The appellant, along with his ex-managing director, had both worked for AAH Pharmaceuticals, whose parent company was based in Germany. In order to comply with German obligations all operating companies within the group were to adhere to the mandatory risk management guidelines provided. During 2006 a relationship with a key UK supplier became the subject of  suspicion concerning fraud, possibly involving a former employee and which may have risked c£10m of the company's cash. The two directors involved a firm of solicitors to investigate the issue but did not inform the parent company during this time, even when the required six month risk report was compiled. The managing director eventually informed his reporting manager of the possible fraud after several postponed meetings following which he and his  co-director were summarily dismissed on the grounds of gross misconduct. At the initial appeal, upheld in the QBD, the judge had rejected any submissions that the directors were entitled to make a judgment about informing the parent company: their obligation was to report the situation which they had not done.

In this appeal, counsel for one of the directors (the other director did not appeal) argued again that the risk inventory and guidelines were not taken seriously by the parent company and that they were entitled to rely on the success of the conduct of the business over many years. Therefore this was an error of judgment rather wilful neglect of repudiatory conduct. Rix LJ rejected these submissions noting that, as a finance director the appellant has a special responsibility for managing risk which, given the clear mandatory nature of the written guidelines in place, had not been fulfilled by simply reporting the matter to the managing director. Accordingly the appellant

"must be regarded as so undermining the trust and confidence which is at the heart of a contract of employment that the employer should no longer be required to retain the employee in his employment, but should be entitled to accept that the contract for employment had been repudiated in its essence, permitting him to terminate it"
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Case No: A3/2009/0895

Neutral Citation Number: [2010] EWCA Civ 183
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
BIRMINGHAM DISTRICT REGISTRY
(MR JUSTICE MCCOMBE)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Monday 25th January 2010

Before:

LORD JUSTICE RIX
LORD JUSTICE MOSES
and
SIR DAVID KEENE

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Between:

**DUNN & ANR (Appellant)

• and -
  

AAH LIMITED (Respondent)**

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(DAR Transcript of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No:  020 7404 1400  Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

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Mr Gerald Clarke (instructed Shakespeare Pulman LLP) appeared on behalf of the Appellant.

Mr Nicholas Randall  (instructed by Wragg and Co) appeared on behalf of the Respondent.

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Judgment (As Approved by the Court)

Crown Copyright©

Lord Justice Rix:

1. The issue in this appeal is whether Mr Davidson, who was the finance director of a company known as AAH Pharmaceuticals Limited (or "AAHP"), was properly summarily dismissed for gross misconduct (or, in the words of his contract, wilful neglect of duty) because of his failure to follow instructions to report on problems of risk within the operations of his company to group headquarters which were in Germany.

1. AAHP together with another operating subsidiary, Barclay Pharmaceuticals Limited (or "BPL"), comprised the operating arm in Britain within a group structure which, at its apex, started with a company known as Celesio AG, a company in Germany, then proceeded through a number of UK companies -- Mentor UK Plc, AAH Limited and Admentor Holdings Limited -- until the great, great grandchildren or thereabouts of the head company, the operating companies in the UK, were arrived at.

1. The turnover of the UK operating companies business was some £3.1 billion in December 2006 and their profits were some £136 million in the same year.  Mr Stephen Dunn was the managing director of AAH Limited and was a director of all the UK companies in line.  Mr Ian Davidson was the finance director and a board member of AAHP as well as being a director of Mentor UK and Admentor Holdings Limited.  He was not, however, a director of AAH Limited.  Mr Dunn and Mr Davidson, however, had their contracts of employment with AAH Limited.  Clause 4A of their contracts provided that the employee will:

"…perform all the duties and exercise all the powers of his office to the best of his ability and will comply with all lawful directions and instructions given by or with the authority of the Board and whenever required to do so will give an account to the Board or the person nominated by the Board of all matters with which he is entrusted."

