England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM AN EMPLOYMENT APPEAL TRIBUNAL
(His Honour Judge J R Reid QC)

		Royal Courts of Justice Strand London, WC2
		16th May 2003

Friday, 16th May 2003 J U D G M E N T
1. LORD JUSTICE PETER GIBSON: I will ask Keene LJ to give the first judgment.
2. LORD JUSTICE KEENE: This appeal raises a short point of construction of a contract of employment. It is an employer's appeal from a decision of the Employment Appeal Tribunal ("the EAT") presided over by His Honour Judge Reid QC.
3. The first of the respondents, Mr Graham, had complained in his originating application of the unlawful deduction of wages by his employer, the appellant, on the basis that there had been a failure to honour national pay awards agreed through the National Joint Council for Local Government Services ("the NJC"). Mr Graham was employed as an attendant from April 1995 onwards at the Warrior Swim Centre, Southend-on-Sea. Originally he had been employed by the Southend-on-Sea Borough Council, but on 3rd January 2000 there was a transfer of undertaking, within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 1981, to the appellant. Thus, Mr Graham became an employee from that date of the appellant. Under Regulation 5 of those 1981 Regulations, the rights, powers, duties and liabilities of the Borough Council under the contract of employment were transferred to the appellant. In simple terms, the appellant stood in the shoes of the Borough Council as employer. After that transfer there were two pay increases agreed by the NJC, a rise of 3% as from April 2000 and a further rise of 3.5% as from April 2001. Neither was passed on by the appellant to Mr Graham. Another 13 employees were in the same position as he was. They made similar originating applications to an Employment Tribunal, and they are the other respondents to this appeal. The issue which arises is whether in the relevant years the respondents were entitled under the terms of their contracts of employment to the pay increases agreed by the NJC.
4. After his employment began, Mr Graham was sent written particulars of employment by the Borough Council in performance of its statutory duty under what is now section 1 of the Employment Rights Act 1996. Those particulars, as they stood at the date of the transfer of undertaking following a variation in April 1998, contained a paragraph dealing with pay and conditions of service. Insofar as relevant to this appeal, that paragraph (paragraph 3) reads as follows:

"During your employment with the Authority, your rate of pay, overtime and other payments, standard hours of work, entitlement to holidays (including the period within which holidays may be taken), holiday pay, sick leave and sick pay, and certain other Conditions of Service (including maternity provisions where appropriate), will normally be in accordance with the National Joint Council for Local Government Services as adopted by the Authority from time to time and as supplemented and applied by the Authority's Staffing Code/Regulations/Personnel Policies. Any variation to national conditions offered at the time of your appointment will be as specified in the appropriate section(s) of this document. Any changes that subsequently may be made in your terms and conditions of employment will be separately notified to you or otherwise incorporated in the documents to which you have access."

5. It was agreed before the Employment Tribunal that that provision formed part of the terms of the contracts of employment of the respondents. I put it like that because it needs to be borne in mind that such written particulars of employment supplied by an employer in performance of its statutory duty do not normally constitute the contract of employment itself, but are simply evidence of the terms of the contract and not conclusive evidence: see System Floors UK Ltd v Daniel [1981] IRLR 475 approved by this court in Robertson v British Gas [1983] IRLR 302. That is not a surprising conclusion, since the particulars are drawn up and provided by the employer, without necessarily being agreed as correct or comprehensive by the employee, and need not be provided to the employee until two months after the start of his employment.
6. When these applications came before the Employment Tribunal in 2002 evidence was given on behalf of the employees by a Mrs Powell, a shop steward of the relevant union. The Tribunal said this about her evidence:

"The evidence of Mrs Powell allows us to find that the Council, throughout her 15 years of service, always did make pay rises in accordance with the rate determined by the NJC, that they were always paid as from April in each year although that would be with retrospective effect. In practice, the pay rise would appear in the wage packet in or about September and would be followed by a payment reflecting the arrears of pay accumulated since the effective date in April. Mrs Powell is not aware that the Council ever did consider a resolution whether or not to adopt a pay rise nor did she ever receive a letter the effect of which was to notify her that the Council had decided to adopt the NJC rate for the year in question."

