Employers' Liability for Psychiatric Injury - Its Roots & Development

Pictured: Psychiatric Injury - Source: NesbitLaw

The Liability of Employers under Psychiatric Injury within Negligence.

Employers’ liability claims are based on similar principles to those for negligence, a concept first outlined in Donoughue v Stevenson.[1]Such claims were only limited to physical injury. However cases such as Dulieu v White[2] and a better understanding of occupational stress, employers’ liability has since extended through common-law to include psychiatric injury.[3] For claims of physical injury, there is a non-delegable duty of care on employers to provide a safe system of work and to not expose employees to any reasonably foreseeable risk that can be guarded against (when cost of running the risk is greater than avoiding it). This principle was applied and subsequently developed in cases of psychiatric injury.[4]

Walker v Northumbria County Council[5] was the first successful claim under psychiatric injury caused by work-related stress. In Walker, the plaintiff suffered a second nervous breakdown due to occupational stress after informing his employer of his condition. The employer did not reduce the plaintiff’s workload as was agreed, resulting in the second breakdown.[6] The Court of Appeal ruled the legal issues to be: whether the injury to the claimant was reasonably foreseeable and whether the duty of care to provide a safe system of work should extend to include psychiatric injury. The court ruled in the plaintiff’s favour and held that the employer’s duty of care includes psychiatric harm and this duty was breached after the plaintiff returned to work and had a second reasonably foreseeable nervous breakdown.[7]

The court’s approach in Walker was to apply the rules of negligence and expand them to include psychiatric injury. Coleman LJ believed if the risk of psychiatric injury is foreseeable to the employer, who does not take positive steps to prevent further harm occurring, this would result in a breach of a duty of care, incurring liability.[8] This approach was too firmly based on negligence, as it suggests that were it reasonably foreseeable, an employee would develop a psychiatric illness for doing a type of work, regardless of the employee contractual duties in regard to doing that work, employers would have to re-allocate them other work or provide them with assistance. Otherwise, they were in breach of the duty and would be liable, opening the potential door to claims.[9] Walker didn’t take policy and other issues into consideration, including when and in what circumstances employers’ liability would be appropriate. This could be because the plaintiff in Walker was a case of a second nervous breakdown at work as foreseeablity was assumed, explaining this lack of discussion. Walker arguably opened the ‘flood-gates’ of similar claims, as it made it easier for employees to claim under psychiatric injury, because in order for liability to be incurred, it only needed to be proven the psychiatric harm was reasonably foreseeable.[10] However, as there is an absence of legislation to control work-related stress or the risk to psychiatric injury in the workplace the case protected employee rights, making employers more aware of the stresses of their workers and risks to psychiatric injury.[11]

The principles of Walker were reaffirmed in Hatton v Sutherland[12]. Hatton consisted of four-conjoined appeal cases, where the plaintiffs were claiming psychiatric injury due to occupational stress. The court held in the plaintiffs favour in three of the four cases, providing guidelines for cases of a similar nature. As the cases’ facts related to single nervous breakdowns the legal issues were of understanding what factors constitute reasonable foreseeability and when employer liability is appropriate.[13] Hale LJ ruled employers could assume employees were suitable for the job, unless they were made aware of ‘some particular problem or vulnerability’. [14] This requirement of employers’ awareness was the aspect which made the psychiatric injury reasonably foreseeable. The judgement also opposed Walker’s principle i.e. if reasonable foreseeablility was satisfied, employees could be freed of contractual duties. The judgement also showed a greater leaning towards considering the costs of running the risk of psychiatric injury and avoiding it.[15] Hale LJ believed that even if the psychiatric injury was foreseeable, it should also be considered based on the circumstances, what the employer could and should have done, in deciding whether a breach of duty occurred.[16]