1. Clause 17A of the employment contracts entitled the employer, AAH Limited, to dismiss the employee summarily if the employee was:

"guilty of dishonesty or incompetence or wilful neglect of duty or of material or persistent misconduct or commits any breach of this Agreement other than a breach which is capable of remedy and is remedied forthwith at the Employer's request"

1. In this particular case the employer, AAH Limited, relied on the ingredient of wilful neglect of duty in that list of the possible elements of summary dismissal, but it is common ground in this case that an expression such as wilful neglect of duty does not differ from or change the common law approach to an employer's right summarily to dismiss an employee for what may be described in common law terms as "gross misconduct" and which requires, in essence, a repudiation of the contract of employment.

1. Thus, it is common ground that the law in this connection is conveniently stated in Laws v London Chronicle (Indicator Newspapers) Limited [1959] 1 WLR 698, in Neary v Dean of Westminster [1999] IRLR 288 and in this court in Briscoe v Lubrizol [2002] IRLR 607 (see in particular paragraph 22 of Lord Jauncey of Tullichettle's decision in Neary and paragraphs 108 and 109 of Ward LJ's judgment in Briscoe v Lubrizol). As Lord Jauncey said at the end of paragraph 22 of Neary:

"There are no doubt many other cases which could be cited on the matter but the above four cases demonstrate clearly that conduct amounting to gross misconduct justifying dismissal must so undermine the trust and confidence which is inherent in the particular contract of employment that the master should no longer be required to retain the servant in his employment."

1. And as Ward LJ said in Briscoe v Lubrizol:

"To draw a distinction between gross misconduct and repudiatory conduct evincing an intention no longer to be bound by the contract is in my judgment to make a distinction without a real difference. It may be more common in employment cases to deal with gross misconduct, but that is essentially a form of repudiatory conduct. The two propositions appear to have been so treated by Lord Jauncey of Tullichettle in Neary …"

8.This is the appeal of Mr Davidson from the judgment of McCombe J upholding the dismissals of both Mr Dunn and Mr Davidson; Mr Dunn has not appealed.

9.The background to this dispute lies in something called the Risk Management Guidelines which the head company Celesio promulgated to its operating subsidiaries, wherever found.  These guidelines were initially brought to the attention of Mr Davidson as its finance director by an email of 22 December 2004.

10.Material parts of the Risk Management Guidelines (or "RMG") included the following:

"1.3 Scope of Application.

The Risk Management Guideline is mandatory for all operational companies and Corporate departments of the Celesio group […]

2.1 Definition and Necessity of Risk Management.

Since the coming into force of the German KonTraG Act (Act on Control and Transparency in Business) on May 1, 1998, risk management has been compulsory for Board members and Managing Directors in order to avoid corporate crises. […]

2.2 Objectives of Risk Management […]

The entire process is accompanied by ongoing communication, monitoring, review and reporting in order to support the Management Board of Celesio AG in fulfilling its obligations under the German KonTraG Act […]

3.6 Operational Companies.

Risk management is an essential part of the responsibilities of the Board of each local operational company.  In order to provide Celesio with a risk information required in this policy it is necessary to implement an auditable risk management process ensuring:

• Twice a year risk inventory in connection with strategic and operational planning 
• Regular and ad hoc risk reporting to Celesio (see standing order, annex 1) […]

4.3.2 Ad-hoc Reporting […]

There is a special obligation for immediate information by telephone and e-mail or fax, also for each individual member of the company's Board, in cases of essential significance to the responsible member of Celesio Mgt. Board and the Chairman of the Celesio Mgt. Board.  Cases of essential significance are in particular:

a) Information, facts, etc. which may have a significant effect on assets or financial position or the general trading position of the company or group company it is responsible for.

b) Impending negative developments and losses from business transactions

c) Irregularities or criminal transgressions of employees, particularly in the financial area …"

1. It will have been observed that the RMG was stated to be mandatory for all operational companies and to be compulsory for board members and managing directors, to enable the head group company, Celesio, to comply with its obligations under German law; that the auditable process of risk management was described as "an essential part of the responsibilities of the board of each local operational company"; and that, apart from the twice yearly risk inventory to be provided, there was a special obligation for immediate information by telephone or email or fax for each individual member of the company's board in cases of essential significance as defined in paragraph 4.3.2 cited above.

