Breach of contract claims and counterclaims – how do they work?

Many people aren’t aware of how breach of contract claims work in employment situations. We look at the different ways claims can be pursued by both employers and employees.

Employees whose contracts of employment are breached by their employers will sometimes have a choice as to whether to bring the claim for breach of contract in the courts or in the Employment Tribunal.  Not all breach of contract claims can be brought in the Tribunal, and even when they can, there are a number of considerations which the employee should assess before deciding on which jurisdiction to use. We will look at some of the key issues below, although it is worth pointing out that it is always best to take specific legal advice, as other factors might be relevant to a particular situation too.

One factor to consider is whether the employment is continuing.  If it is, then the claim has to be brought in the courts.  The Tribunal only has jurisdiction to hear claims which arise or relate to sums outstanding on the termination of employment.

Another important question is the value of the claim.  When Tribunals were given the power to hear breach of contract claims in the mid 1990s, the value of the claim was limited to £25,000.  For some unknown reason that figure has not increased, and so remains at £25,000. So if a claim is worth more than that, it would have to be pursued in the civil courts.

Further issues for employees to consider are costs and interest.  In order to bring a claim in the Employment Tribunal, there is no fee required.  A prospective claimant will need to go through early conciliation through ACAS, but that service is free.  In the courts however, there are fees payable, which vary depending on the value of the claim.

It is also a consideration that in the Employment Tribunal, each party will normally bear their own costs, irrespective of the outcome.  However, in the courts, the losing party is usually ordered to pay at least some of the costs of the winning party – clearly this is a double edged sword, and given the uncertainty of litigation, the employee should at least be aware of the risk that they may have to pay their employer’s costs.

Another point which may be relevant, particularly with larger claims, is that in the courts the employee who succeeds in their claim is likely to be awarded interest on the sum due, whereas in the Tribunal this is not necessarily the case.

Time limits may also be important.  In the courts, claims have to be brought within 6 years of the alleged breach of contract; in contrast, claims in the Tribunals have to be brought within 3 months.  This limit can be extended in some circumstances by the period of early conciliation, but nevertheless it is still very much shorter than the equivalent period in the courts.

Whichever jurisdiction the employee chooses, they should be aware that once they bring a claim for breach of contract, the employer is entitled to bring a counterclaim alleging a breach of contract on the employee’s part.  The counterclaim will not be limited to the amount of the employee’s claim, so if, for example, the employee brings a claim with a value of £5,000, the employer can counterclaim £20,000.  However, in the Tribunal, there is of course the £25,000 limit for breach of contract claims, which applies equally to the employer’s counterclaim.  In practice,what tends to happen is that if the employer has a claim against the employee for a large amount, it is likely to instigate the proceedings itself, rather than respond to the employee’s claim, but it may depend on the situation and tactics.  Employers can only bring standalone claims against employees in the courts, not the Tribunal, so the various considerations referred to above may not apply.

Employees should also be aware that once they have brought the claim for breach of contract, any counterclaim by the employer will continue, even if the employee withdraws their claim.  This was what happened in the recent case of Cortel Telephone Limited v Shah.  Mr Shah brought a number of claims, including unfair dismissal, unpaid wages, and breach of contract in respect of unpaid notice pay.  At the Tribunal hearing, Mr Shah withdrew most of his claims, including his claim for breach of contract.  The Tribunal therefore decided that Cortel Telephone’s counterclaim could not proceed.  Cortel Telephone appealed, arguing that once a breach of contract claim had been brought, then they were entitled to bring a counterclaim and therefore in the circumstances the counterclaim should continue, notwithstanding the withdrawal of the employee’s claim.  The Employment Appeal Tribunal agreed, and ordered the Employment Tribunal to hear the employer’s counterclaim.

There is always a risk when an employee brings a breach of contract claim that the employer will bring a counterclaim – often for a significantly greater sum than the employee is claiming.  If the employee has a choice as to whether to bring a breach of contract claim or a claim for unauthorised deduction of wages, from a tactical point of view it is often best for the employee to choose the unlawful deduction of wages option, as this does not open up the possibility of a counterclaim.