Hatton arguably limited the scope of psychiatric injury making it harder for employees to establish an employer’s breach of duty of care for cases of single breakdowns. This could be due to policy reasons, as the previously opened ‘flood-gates’ in Walker had resulted in more psychiatric injury claims.[17] However, the case was also favourable for employees to an extent, as it suggested that foreseeable risk of psychiatric injury is established if they informed their employer of a ‘particular problem or vulnerability’ which put a duty of care on the employer to assist the employee.[18] Hatton did not however, provide control mechanisms, such as the Alcock test[19], which could result in inconsistencies in the Law, as without these, Hatton’s guidelines could be interpreted as strict, which has occurred in the recent cases of Dickens v 02 plc[20] and Daw v Intel Incorporation[21]. In both cases the defendants argued as they provided counselling services, they could not be in a breach of duty of care, because as ruled by Hale LJ those providing these types of services were ‘unlikely’ to be found in a breach of duty.[22]

Hatton’s guidelines proved to be the authority on cases of psychiatric injury, as shown in Barber v Somerset County Council[23]. Barber was one of the conjoined cases in Hatton where the court ruled in the defendant’s favour, after which the plaintiff appealed to the House of Lords. Barber concerned a plaintiff who had suffered from work-related stress. He had spoken to senior management regarding his condition, after which he became seriously ill and was no longer able to work. The legal issue was whether duty of care required the council to take positive steps to avoid the injury which had been breached. Their Lordships ruled in the plaintiffs favour that a duty of care was owed, which had been breached, and upheld Hale LJ’s guidelines in Hatton, but explained they were not meant to be strict rules.[24] One may argue Barber is of little significance as it only re-iterated Hatton however it showed that the duty of care extends to employers taking positive steps in reducing employee workload[25]

The rulings of Hatton were confirmed in the subsequent Dickens v 02 plc[26] and Daw v Intel Incorporation[27] and Hartman v South Essex NHS Trust[28]. Hartman involved a claimant who disclosed information to the Occupational Health Department regarding a previous mental breakdown, after which had a nervous breakdown, and claimed for psychiatric injury. The legal issue was whether the injury was foreseeable, due to the information that had been submitted. The Court of Appeal upheld Hatton, ruling in the defendants favour, that they couldn’t have been expected to have known of the claimant’s vulnerability. The Court’s approach was to follow Hatton, but still considering each case on its own merits. A possible issue is that it means the extent to which Hatton is followed can vary from case to case, resulting in discrepancies within the law. However, arguably this is the best approach, as it does not limit the courts to use control mechanisms when reaching decisions, thus allowing the common law approach on psychiatric injury to gradually develop.

The common law approach to psychiatric injury has developed since Walker, following the same principles of employer liability for physical damage that a duty of care is owed to provide a safe system of work. However the law on this area is subject to change on a case-by-case basis depending on the legal issues brought forward by future cases.

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[1] [1932] AC 562

[2] [1901] 2 KB 669

[3] As per the judgement of Hale LJ in Hatton v Sutherland [2002] All ER para. 4, 7

[4] Hodgson J., Lewthwaite J., Tort Law Textbook, (2nd Edition, 2007) p. 172

[5] [1995] All ER 737

[6] Barret B., Oxford Industrial Law Journal, Vol. 33, No. 4, p.344

[7] Ibid

[8] As per the judgement of Cole LJ in Walker V Northumbria Country Council [1995] All ER 737

[9] McBride N. J., McBride N., Bagshaw R., Tort Law, (3^rd Edition, 2008) p.113

[10] Torrington D., Earnshaw J., Tackling under-performance in teachers (1^st Edition, 2003) p.41

[11] Allison Spears, Work-Related Stress, Health and Safety Executive, April 2008, p. 12

[12] [2002] All ER

[13] Hodgson J., Lewthwaite J., op. cit. p. 172

[14] As per the judgement of Hale LJ in Hatton v Sutherland [2002] All ER para. 29

[15] McBride N. J., McBride N., Bagshaw R, op. cit. p.113

[16] As per the judgement of Hale LJ in Hatton v Sutherland [2002] All ER para. 33

[17] Torrington D., Earnshaw J., op. cit. p.41

[18] As per the judgement of Hale LJ in Hatton v Sutherland [2002] All ER para. 29

