The Court of Appeal has held that an employee's failure to follow instructions and report a significant risk issue undermined trust and confidence to such an extent that the employer was entitled to terminate the employee's employment without notice (Dunn v AAH Ltd).

In this case, the Company had internal risk management guidelines which were issued to and mandatory for all directors. One of the guidelines concerned the reporting of possible fraud to the parent company in Germany. Two employees, the Managing Director and the Finance Director had become aware that there was a significant risk that a supplier was perpetuating a fraud, exposing the Company to a loss of approximately £10.9 million. The employees took the view that they could deal with the fraud themselves and did not report it to the parent company for a period of approximately five months.

Both employees had express obligations in their contracts of employment requiring them to comply with all lawful instructions of the Company and to account to the Board on all matters with which they were entrusted. The Company viewed their failure to report the matters (as required under the Company's internal risk management guidelines) as a specific breach of an instruction and treated it as gross misconduct. Both directors were dismissed without notice.

Both brought claims for damages, in which they were unsuccessful. Mr Davidson appealed and the Court of Appeal upheld the Company's decision to dismiss, confirming that employees can be dismissed for gross misconduct for not following an employer's instructions even though the specific behaviour may not itself be forbidden in the employment contract.

In the end, it was the failure to report the risk to the parent company that led to both employees' dismissals. The Court of Appeal likened gross misconduct to a form of conduct so undermining the trust and confidence that the employer should not be required to retain the employee in his employment, but should be entitled to terminate the employment immediately.

Impact on employers

  • This case is helpful for employers insofar as it confirms that failures to follow lawful instructions can amount to gross misconduct, justifying summary dismissal, even where employees are acting in good faith and genuinely trying to sort out matters themselves without recourse to senior management.
  • The case highlights the importance for employers of making good use of contractual terms when drafting employee contracts. The express contractual terms, which the Company had agreed with the employees, were in this case an extremely powerful tool as the clarity of the requirement to obey a reasonable instruction permitted a clear finding of gross misconduct.
  • Employers can have and should always consider having internal written procedures to supplement and expand a contractual requirement to follow reasonable instructions.