1. Those then were the formal instructions, given to Mr Davidson and Mr Dunn alike, which provide the background to this dispute.  The particular problem which led to their dismissal arose out of the use by AAHP of a supplier known as Waypharm.  The relationship with Waypharm had been introduced to the UK operating subsidiaries in 2003 by a former employee of BPL, a Mr David Condliffe.  For a number of years the relationship appeared to have worked satisfactorily, and by February 2006 some £27 million worth of stock had been supplied by Waypharm.  Payment was made by way of a letter of credit.  The terms of the letter of credit were unusual in that it permitted Waypharm to substitute products of its own choice for those ordered by the AAH operating company.

1. During 2006 AAH became concerned that pharmaceutical products supplied by Waypharm were "diverted stock", ie stock procured for a low price for export to Africa but then recycled into the UK market.  When AAH sought to insist that the stock supplied was not diverted, supplies began to dry up.  The particular problem with which Mr Davidson and Mr Dunn became concerned started in October 2006 with an order for the delivery of pharmaceutical stock from Waypharm to the value of £2.4 million.  The ordered goods were not available; alternative goods consisting of coffee, skincare products, household goods and contraceptives were supplied instead.  Then, in December 2006, there was a further drawdown by Waypharm under the letter of credit in the sum of £9.7 million, again against documents for the purchase of similar non pharmaceutical products.  AAH employers were unhappy about this, consulted the bank as to whether they could prevent the letter of credit being drawn down against, but it turned out that this was not possible on the wording of the letter of credit.

1. Earlier in the year 2006, between February and November, there had been exchanges between AAH personnel in the UK and a gentleman at Celesio about the unsatisfactory nature of the existing letter of credit.  AAH sought to deal with the unusual supplies of October and December 2006 by leaving the goods with the freight forwarders and getting Waypharm to broker an onward sale. When, however, resales were not materialising by mid-March 2007, AAH sought to arrange delivery of the stock to its UK warehouses so that it could take direct control of their resale.  It was in these circumstances that it began to appear that not all the goods were with freight forwarders and that full inspection facilities were being refused by Waypharm.  It was at this point that on 12 April 2007 Mr Davidson and a Mr Mark James, who was the commercial director of AAHP and was the man principally concerned with the relationship with Waypharm, met with their managing director, Mr Dunn, to brief him on the problem.  It was agreed that they should instruct a firm of solicitors, Messrs Charles Russell, and in the meantime Mr James should increase efforts to engineer a commercial solution.

1. It was only a week later, on 19 April, that Mr Dunn and Mr Davidson received copies of an email from Celesio reminding them that their next half yearly risk inventory was due on 11 May that year.  The email stated:

"Having seen some inconsistencies in the past we would like to ask you to consider the following:

Are there any new risks which have not been referred to in the previous risk inventories?

Please describe the measurements to manage or mitigate these risks as concrete as possible"

1. It was on the same day as the receipt of that email, 19 April, that Mr Davidson received a copy of an email from Waypharm to a colleague at AAHP, a Mr Redfern, who was also involved in working on the Waypharm relationship, complaining that BPL had left stock with the freight forwarder which was incurring charges and that the stock was losing value, and Waypharm purported to give notice that it was seizing the stock concerned and would deny AAHP access to it.  This email clearly would have raised the temperature in the relationship between the two companies.

1. On 23 April Mr Redfern briefed Charles Russell in an email which he copied to Mr Davidson.  That email referred to a proposed meeting with Waypharm but that, in the meantime, Mr Redfern stated:

"Clearly I have a major problem in believing that all of the stock exists … Clearly this is a sensitive matter and a large amount of money is involved"

1. He inquired to understand whether there were criminal prosecution possibilities. There was a meeting with Waypharm which took place a few days later on 27 April and that reached an agreement that Waypharm by 7 May produce a full stock list and would deliver the goods to the UK by 31 May and would reimburse the cash equivalent of any stock covered by the invoices which it could not deliver.  On the face of it, that would have been a satisfactory commercial outcome, or at any rate not a disastrous one.  Mr Dunn, who was away on holiday from 3 to 11 May (the latter day was the day on which the half yearly risk inventory was due).  In the meantime, during his absence, on 7 May Waypharm produced a preliminary inventory check which revealed a shortfall on the expected stock of some £4 million.

