England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
CIVIL DIVISION
ON APPEAL FROM THE EMPLOYMENT APPEAL TRIBUNAL

		The Royal Courts of Justice The Strand London Thursday 7 March 2002

Thursday 7 March 2002

1. LORD JUSTICE PILL: This is an appeal against the judgment of the Employment Appeal Tribunal delivered on 14 May 2001, Mr Recorder Langstaff QC presiding, whereby they dismissed an appeal by Transco PLC (formerly BG PLC) (the appellants) from a majority decision of an Employment Tribunal sitting at Southampton which had held on 9 August 1999 that the appellants were in breach of their contract of employment with Mr Paul O'Brien (the respondent) by failing to consider him for, and subsequently offer him, the enhanced contractual redundancy payment referred to in their document, "Financial Packages 1996-2002". It was further ordered that the matter be relisted before an Employment Tribunal for consideration of remedy. There had been an earlier decision of an Employment Tribunal on the question whether the respondent was an employee of the appellants, the appellants arguing that he was self-employed. It had been decided unanimously on 19 February 1999 that the respondent was an employee and that finding has not since been challenged.
2. The respondent began work for the appellants on 1 August 1995 as a Finance and Administration Manager. He was responsible for their contract with one particular customer, and that involved financial and operational management of that customer's facilities. The respondent's function was unique in the appellants' structure. He was employed initially through an employment agency, then as an hourly paid worker, and finally under an annual salary. It was held in the Employment Tribunal that he was under a contract of service from February 1996 until August 1998.
3. In mid-1996 those employees of the appellants who were involved in the activities of BGP (British Gas Properties) were asked to sign a five-year contract, the intention being that everyone would be made redundant within that five-year period. That was because the BGP portfolio of properties was to be sold over the five-year period and it was wished to retain existing staff to deal with that operation. In order to encourage existing employees to remain, they were offered fresh terms. That was done in a document entitled "Financial Packages 1996-2002". The terms offered to encourage employees to remain and work on the disposal of properties included a significant annual bonus based on sales results, a loyalty bonus and an enhanced redundancy package. To qualify for the incentive scheme, the criteria were (1) to have completed three months' service at the end of the performance period, (2) to be a BGP permanent employee and (3) to have accepted BGP's terms and conditions by signing a revised contract of employment by the end of July 1996.
4. It is common ground that the respondent met the first of those criteria. Whether he is now entitled to the enhanced redundancy payment depends on the terms and effect of his existing contract of employment with them when, in the summer of 1996, they declined to offer him the improved terms. The issue before the Employment Tribunal was as to whether he was a permanent employee. He did not accept the terms, and thereby comply with the third criterion, because they were not offered to him.
5. The appellants had 75 workers who were recognised as permanent employees. They were all considered entitled to the enhanced redundancy package, with the possible exception of one employee who in the event had not chosen to accept the package. The only explanation given for singling out the respondent was the fact that the employers had not believed him to be a permanent employee.
6. By a majority the Employment Tribunal held:

"The majority say [the failure to accept the terms] was because [the appellants] had failed to offer him the revised Contract of Employment, but in view of his status as a permanent employee they should have done so. Their failure to do so was in breach of their implied duty of trust and confidence and in particular their duty to treat employees in a fair and even handed manner. The majority say that [the appellants] should not be permitted to rely upon their own breach of contract."

7. In his dissenting opinion, the chairman found that the respondent was a temporary and not a permanent employee, and so did not qualify for the offer of improved terms of employment. The chairman went on to express the view that the reason the respondent was not considered for the enhanced redundancy package was because of the appellants' mistaken belief as to his status.
8. The Employment Appeal Tribunal upheld the decision of the Employment Tribunal. They did so on two grounds. First:

"The question the Employment Tribunal had to answer was whether it was a breach of contract to deny Mr O'Brien the opportunity of entering a revised contract of employment with enhanced redundancy terms. There was no reason for excluding him, other than the fact that it was not realised that he was a permanent employee.

The simple approach in fact is to note that if it had been appreciated that he was a permanent employee, he would have been offered the enhanced terms. If it was a breach not so to regard him, he must be placed in the position he would have been had the contract been fulfilled. He would have had the offer."