[19] Alcock v Chief Constable of South Yorkshire Police [1992] 1 AC 310

[20] [2008] EWCA Civ. 1144

[21] [2007] EWCA Civ. 70

[22] As per the judgement of Hale LJ in Hatton v Sutherland [2002] All ER proposition (11) at para. 43

[23] [2004] All ER 385

[24] Barret B., Oxford Industrial Law Journal, Vol. 33, No. 4, p.345

[25] Alastair M., Tort, All England Annual Review (2004) para. 28.8

[26] [2008] EWCA Civ. 1144

[27] [2007] EWCA Civ. 70

[28] [2005] EWCA Civ. 06

The Pensions Regulator have published their Determinations Panel report explaining why,inter alia, three main operating companies within the UK should provide financial support for the Lehman Brothers Pension Scheme following Lehman Brothers Holdings Inc bankruptcy in the US on September 15, 2008. The report makes very interesting reading.

Managerialism - A brief outline

Managerialism

Adolf Berle and Gardiner Means - The Modern Corporation & Private Property.

Even though it has its critiques, it remains central to Company Law Theory...

Managerialism outlines that dispersed ownership + shareholder passivity

= separation of ownership + control

(shareholders) (management)

5 Types of Control

• Control through almost complete ownership

• Majority Control

• Control through legal device without majority control (Pyramid System)

• Minority Control

• Management Control

Separation of management & control leads to management becoming a ‘self- perpetuating body’... with corporate management left to pursue their own interests of prestige/power/profits.

THIS CONTROL MEANS THEY ARE UNACCOUNTABLE to those who they are MEANT to represent...

Herman revisited the thesis...

Argued that managerial discrection (to do other things than SHH wealth max) and power were true

 Argued approach to ‘power’ = unsophisticated... with the view there was or was not managerial control... no context of its limits.

HERMAN introduced theory of CONSTRAINED MANAGERIAL CONTROL - Managerialism could exist but it has its constraints.

A ‘Strategic Position’ in terms of high occupancy in comp, was a source of control...

‘Control’ = Ability to make key decisions in an organisation

Financial Institutions exercise powerful constraints over management

 Impact of managerialism on corps difficult to access among the OTHER influences that may be present on how corps are run

Said Berle and Means fear: managers would use their position of maximising shareholder profits... to benefit themselves: prft /power/prestige were wrong.

In the modern context, dispersed ownership companies with DRs having managerial control... are still committed to corporation’s growth w/ shareholder primacy... max SH/H value... due to internalisation of profit maximisation criteria in corporate cultures and internal operating rules

This commitment to it is the same that would be in a shareholder owned corp.

The Managerialism Thesis is still relevant

o Still applicable notion of DR’s discretions and power in nations with highly dispersed ownership companies. E.G. USA + UK

o Not applicable in nations of concentrated ownership i.e. Germany/Japan

Defects of the Managerialism thesis

o Hermans Critique unsophisticated notion of ‘power’... didn’t identify its limits

o Ignorance of how good implementation of D.D. common law would impact on ‘power’

o Institutional Shareholder influence not taken into account... ability to constrain the ‘power’ and management discretion

o Public feeling at the time... following great depression... blaming it on managerialism... `

Company Law - The Corporate Constitution

• Cross comparisons of the concept of the Corporate Consitution in the Companies acts 1948, 1985, 2006
• Corporate constitution being defined as the contractual obligations between shareholders in their capacity as members and the company.

