The High Court has held that a compensation payment agreed by the NHS Trust with a departing chief executive was "irrationally generous" and therefore beyond the Trust's legal powers. Consequently, the Trust was entitled to withhold payment even though the parties had entered into a compromise agreement providing for payment of the sum (Rose Gibb v Maidstone and Tunbridge Wells NHS Trust).

Ms Gibb was Chief Executive of the Trust. The Trust terminated her employment immediately before the publication of the Healthcare Commission's report into an outbreak of C-difficile in the hospitals managed by the Trust, which had led to a large number of deaths and substantial adverse publicity. It entered into a compromise agreement in relation to her dismissal, under which it agreed to pay £250,000 to Ms Gibb. Of this sum, £75,000 represented payment in lieu of notice, with the balance being compensation for loss of office. After publication of the final report into the outbreak, the Department of Health ordered the Trust to withhold payment of the compensation (but not the payment in lieu of notice). Ms Gibb sued the Trust in the High Court for payment of the balance due under the compromise agreement.

The High Court held that the Trust could reasonably have assessed its potential liabilities to Ms Gibb at £145,000, representing her contractual notice period and the maximum award for unfair dismissal. No proper financial analysis had been carried out to justify the additional sum, which Ms Gibb claimed related to legal and management costs saved by not going to tribunal and the benefits of avoiding further damaging publicity. Further, the Trust had taken into account irrelevant considerations such as her previous good service and had only paid lip service to the need to be seen not to reward failure and to regard payments over statutory and contractual liabilities as exceptional. The payment was therefore beyond the legal powers of the Trust and void and Ms Gibb's claim for payment failed.

Impact on employers

  • This decision is of significance for public sector employers and charities and trusts that have powers to make ex gratia payments to departing employees. It is the first time that a payment of this type to a departing executive has been declared void on these grounds.
  • Public sector employers need to ensure that they have guidelines for setting the level of compensation and the process for approving termination payments to senior managers. The guidelines should take into account any relevant sector or regulatory guidance.
  • The decision perhaps reflects the more robust opposition to "rewards for failure" that exists in the private sector following the meltdown in the financial services industry. Even in the private sector, a robust approach to compensation and a proper analysis of the justification for any payment over and above contractual and statutory liabilities is essential. In certain circumstances, the Companies Act 2006 requires shareholder approval for a compensation payment made to a departing director. Where approval is required, but has not been obtained, the shareholders can challenge the actions of the directors on behalf of the company.