9. The EAT went on to consider the terminology used by the Employment Tribunal in relation to implied terms of trust and confidence in contracts of employment. They held that:

"... to offer a particular benefit to the entirety of a class of employees bar one is capable of being an act calculated seriously to damage or destroy the trust and confidence between the employer and that one employee."

10. It was held that to single out an employee without reasonable and proper cause was an act that no reasonable employer could take. The use of the expression "fair and even handed manner", used by the Employment Tribunal, was one which the EAT recognised did not emerge from the authorities. But the EAT held that the expression was used "as the antithesis of that which is arbitrary and capricious" and its use did not involve an error of law.
11. The appellants accept that a term can be implied into a contract of employment that the employer will not "without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee": Lord Nicholls of Birkenhead in Malik v Bank of Credit and Commerce International SA [1998] AC 20 at page 34.
12. In Malik at page 45F Lord Steyn again set out the term, as he understood it:

"It is expressed to impose an obligation that the employer shall not

'without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee:' see Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666, 670 (Browne-Wilkinson J), approved in Lewis v Motorworld Garages Ltd [1986] ICR 157 and Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589." [The second "and" in that passage is a misprint. The word used by Browne-Wilkinson J in Woods is "or".]

13. In Imperial Group Pension Trust v Imperial Tobacco Sir Nicholas Browne-Wilkinson V-C, having set out the term later cited by Lord Steyn in Malik, added at page 597H:

"I will call this implied term 'the implied obligation of good faith.' In my judgment, that obligation of an employer applies as much to the exercise of his rights and powers under a pension scheme as they do to the other rights and powers of an employer. Say, in purported exercise of its right to give or withhold consent, the company were to say, capriciously, that it would consent to an increase in the pension benefits of members of union A but not of the members of union B. In my judgment, the members of union B would have a good claim in contract for breach of the implied obligation of good faith: see Mihlenstedt v Barclays Bank International Ltd [1989] IRLR 522".