The Corporate Consitution

As described by Professor Rajak, the s.14 Companies Act (CA) 1985 gave rise to mutual rights and obligations between the company and shareholders in their capacity as members, creating a contractual relationship[1]. Cases such as Bratton Seymour Service Co Ltd v Oxborough[2] clearly show s.14 resulted in making the company’s articles of association a statutory contract between the company and the members of the company. With regard to Rajak’s contention, three parties can enforce this statutory contract: shareholders, the company and parties who in their dealings with the company become members of the company.[3]

Section 14 CA 1985 replaced the same provision in the earlier s.20 1948, with no change made to the law from the. Similarly s.14 CA 1985 has also now been replaced by s.33 CA 2006 with no change to the law as well. But there is a clear difference in wording. Section 14 refers to the ‘memorandum and articles’ whereas s.33 replaces this referring to it as the ‘company’s constitution’. This is the clear manifestation of the evolution of the corporate constitution from the CA 1985 to the CA 2006. Under pre-existing company law the corporate constitution consisted of a memorandum of association (that included the obligatory objects of the company)[4], articles of association and supplementary items such as shareholder agreements. It was the memorandum of association which had seniority over other components. However with the DTI’s (Department for Trade and Industry)[5] initiation of the Company Law Review resulting in the CA 2006, the law relating to the corporate constitution has changed. The Company Law Reform Steering Group suggested a shift away from the two documents: memorandum and articles in favour of the articles of association being the key element of a company’s constitution.[6] This has been implemented into UK law with the CA 2006 considering the memorandum as supplementary to the corporate constitution, with the majority of its content under the previous act now being implemented into the articles of association with the CA 2006.[7] However the extent s.33 CA 2006 is capable of heralding a ‘new era’ for the corporate constitution is debatable because as before mentioned there is no change in the law, as s.33 still applies the statutory contract from s.14 CA 1985.[8] The only difference made by s.33 CA 2006 it with its clarification that the company is also a part to this contractual relationship.[9]

However, the extent to which the company and shareholders have mutual rights, responsibilities and ability to sue for a contractual breach under the articles of association is questionable. In order to assess this, shareholder rights, in the situation of their bringing of personal action against the company and other shareholders for breaches of the articles of association (and thus contractual breaches) will be examined.

Section 14 CA 1985 and the following s. 33(1) CA 2006 govern the statutory contract binding the company and its shareholders to the company’s articles of association.[10] As a result of this contract, shareholders can take personal action in cases against the company where there has been a breach of the company’s articles of association.[11] This contractual relationship allows shareholders to bring personal action against the company. This type of action as well as the contractual relationship was demonstrated leading case of Hickman v Kent[12]. In Hickman the claimant’s action was brought against the defendant’s company. The claim failed as the claimant was held to be a member of the defendant’s company and action was brought prior to his seeking of arbitration, as was required by the company’s articles of association.[13] The claimant did not follow the articles, which they as members of the company were contractually bound to follow. Shareholders can also bring a case personal action against other shareholders, as demonstrated in Rayfeild v. Hands[14].

The fact that shareholders can bring an action only in their capacity as shareholders needs to be considered in order to judge the validity of Rajak’s contention. Three provisos can apply in these cases of personal action by minority shareholders, with relation to their capacity as shareholders to bring an action.[15] These include: the ‘rule’ in Foss v Harbottle[16] and in insider/outsider principle.[17] The first proviso is the majority rule in Foss, which outlines that if something is contradictory to the company’s articles of association but is still ratified by the company’s shareholders in a general meeting (of any type), there are no grounds for shareholders to bring any personal action. The reason for this is similar to the reasoning of the court in the later case of Beattie v E. Beattie Ltd[18] where it was held that action is only enforceable to rights common to the shareholder ‘himself and all other members’.[19] Therefore issues ratified by shareholders themselves as a group, even if contrary to the articles shouldn’t be actionable as they themselves ratified it.

Secondly shareholder remedies are also limited by the second proviso of insider and outsider rights.[20] The principle of this is that litigation can only be brought by those minority shareholders of which are regarded to have insiders’ rights, allowing them to enforce those rights as a member of the contractual relationship. As explained in Beattie v E. Beattie Ltd[21] insiders’ rights are those rights which are common to the majority of the company’s shareholders. Conversely with those whose shareholding rights are not common of majority are considered to have outsiders’ rights, excluding them from contractual relationship with the company and its members.[22] Case law has shown directors have often been considered to have outsiders’ rights, even though they can also be minority or even shareholders. This was the case of the defendant in Beattie[23] who was held to have outsiders’ rights even though he was the company director. Therefore prior to shareholders enacting on the contractual rights in accordance with the articles of association under s.14 1985, and now s.33(1) CA 2006 shareholders should asses the commonality of their shareholding rights ensuring they do not have outsiders’ rights.