1. On 11 May AAHP submitted the requested half yearly risk inventory to Celesio but did not mention the problem with Waypharm, although other matters, arguably of less importance, were mentioned in the inventory.  In explanation of this omission, in his evidence at the trial, Mr Dunn said that at the end of April he did not consider the matter to be a significant one and thought that he and his colleagues had a solution to it.  In the light of the meeting and the agreement that had taken place on 27 April that may have had some justification to it as an explanation.

1. However, by 25 May matters had not got any further forward so far as the hoped for commercial solution was concerned, and it was on that day that Charles Russell wrote a long email to Mr Redfern at AAHP stating that there appeared to be a "significant risk" that AAHP were the victims of a fraud perpetrated by Waypharm and advising that serious consideration should be given to making applications for worldwide freezing injunctions and other protective relief in the UK and other jurisdictions abroad.  The solicitors' email also mentioned AAHP's suspicions that Mr Condliffe had been complicit in the fraud.  That email was forwarded to Mr Davidson on the same day, and on 31 May Mr Davidson forwarded it to Mr Dunn referring to it as having been discussed.  Also, on 31 May Mr Dunn arranged for a meeting to embrace him, Mr Davidson, Mr James and Mr Redfern to take place on 4 June following an offsite directors' meeting planned for that day.  It was clear that Mr Dunn wanted to keep the matter as confidential as possible within the organisation.

1. On 12 June Charles Russell was instructed to select a firm of forensic accountants to carry out further investigations into Waypharm and to continue with further investigations in Belgium, France and Spain.

1. On 6 July Charles Russell's French correspondents reported that a Monsieur Antoine Mekni, the principal in Waypharm, had a recent criminal record in France for forgery and false pretences arising out of a fraud which had been perpetrated on another company in the Celesio group, OCP Parisienne.  Mr Davidson wrote to Mr Dunn to say that what they had finally come up with that day was "frankly a nightmare".  By 10 July Charles Russell were reporting that they had established a link between Mr Condliffe and Waypharm.  On 17 July, at a meeting held with counsel instructed by Charles Russell, a legal strategy was formulated which included the possibility of seeking freezing orders, search and seizure orders and third party disclosure, but nothing was done to put any such strategy into effect.  Nor was anything done to report any of these matters or the increasing information which was being derived from Charles Russell and other investigating agents to Celesio, albeit Mr Dunn said in his evidence that it was at that stage -- namely, on 17 July following or at the meeting with counsel and the solicitors -- that he decided that he would report the Waypharm matter to his reporting manager at Celesio, a Mr Mahr, albeit not immediately but at their next regular quarterly meeting, which was then to take place in July but which was shortly thereafter cancelled.

1. Mr Dunn then went away at the beginning of August; a meeting with Mr Mahr was scheduled for late September in Germany, but, as it was, that meeting had to be cancelled too because Mr Mahr had business in Russia.

1. Mr Davidson said in his evidence that during August he asked Mr Redfern to prepare a briefing note on the Waypharm matter for Mr Dunn to give to Mr Mahr in due course.

1. On 20 August Mr Davidson wrote to Waypharm summarising the state of play between the two companies as follows:

"…. You have had the benefit of £12.1 million of our money for approximately a year and so far we have received only approximately £1 million of stock and cash …"

1. It was not until 25 October 2007 that the meeting between Mr Dunn and Mr Mahr took place.  Mr Dunn handed over Mr Redfern's briefing note. Mr Mahr said that he wanted to discuss the matter with a colleague at Celesio.  It was on 9 November that Mr Dunn and Mr Davidson were suspended on full pay.  There followed a disciplinary hearing conducted by the company secretary of AAH, following which they were summarily dismissed.  An appeal came on before Mr Timothy Kerr QC which upheld the dismissals.