14. On behalf of the appellants, Mr Leiper submits that the Employment Tribunal erred in law in holding that the implied term included a duty "to treat employees in a fair and even handed manner." That is an unacceptably broad approach to the trust and confidence term, it is submitted. The true test is whether failure to offer the enhanced redundancy package was a capricious act. The appellants' decision could not be categorised as arbitrary or capricious, or as irrational or perverse, given their belief that the respondent was self-employed. The belief was an honest one and the fact that it has been held as a matter of law to be incorrect does not render perverse a decision based on the belief. Subsequent recognition of the true legal label does not render the reason given at the time inadequate. As presented orally, those submissions became the second and third submissions of Mr Leiper.
15. His first and indeed primary submission was that the implied term of trust and confidence can have no application in the present situation. The difference between the present case and the cases in which the term has been applied, he submits, is that they were concerned with implementing existing rights under a contract and ensuring their effectiveness. They do not cover the present situation where the issue is whether the employer was obliged to offer fresh contractual terms to the employee. The term, he submits, cannot go as far as to allow the creation of new rights and positive obligations which do not exist under the contract under consideration. It may be applied to enforce existing terms and to regulate existing terms, but not to create the new rights which the respondent in the present case seeks to enforce. To permit the term to operate in the respondent's favour in present circumstances would involve a requirement that an employer must offer a new contract to an employee. It was open to the employers in this case, even on capricious grounds if they saw fit, to decline to offer a new contract to the respondent.
16. I reject that submission. There may in law be a breach of the implied term of trust and confidence in a decision to refuse to offer an employee a new contract in circumstances such as the present, just as in a decision to refuse to offer a variation. I should add that Mr Leiper put his proposition even more broadly and submitted that even in a case of variation an employee could not have the protection of the implied term.
17. In this case, for good commercial reasons the appellants decided to offer their workforce (the relevant part of which was over 70 strong) a new contract on better terms. To single out an employee on capricious grounds and refuse to offer him the same terms as are offered to the rest of the workforce is in my judgment a breach of the implied term of trust and confidence. There are few things which would be more likely to damage seriously (to put it no higher) the relationship of trust between an employer and employee than a capricious refusal, in present circumstances, to offer the same terms to a single employee.
18. The matter should be looked at as one of substance. Whether the form of the change proposed by the employer is by way of variation or by way of a new contract is not in itself of great importance: the context and the substance of the matter must be considered. The substance here was an offer of fresh contractual arrangements to a workforce in order to achieve the employer's aims and objects, though the welfare of the workforce may well also have been a factor. To deprive one member of a large workforce of the same opportunity as offered to all his fellow workers is a clear breach of the implied term, in my view.
19. I have already stated in summary form the second submission made, which is that the Employment Tribunal have erred in law by their use of the expression "to treat employees in a fair and even handed manner". It is submitted that the wrong test has been applied. In my judgment, even if that is right it does not affect the outcome of this appeal. The facts are clear and are not and cannot be disputed, and it is for this court, as a matter of law (as it was for the EAT) to hold whether on those facts there was a breach of the implied term. Reference to fairness and even-handedness is surplusage. The present appeal can be decided without reference to the nuances of language raised by the Employment Tribunal's use of that expression. I will return briefly to that question, having first considered what was the actual situation.
20. It is not suggested on behalf of the respondent that the refusal to offer terms to him was capricious in the sense in which Mr Leiper used that term as the basis for his first submission. The reason why the terms were not offered, as the Employment Tribunal recognised, was a genuine but erroneous belief that the respondent's status was not that of a permanent employee, as contemplated in the scheme. It is submitted that such genuine and reasonable belief was a good reason for failing to make the offer to the respondent, good in the sense that it did not involve a breach of the trust and confidence term.
21. I am not able to accept that submission. Employment tribunals have found unanimously that the respondent was an employee and by a majority that he was a permanent employee. The reason given by the employers has been found to have been unsound. A reasonable belief in a state of affairs now held not to exist is not in my judgment a ground for depriving the employee of the improved terms of employment which would have been offered but for the error.
22. In the present case it was plainly a breach of contract to treat an employee as not being entitled to benefits resulting from his being a permanent employee when he was in fact a permanent employee. The good faith with which the erroneous belief was held does not alter the character of the failure. Had the employers assessed the respondent's status correctly he would have been offered the enhanced terms. The EAT were correct to conclude that the respondent must be placed in the position in which he would have been but for the breach of contract. The employers were in breach of contract in failing to offer the respondent the enhanced contractual redundancy payment, as held by the majority of the Employment Tribunal. Questions as to the loss resulting from that breach and of causation do not arise for consideration upon the present appeal.
23. I return to the use by the Employment Tribunal of the expression "fair and even handed manner" which, it is submitted, is an erroneous statement of the test to be applied when considering the effect of the implied term of trust and confidence. Seeking to uphold the use of that term, Mr Mead for the respondent submits that by using that expression the Tribunal were merely underlining the fact that there had been differential treatment. They were not, by using it, considering the reasonableness of the employers' conduct as the test to be applied.
24. I do not find it necessary or appropriate to consider the effect of the use of that expression, which in my judgment and for reasons I have given does not affect the outcome of this appeal. Plainly there are dangers in using terminology which may extend, or may appear to extend, the scope of the implied term of trust and confidence, as explained in Malik and the cases cited in Malik. Employment tribunals should apply the tests stated in those cases and not use language which may detract from the correct test or suggest that a different test has been applied. Of course the language of a judgment as a whole has to be considered when considering the effect of a particular expression.
25. For the reasons I have given, I would dismiss this appeal.
26. LORD JUSTICE LONGMORE: I agree and do not wish to add anything.
27. SIR MARTIN NOURSE: I also agree that the appeal should be dismissed for the reasons given by my Lord. I add some brief observations in relation to Mr Leiper's first submission.
28. I am unable to see any reason in principle why the implied term of trust and confidence should not in appropriate circumstances impose an obligation on an employer to offer an employee a variation of his existing contract or even a new contract. It is not correct to say, as Mr Leiper has said more than once, that the effect of the decisions below is to hold that the implied term can bypass the express terms of the contract. The implied term, as much as the express terms, is part of the contract. Though it is there from the start, a particular obligation under it does not arise until the employer conducts himself in such a manner as to occasion a breach of it. Where, as here, the conduct complained of is an offer made by the employers to all but one of more than 70 employees to agree to a variation of their existing contracts favourable to them, there can be no objection in principle to holding that the implied term obliges them to make the same offer to the remaining employee as well.
ORDER: Appeal dismissed. The respondent will have his costs of the appeal, to be subject to detailed assessment if not agreed. Permission to apply to the House of Lords refused. (Order not part of approved judgment)