Thirdly the ‘proper plaintiff’ principle from Foss v Harbottle [24] is another proviso. The principle outlines that where there is wrongdoing conducted against the company itself, it is the company who should be the ‘proper plaintiff’.[25] The reasoning behind this is related the fact that the company is a separate legal entity, meaning they should bring their own action as plaintiffs. Therefore in a case of wrong doing by directors negatively affecting the company it should be the directors who approve action on behalf of the company (against themselves) so the company can pursue the case as the plaintiff. Moreover as it is highly unlikely directors would permit a case against themselves, these claims type are in-actionable for shareholders.[26] On the other hand it is arguable that this last proviso is not absolute. If the personal rights of the shareholders were involved there could be an argument that, it would still be actionable. But this would depend on the extent to which these individual rights were affected.[27]

Then again in spite of these three provisos if the shareholder can show the action of the company or another shareholder was ‘ultra vires’ they could have a successful claim. [28] With the CA 1985 and its predecessor acts it was mandatory for the company’s memorandum of association to include the objects clause.[29] The purpose of which was to define the ancillary areas in which the company could function, protecting the interests of the shareholders and creditors as they would know where there financial investments had been used.[30] Therefore minority shareholders could bring an action under the ‘ultra vires’ principle if a company was registered under the 1985 Act (or earlier) with clearly defined objects, and the company’s actions or other shareholders’ actions were in areas contrary to these as set out in the objects. The ‘ultra vires’ principle is that any breach from the defined objects is actionable, as was the case in Re Introductions Ltd where a company’s loan used to move into pig farming was held to be a contravention of the objects clause.[31]

However with companies incorporating under the new constitutional arrangements of the CA 2006, this ‘ultra vires’ principle wouldn’t be applicable. This is due to s.31(1) CA 2006 which shows there is to be a presumption made that a company’s objects are completely unfettered, unless if specified otherwise in an objects clause within the articles of association.[32] Overall it could be argued that Rajak’s contention is true to an extent. But there are many more situations where the rights and obligations of shareholders are against them in their contractual binding under s.33(1) CA 06 to their company’s articles of association. This restricts their ability to bring action as minority shareholders against the company, or other shareholders. Furthermore as companies post CA 2006 registration are no longer applicable to the ‘ultra vires’ principle to bring an action this could suggest the new constitutional arrangements of the CA 2006 have also reduced the contractual rights of shareholders with respect to being able to litigate against the company and other shareholders.

Shareholders also have the right to attend both annual general meetings as well as extraordinary general meetings.[33] However the amount of shares of the company which these shareholders are holding can often determine the extent to which they have these shareholder rights. Some individuals may own more shares than others, which can occur within in private limited companies and public limited companies (PLC) where they are referred to as institutional investors. [34] This means that shareholders only have one vote per share at the AGMs these minority shareholders are often be outvoted by the majority. But this can problematic in the situation of directors or other shareholders using their majority shareholding to ratify actions contrary to the articles of association[35]. In this scenario the case of Wood v Odessa Waterworks[36] suggests minority shareholders could bring personal action against the directors. The claimant in Wood (also a minority shareholder) argued for the enforcement of the company’s articles of association, claiming the directors’ activities in question were contrary to a provision in the articles. The claimant was successful even though the shareholders had ratified the action.[37]

Reform of the law in the area of the corporate constitution is ongoing. The issue surrounding the rights of shareholders in enforcing their contractual obligations with respect to the articles of association were also considered during the Company Law Review by the Company Law Review Steering Group (CLRSG). Their findings were that the enforcement of the obligations imposed by the company’s constitution with respect to s.14 CA 85 should be promoted. [38] This is because personal action on behalf of shareholders could help with the holding of the company and other shareholders into account. But this should only be done for issues of significance.[39] Otherwise as suggested in the CLRSG’s final White Paper these shareholder disputes should go through the routes of mediation arbitration in order to resolve them.[40]

With regard to Professor Rajak’s contention, the changes made to the corporate constitution with the CA 2006 have resulted in more rights lying against shareholders. But on balance the s.33 CA 2006 reaffirmed the previous the 1985 Act continuing the statutory contractual relationship, binding shareholders, and the company to the articles of association.

