Can an employer sack an employee for gross misconduct without breaching its contract of employment with the employee?

This question came before the Court of Appeal in the case of Dunn and another v AAH Ltd. Stephen Dunn had previously been the Managing Director of AAH Ltd., one of a group of companies of which the head company, Celesio AG, was based in Germany. Mr Dunn had failed to inform AAH of a fraud of which he had been aware for five months.

When his employer discovered this, Mr Dunn was sacked for gross misconduct. He then sought compensation.

Celesio had in place a set of mandatory Risk Management Guidelines for the directors of its subsidiary companies to follow. These obliged subsidiary directors to report immediately any potential risks to Celesio. In addition, Mr Dunn’s contract of employment obliged him to ‘perform all the duties and exercise all the powers of his office to the best of his ability and …comply with all lawful directions and instructions given’.

The argument went all the way to the Court of Appeal, which ruled that Mr Dunn had repudiated his contract because his behaviour was such that it undermined the employer’s trust and confidence in him to such an extent that it was no longer reasonable for AAH to continue to employ him.