The Court of Appeal in Irwell Insurance Co Ltd v (1) Neil Watson (2) Hemingway Design Ltd (in liquidation) (3) Darren Draycott [2021] EWCA Civ 67 has upheld the decision of the Employment Appeal Tribunal and found that the Employment Tribunal’s jurisdiction extended to claims brought against insurers of insolvent employers under the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act).  The Court of Appeal found that the Employment Tribunal was a “court” within the meaning of section 2(6) of the 2010 Act, and therefore had jurisdiction to determine liability under the insurance policy.  This was despite the policy containing an arbitration clause.  The Court of Appeal found that the claims for unfair dismissal and disability discrimination brought in the Employment Tribunal were subject to the Tribunal’s exclusive jurisdiction and that in these circumstances the arbitration clause must yield to the Employment Tribunal’s jurisdiction such that both elements of the claim should be heard by the Employment Tribunal.

Background

Mr Watson, the Claimant, was an employee of Hemingway Design Ltd (Hemingway), against which he brought a claim for unfair dismissal and disability discrimination in April 2017.  The disability discrimination claim was also brought against the former Managing Director of Hemingway, Mr Draycott.  In December 2017, Hemingway entered into a creditors’ voluntary liquidation and the company was dissolved.

Hemingway had a policy which insured it against awards arising from successful claims against it in Employment Tribunal proceedings, which was underwritten by Irwell Insurance Company Ltd (the Insurer).  The policy contained an arbitration clause.  In 2018, Mr Watson applied to join the Insurer to his claim under the 2010 Act.

By way of reminder, the 2010 Act assists a third party who has a claim against an insolvent person/entity, where that claim is insured, and allows the third party to sue the insurer directly.  The 2010 Act replaced the 1930 Act of the same name (the Third Parties (Rights Against Insurers) Act 1930 (the 1930 Act)) and introduced a new single stage process which allows a third party to proceed directly against the insurer and resolve issues relating to both the insolvent entity’s liability and policy coverage in one set of proceedings.  Previously under the 1930 Act, the third party was required to establish liability against the defendant insured first, before it could proceed against the insurer to satisfy its claim.

The question arose in this case as to whether issues of interpretation and construction of the  policy could fall within the jurisdiction of the Employment Tribunal.

In September 2018, EJ Ahmed, sitting in the Leicester Employment Tribunal, determined the Employment Tribunal did not have jurisdiction and stayed the proceedings pending determination in the ordinary courts as to whether the Insurer was liable to Mr Watson under the 2010 Act.  Kerr J sitting in the Employment Appeal Tribunal overturned this decision in December 2019, holding that the Employment Tribunal did have jurisdiction to decide issues relating to the policy. The Employment Appeal Tribunal decision was further appealed to the Court of Appeal by the Insurer.

The Court of Appeal (Bean LJ, Flaux LJ and Males LJ) considered two issues:

  • whether the Employment Tribunal had jurisdiction to consider issues relating to the policy as a “court” within the meaning of section 2(6) of the 2010 Act; and
  • whether the arbitration clause, if invoked, would require a further stay of the Employment Tribunal proceedings, while the issue of liability under the policy was determined in the arbitration.
Issue 1 – Jurisdiction of the Employment Tribunal under the 2010 Act

As noted above, the 2010 Act allows a third party claimant to proceed directly against the insurer as soon as the defendant insured is subject to an insolvency event and resolve issues relating to both the insured’s liability and policy coverage in a single set of proceedings.  Before this case it had not been established whether the 2010 Act extended to proceedings brought in the Employment Tribunal, and whether the Employment Tribunal was a “court” within the meaning of the s 2(6) of the 2010 Act.

The Insurer put forward a number of arguments in the dispute, including that the Employment Tribunal is a creature of statute, and that its statutory authority did not give it the jurisdiction to deal with the provisions of the 2010 Act.  It also argued that:

  • the Employment Tribunal lacked inherent jurisdiction to grant declarations,
  • the 2010 Act specifically referred to “Particulars of Claim”, which is strictly speaking a phrase from the Civil Procedural Rules rather than the Employment Tribunal Rules,
  • the Employment Tribunal lacked enforcement powers,
  • Parliament could not have intended the Employment Tribunal to deal with questions of insurance law, and
  • the Employment Tribunal was not a “court” within the meaning of section 2(6) of the 2010 Act, relying on Brennan and others v Sunderland City Council and others [2012] ICR 1183 which held that the Employment Tribunal did not have jurisdiction to make orders for contribution under the Civil Liability (Contributions) Act 1978.