1. In his detailed decision Mr Kerr included the following:

"64.  Having disposed of these preliminary points I turn to consider the real issue: whether the two employees have committed gross misconduct justifying summary dismissal […]

1. The employees submitted as follows.  They had made a judgment in good faith to seek a resolution of the Waypharm issue without involving Celesio's higher management.  Mr Dunn said that he had serious concerns about maintaining confidentiality if he were to make a report to Celesio, which he regarded as a rumour mill and a leaking sieve.  If the employees had made an error of judgment, it was not an error going to the root of the contract of employment.  They submitted that other issues had arisen, not involving probable fraud, which they had been congratulated for resolving in house, without reporting to the German parent company.

67.  They submitted that they stood to gain nothing by keeping silent from April to October 2007 about the Waypharm matter.  They submitted that nothing Celesio could have done would have made a difference or improved the outcome […]

70.  In my judgment the risk management guideline document constituted a lawful instruction to the two employees to act in accordance with its terms, which were 'mandatory' as provided at paragraph 1.3 of the document […] The employees were bound by clause 4(a) of their service agreements to act in accordance with that instruction.

1. They did not do so. They disobeyed it. They failed to include the Waypharm matter in the risk inventory submitted on 11 May 2007. They failed to contact Mr Mahr or some other appropriate Celesio manager in May 2007 or thereafter until 25 October 2007, a period approaching six months.  Yet the facts relating to Waypharm, as they stood in early May 2007, plainly fell within each of subparagraphs a), b) and c) […] of paragraph 4.3.2 of the risk management guideline document.  The obligation of Mr Dunn and Mr Davidson under paragraph 4.3.2 was therefore to make an 'immediate' report of those facts to Celesio's management board.  They did not comply with that obligation.

72.  The exposure of up to about £10.9 million represented a substantial threat to AAHP's profit. The effect on profit could potentially be to reduce it by up to about 10 per cent when measured against the profit of about £108 million for the year ended 31 December 2006 […]

73.  I do not accept the employees' contention that they are entitled to make a judgment whether or not to inform Celesio about the situation, taking into account factors such as the risk of a breach of confidentiality, whether Celesio would be able to handle the situation any differently, and how serious the situation was.  That was not a judgment for them to make. Under paragraph 4.4 of the risk management guideline, it was for Celesio to decide what should be done, in discussion with them.  Their obligation was to report the situation so that Celesio, not they, could judge what should be done.

1. I have carefully considered whether both employees have committed gross misconduct, or whether the result should be different in the case of each. I have concluded that there is no basis for differentiating between the seriousness of the conduct of the two employees.  Both were members of AAH's board [that perhaps should more properly refer to AAHP's board].  Both were bound by the instruction to implement the mandatory provisions of the risk management guideline document.  Both were responsible for the manner in which the Waypharm matter was handled.

1. Mr Davidson had a particular obligation as finance director for the financial health of AAH.  As such, he was responsible for judging the extent of the financial risk and for reporting it.  Mr Dunn had a direct responsibility to inform Mr Mahr to whom he reported.  The position would have been different if Mr Davidson had favoured disclosure of the Waypharm matter to Mr Mahr and had been overruled by Mr Dunn.  In that event Mr Davidson's misconduct would probably not have been gross (and the two employees would probably have needed separate representation).  But that was not the position.  Indeed Mr Hibbs did not submit, event contingently or in the alternative, that I should differentiate between the conduct of the two employees."

1. In essence the trial judge of these proceedings, McCombe J, agreed with those conclusions.  While putting it in his own words, he concluded (see paragraph 50 of his judgment) that at any rate from at latest 25 May 2007, which was when Charles Russell had advised that there was a significant risk of fraud; that there was an obligation to report; and that there had been no adequate explanation of that failure from that time onwards.  He accepted that it might be that the absence of the Waypharm matter from the 11 May risk inventory would not by itself have justified action by the employer, and in that respect he may have had in mind (but did not mention specifically) the then current agreement (of 27 April) by Waypharm to provide the goods or cash in place of any goods which they could not provide, but the judge went on, as I have said, to stress 25 May 2007 as a critical date and also to stress the further information which had emerged in July about Mr Condliffe's confirmed complicity and the realisation that Waypharm itself had in its principal a convicted fraudster.