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[1] Chris Ryan, The Statutory Contract Under s.33 of the Companies Act 2006: The Legal Consequences for Banks Pt. I (2008), Journal or International Banking and Finance Law 304

[2] Saleem Sheikh, A Guide to the Companies Act (1 edition Routledge-Cavendish) 2008, p.240; [1992] BCLC 693

[3] The City Law School, Company Law in Practice, (7^th Edition Oxford University Press) 2008, ch. 3, p 38.

[4] s.2(1)(c) Companies Act 1985

[5] To which the Company Law Reform Steering Group (CLRSG) also contributed.

[6] Modern Company Law for a Competitive Economy: Final Report Volume II, The Company Law Review Steering Group p.91

[7] CA 2006 28 (1)

[8] Saleem Sheikh, A Guide to the Companies Act (1 edition Routledge-Cavendish) 2008, p.240

[9] J.Lowry and A. Reisberg, Pettet’s Company Law Ch. 4, p. 87; As was considered in Hickman v Kent [1915] 1 Ch 881

[10] Geoffery Morse, Charlesworth’s Company Law, 17^th Edition, Sweet and Maxwell), ch. 3, p. 72

[11] Ibid

[12] (1920) 37 TLR 163 (CA)

[13] 1920) 37 TLR 163 (CA)

[14] [1960] Ch 1 194

[15] The City Law School, Company Law in Practice, (7^th Edition Oxford University Press) 2008, ch. 3, p 39; Chris Taylor, Company Law, Ch. 5, p.49 (1^st Edition)

[16] (1843) 2 Hare 461

[17] Ben Pettet, Company Law, Ch. 4, p88 (2^nd Edition, Pearson Education)

[18] [1938] 1 Ch 708

[19] Ibid, at pp.718-722

[20] Pettet Ch. 4, p88; as outlined by Astbury J in Hickman v Kent [1915] 1 Ch 881

[21] [1938] 1 Ch 708

[22] Ben Pettet, Company Law, (2^nd Edition Pearson Education) 2005, ch.5, p.92

[23] [1938] 1 Ch 708

[24] (1843) 2 Hare 461

[25] Ibid

[26] A.J. Boyle, Minority Shareholders’ Remedies, (1st Edition Cambridge University Press), Ch. 1, p.4, 2002

[27] Chris Taylor, Company Law, Ch. 8, p.89 (1^st Edition Pearson Longman)

[28] As was discussed in Ashbury Railway Carriage & Iron Co. v. Richie (1875) LR 7 HL 653

[29] s.2 (1) (c) Companies Act 1985

[30] Chris Taylor, Company Law, Ch. 5, p.49 (1^st Edition, Pearson Longman)

[31] [1904] 2 Ch 608

[32] J.Lowry and A. Reisberg, Pettet’s Company Law, p. 86

[33] J.Lowry and A. Reisberg, Pettet’s Company Law, p. 145

[34] Chris Taylor, Company Law, Ch. 8, p.88 (1^st Edition Pearson Longman)

[35] Ibid

[36] (1889) 42 Ch D 636

[37] Ibid

[38] A. Hicks and S.H. Goo, Cases and Materials on Company Law, (6 edition Oxford University Press) 2008, p. 206; Modern Company Law for a Competitive Economy: Final Report, section 7.3.4

[39] Ibid

[40] Company Law Review, White Paper, Modernising Company Law, Cm.5553-I, 2002, p. 22