IRLR 161. If the counterclaim is pursued to judgment, the employer will not be able to bring a claim for any excess above £25,000 in the Civil Courts. This limit on contract claims and counterclaims has been in place since the inception of the Order in 1994, and in the writer's view should be revised upwards, or removed entirely.
What type of contract claims can be brought?
As the right to bring a counterclaim is contingent on there being a contract claim, the typical counterclaim in this context will be brought out of a desire to offset or neutralise the employee's contract claim (usually amounting to a claim for notice pay), usually as a cross claim for sums which have been overpaid to the employee during the currency of the employment contract.
However, despite the limitations imposed by Article 5, there is considerable scope for employers to bring a variety of contractual claims. After all, a contract claim for these purposes is not confined to a claim relating to breach of express terms of the employment contract, but can also arise out of breach of the usual implied terms, such as the implied duties of service, fidelity (including trust and confidence) and care.
If an employee leaves without giving the required notice, an action can be maintained on the basis of an express term as to notice, or by an implied term in relation to notice (as a minimum, by the term implied by s.86 ERA 1996) by the employer. This would manifest itself as a claim for damages in relation to the consequences of that short notice. For instance, there may be a quantifiable loss of profits attributable to the loss of the employee for that period of time, such as was the basis of the counterclaim in Hugh Conway v Comms People Limited (2003) EAT/388/01/MAA, where an employee's premature departure caused financial loss by preventing an effective handover to a replacement who had been placed with a client. There may also be a loss in an appropriate case where it has been necessary to engage a temporary replacement to cover the departed employee's duties during the notice, period. This loss would be the difference in wages between what was paid to the former employee and the temporary replacement, as well as any incidental transaction costs associated with recruiting the temporary replacement.
Turning to the implied term of trust and confidence, in the case of Wright v Weed Control Limited (2008) UKEAT/0492/07/DM, the employer brought a counterclaim against its former managing director in relation to various acts of misconduct such as acts of financial impropriety, bullying of other members of staff, deliberately not cooperating with colleagues and he also failed to notify the relevant health and safety authorities of two industrial accidents which should have been reported.
Whilst the employer failed to establish causation in relation to most aspects of its counterclaim, it succeeded in its counterclaim for damages of £18,159.79 as a result of acts of financial impropriety amounting to a breach of the implied term of trust and confidence. It was found that he had issued cheques that bounced in respect of the employer's VAT liability, and he did not report this to the employer's board of directors.
On appeal, the EAT rejected the employee's submission which equated breach of the implied duty of trust of confidence with a term imposing an obligation of confidence, which was excluded from the employment tribunal's jurisdiction. As such, the Employment Tribunal had jurisdiction and the appeal failed.
It was noted en passant that it was a moot point as to whether the particular duty relied upon by the employer was best characterised as a breach of the duty of trust and confidence, or whether it was an incident of the obligation to take reasonable care in the performance of the employee's duties.
As to this latter incident of the employment relationship, it has long been the case that an employer is entitled to sue his employee for damages for negligence arising out of a breach of this implied contractual duty of care. See further, Lister v Romford Ice and Cold Storage Ltd AC 555 and Janata Bank v Ahmed  IRLR 457. There is no reason in principle why a claim of this sort could not form the subject matter of a counterclaim in the Employment Tribunal.
Practitioners should bear in mind the examples of the types of contract claims set out above that can form the subject matter of a tribunal counterclaim. If deployed astutely, a counterclaim can be an effective weapon in the employer's arsenal, and one that employees should bear in mind when considering whether to issue a contract claim at all. Indeed, most of the time a breach of contract claim will produce little benefit for an employee with an unfair dismissal claim, since the loss of contractual notice will be set-off against the loss of earnings achieved.
This article was first published in ELA Briefing: Vol.20, Number 7 (August 2013), p.9.