1. The judge described Mr Dunn's attempted explanations of his failure at latest at that stage in July to report the matter to Mr Mahr as "frankly incredible".  Whatever other difficult problems Mr Dunn and Mr Davidson had handled without reporting, and they have been mentioned again on this appeal by Mr Gerald Clarke, counsel for Mr Davidson, but without any specific identification of such matters, the judge concluded that fraud was a different matter because in matters of fraud the victims of it may have little control of events.

1. As for Mr Davidson, the judge specifically said this:

"49. Mr Davidson knew that the matter had not been reported to Celesio.  He does not suggest that he was trying to urge Mr Dunn to make such a report.  In the absence of any such attempt, and in view of his position in the company, he must bear the same responsibility as Mr Dunn."

1. The judge went on to stress how the concept of ad hoc reporting was clearly an important and specific feature of the RMG, independently of the standing orders for twice yearly disclosure, and it was in these circumstances that he concluded that there had been a wilful neglect of duty or gross misconduct and repudiatory conduct entitling AAH summarily to dismiss the two directors.

1. In his submissions today on behalf of Mr Davidson, Mr Clarke, who has said everything that he could do, has essentially repeated the submissions which other counsel had made before Mr Kerr at the appeal of the disciplinary hearing and which he had himself addressed to McCombe J below. He submitted that the evidence of Mr Dunn and Mr Davidson was that the risk inventory and the RMG as a whole were not taken seriously and that they considered that they were entitled not to take them seriously, relying upon the success of their conduct of the business together over many years and the fact that they had handled other delicate and important matters without reporting to Celesio, other than perhaps upon their ultimate success in dealing with them.  Mr Clarke submitted that, in essence, any error here was that of an error of judgment, rather than something which could be described as wilful neglect or repudiatory conduct.  Above all, Mr Clarke stressed that in reporting the Waypharm matter to Mr Dunn, which he did back on 12 April, and in continuing to report to Mr Dunn the further investigatory work and so forth which I have outlined in this judgment, Mr Davidson had fulfilled his duty.  He had no personal responsibility if Mr Dunn thereafter had failed to report the matter to Celesio for months on end.

1. Mr Clarke sought support from Mr Davidson's evidence in cross-examination such as this:

"Quite clearly as well I was in a situation where my line manager [ie Mr Dunn] was fully informed, and therefore from my point of view I was in a situation where I felt we could push ahead.
[…]

We were clearly keen given the fact that we decided to do an investigation to do a thorough job. […]

I was confident that we were pushing ahead and finding out more information, and I was confident that I was keeping my line manager informed."

Clearly it was Mr Davidson's evidence that in his view of the matter he had performed his duty by reporting to Mr Dunn and by continuing his investigations.

1. In my judgment, however, these submissions are not satisfactory and do not exculpate Mr Davidson.  Mr Davidson recognised that by 12 April matters were serious enough to need to be reported to Mr Dunn.  It may be that, over the period up to and including 11 May (the date for the risk inventory), there were special reasons perhaps for keeping the Waypharm matter off that list in the hope that, perhaps even within a day or two, the commercial relations with Waypharm would produce a satisfactory answer.  However, by 25 May 2007 fraud, with the possibility that it extended to an ex-employee, was strongly suspected, and that was on the advice of the solicitors who had been instructed.  I would agree with the judge that that date of 25 May is a critical date for when Celesio should have been reported to at least on an ad hoc basis as required by paragraph 4.3.2 of the RMG.  Matters only continued to get worse the further that matters were investigated, or, as Mr Davidson described it, the further that they "pushed ahead".

1. By early July it was known that the principal of Waypharm had received a recent conviction for fraud.  Mr Condliffe's involvement was confirmed. Mr Davidson himself described the affair as a "nightmare".  However, even when Mr Dunn decided that in mid-July it was time to make a report, he constantly put off the time of reporting until a meeting with his line manager, Mr Mahr, in Germany.  There was nothing, however, to stop him or Mr Davidson lifting the telephone and enquiring whether, in the circumstances, Celesio required any further report, or indeed whether it would be necessary (because sometimes these things are of course best dealt with face-to-face) for someone like Mr Dunn to fly to Germany to report.  That easy option, however, was not taken, and repeated attempts to get Mr Davidson or Mr Dunn to explain why not in their evidence at trial really were left unanswered.