Mr Watson argued the 2010 Act must apply to Employment Tribunal claims, as it would otherwise create a two-tiered system where third parties bringing contractual claims, such as for wrongful dismissal (which falls within the jurisdiction of the civil courts), would have a benefit not available to third parties bringing claims which fall within the exclusive jurisdiction of the Employment Tribunal.  In support of the argument that the Employment Tribunal was a “court” within the meaning of section 2(6) of the 2010 Act, Mr Watson also referred to Peach Grey v Sommers [1995] ICR 549, which found that an industrial tribunal was an “inferior court” within the meaning of the High Court rules, such that it had the power to punish contempt in relation to industrial tribunal proceedings, and to Vidler v UNISON [1999] ICR 746 where the Employment Tribunal was found to be included in the term “court” in what is now the Senior Court Act 1981, so that a party declared a vexatious litigant in the High Court was unable to pursue proceedings in the Employment Tribunal without leave.

The Court of Appeal agreed with Mr Watson and approved the judgment of Kerr J in the Employment Appeal Tribunal.  It agreed that the principle mischief the 2010 Act was aimed at removing was the need for a third party to issue two sets of proceedings to bring a successful claim.  Applying a narrow construction to the word “court” would deny the benefit of the 2010 Act to third parties, such as Mr Watson, whose primary claims were subject to the exclusive jurisdiction of the Employment Tribunal, thereby allowing the “mischief” which the 2010 Act had sought to address. The Court of Appeal did not believe this could have been the intention of Parliament and confirmed that the benefit of the 2010 Act extended to third parties bringing claims in the Employment Tribunal.

Issue 2 – Enforceability of the Arbitration Clause

The second issue for the Court of Appeal was whether, if invoked, the arbitration clause in the policy would override the benefit of the 2010 Act and prevent the issue of liability under the policy being determined by the Employment Tribunal.  It should be noted that this issue would not arise in the vast majority of cases.  As a general rule, a third party will be bound by an arbitration clause in the policy, so will need to bring the single set of proceedings as a claim in arbitration, under section 2(7) of the 2010 Act.

Unlike tortious or contractual disputes, claims for unfair dismissal and disability discrimination are subject to the exclusive jurisdiction of the Employment Tribunal and thus cannot be heard by an arbitral tribunal.  Therefore, if the hearing as to liability under the policy were to be stayed in favour of arbitration, under s9 of the Arbitration Act 1996, the third party would again be denied the benefit of the “single stage” process provided for in the 2010 Act, as the primary claims for unfair dismissal and disability discrimination would still need to be brought in the Employment Tribunal.

The Court of Appeal commented that it was not unusual for arbitration clauses to be treated as inoperative where restrictions to it derive from other areas of law – for example, in the fields of matrimonial law and employment law – and it considered that this same approach should apply in the present circumstances.  The Court of Appeal held that the arbitration clause should yield to the jurisdiction of the Employment Tribunal so that the Insurer would be prevented from relying on it as a defence in or procedural block against the claim brought by Mr Watson, and that Mr Watson would retain the benefit of the 2010 Act.

Comment

The case provides useful clarity for employees regarding their ability to bring claims against insurers of insolvent employers in the Employment Tribunal, which may be timely given the financial difficulties many companies are facing as a result of the Covid-19 pandemic.

For liability insurers covering certain claims against employers in the Employment Tribunal, the case means that insurance coverage issues relating to policies may now, in a small number of cases, be determined by Employment Tribunal judges.  Insurers will also need to be mindful of the risk that arbitration clauses may also not be enforceable when providing cover for risks relating to Employment Tribunal claims.

Paul Lewis
Paul Lewis
Partner
+44 20 7466 2138
Hebe Peck
Hebe Peck
Associate
+44 20 7466 2302