1. In my judgment, as finance director Mr Davidson, albeit he had a line manager more senior than him, had a particular obligation.  It is the particular obligation of someone like a finance director to keep a proper hold over such matters as risk management.  It was his view that he had done his duty by reporting to his managing director, but the RMG shows that that was not so, that he had a personal duty as a finance director of an operating subsidiary to report himself and to do so immediately in a situation such as this by an instant means of communication such as telephone, email or fax.  Above all, Mr Davidson knew that the matter was not being reported by his managing director, Mr Dunn; therefore it followed that he knew that his report to Mr Dunn was ineffective as constituting his discharge of his duty to report to Celesio.  Therefore Mr Davidson could not take comfort in the thought that he had done all that was required of him because he knew that he could not rely on his managing director to perform on his behalf his own personal duty of reporting up the line to senior management in Germany.

1. In these circumstances Mr Davidson did not press Mr Dunn to make a report but simply considered that he had discharged his duty by reporting to Mr Dunn.  In this connection I don't need to suggest that it was Mr Davidson's duty to "go behind his managing director" by reporting to Celesio.  It does indeed appear to have been the duty imposed upon him by the RMG, but the fact is that he did not even raise with Mr Dunn the problem that was arising by Mr Dunn's failure to report and the difficult position that that put Mr Davidson in, to his own knowledge.  Mr Clarke says that all this was merely an error of judgment, or, if anything worse, only in hindsight; but that was not the judge's view.  The judge thought that Mr Dunn and Mr Davidson were deliberately seeking to downplay the importance both of the RMG and the particular issue that had arisen in relation to Waypharm.  Thus the judge said this at paragraph 40 of his judgment:

"In my judgment, in summary, Mr Randall is correct in saying that the oral evidence of Mr Dunn and Mr Davidson flies in the face of the contemporaneous documentation. That documentation was formally circulated; it was mandatory in its tenor; it was required by the controlling shareholder for proper compliance with its legal obligations under the law of its own jurisdiction; and it was implemented.  In my judgment, both claimants understood these matters.  Both claimants, in my view, sought unsatisfactorily to downplay these factors in their evidence."

1. By describing that evidence, not only as downplaying but as an unsatisfactory attempt at downplaying, the judge was expressing his poor view of the witnesses' credibility. To similar effect was his paragraph 45:

"The amount involved was, as Mr Davidson ultimately conceded in evidence, 'a substantial amount in the context of the business', representing as it did nearly 10% of the amount of pre-tax profit made in the year to December 2006.  The tendency of each claimant to downplay the significance of the problem, in my view, undermined the value of their evidence."

In other words, the value of their evidence, that it was only with hindsight that they could be criticised for what was at most an error of judgment, was undermined, and with it the credibility of those witnesses.

1. In my judgment, both Mr Kerr and the judge got the matter right when they emphasised the clear mandatory nature of the instructions which had been given to inter alios Mr Davidson as a director of the operating company as well as the deliberate and persistent failure to follow those instructions.

1. On a serious matter, where fraud extended as far as to implicate an ex-employee of another sibling operating company, and where no one could be certain, once fraud was afoot, how far such mischief might reach, it was imperative -- and Mr Davidson ought to have known and, in my judgment, must have known that -- for Germany to be made aware, so that group headquarters could assess the risk for themselves.  In failing over a period of about five months, at least, to inform Celesio, knowing that there had been no report by his managing director, in my judgment Mr Dunn had repudiated his employment contract.  In the terms of the modern formulation of gross misconduct, Mr Davidson must be regarded as so undermining the trust and confidence which is at the heart of a contract of employment that the employer should no longer be required to retain the employee in his employment, but should be entitled to accept that the contract for employment had been repudiated in its essence, permitting him to terminate it.

1. It follows that this appeal must be dismissed.

**Lord Justice Moses: 
**42. I agree.

**Sir David Keene:
**43. I also agree.

Order: Appeal dismissed