7. The Tribunal then looked at the result of a number of other decided cases and considered a submission from the employer that the word "normally" meant that it could choose whether or not to adopt NJC pay determinations, and only if it did so would the pay rise be incorporated into the contracts of employment. The Tribunal, commenting that the point was not an easy one, preferred the submission on behalf of the employees. It concluded that, had the Council specifically adopted the NJC rise each year, it would have written to its employees to tell them so; but the evidence showed that the Council gave no such indication. At paragraph 14 of its Extended Reasons the Tribunal stated:

"We consider that the word 'normally' is to be treated as indicating what is the prevailing situation and as distinct from one that is not normal. That abnormal situation will arise, as the remainder of the clause makes clear, when a determination is made and notified that the NJC package, or any part of it, is no longer to be treated as adopted. The Council is not binding itself forever and a day to stick by the NJC terms but it has determined that it will do so for the time being and until notice to contrary effect is given."

8. Finally, it added:

"To the extent that the interpretation placed upon the document by the respondent can be said to be arguable, then there is ambiguity in the drafting. That being so, we must construe it in a way least favourable to the respondent and that leads us to conclude that the complaints of the applicants succeed."

It therefore granted the application by the employees.

9. On appeal by the employer to the EAT, that Tribunal held a preliminary hearing to decide whether the matter should go to a full inter partes appeal hearing. It concluded that it should not, the point at issue not being sufficiently arguable. It rejected an argument that it was wrong for the Employment Tribunal to have used Mrs Powell's evidence to construe the contracts, concluding that it had only been used to determine whether in fact the Borough Council had formally adopted the various NJC awards. On the main issue of interpretation, the EAT concluded that normally the NJC rate of pay would be incorporated but that the employer was not bound automatically in all circumstances to accept such a rate:

"It reserved to itself the right not to do so and to determine that some other rate of pay should apply."

But, said the EAT, once the employer wished to depart from the NJC rate, while it had power to do so, "it was required to give notice to do so, as it envisaged by the concluding words of the clause", that is to say paragraph 3. Consequently the EAT concluded that the tribunal below had been right and that there should not be a full inter partes hearing.

10. Before us it has been agreed that, if we disagree with the EAT's decision, we should not send the case back for a full appeal hearing but instead should determine the issue ourselves.
11. On behalf of the appellant employer, Mr Sheldon argues that the wording of paragraph 3 of the Statement of Particulars shows that the appellant was not contractually obliged to pay the rates of pay established by the NJC from time to time. The use of the word "normally" and the phrase "as adopted by the authority from time to time" indicates that those rates were not automatically incorporated into the individual contracts of employment. Reliance is placed on another decision of the EAT in the case of Glendale Grounds Management v Bradley (unreported) EAT 484/97. The relevant provision in that case read as follows:

"During your employment with the Authority, your rates of pay and Conditions of Service will be subject to collective agreements negotiated with the trade unions which are recognised by the Authority for collective bargaining purposes. Agreements reached nationally are incorporated after approval by the County Council into your contract of employment and are normally set out in the scheme of conditions of service at [the NJC]."

12. The EAT in that case held that the clause meant what it said:

"... an NJC pay increase will be incorporated after approval by the employer, formerly the County Council, now the Respondent. The Respondent did not approve the award, hence the increase was not incorporated into the Applicant's contract of employment."

13. Mr Sheldon argues that the wording in the present case amounts to the same thing, namely that the authority had to approve each NJC pay rise before it would apply. Otherwise, he contends, one is not giving effect to the phrase "as adopted from time to time". He submits that there is no ambiguity in these words and therefore no scope for the contra proferentum to apply. Furthermore, it is argued that the employer under this provision is not required to tell the employees that an NJC pay rise is not going to be implemented. It does, because of the later wording of paragraph 3, have to notify them if it is going to implement such a rise because that would be a change in the terms of employment. But the Tribunal was wrong to conclude that the employer would have to give notice to the employee before departing from the NJC pay rates as agreed in that year. Mr Sheldon contends that the Tribunal's decision should not be read as saying that the Council in practice did not tell employees that it had decided on a pay rise. In this connection, it is submitted that the Tribunal erred in relying on Mrs Powell's evidence to see whether the Borough Council had adopted the various NJC pay rises in the past. Here reference in made to the well-known House of Lords decision in James Miller & Partners v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, where it was held that subsequent conduct of the parties is not admissible to assist in the interpretation of words used in a contract.
14. It does seem to me to be of some importance to recognise that what is truly at issue in this appeal is not whether the employer could depart from the agreed NJC rates but in what circumstances he could so depart. The EAT concluded that he had the power to depart from those rates, but only after giving notice to the employee that such was his decision. Was that the proper interpretation of the contract of employment?
15. The wording of paragraph 3 is, to my mind, not as clear as that in the Bradley case, where the relevant provision indicated that national agreements had first to be approved by the relevant council before they would be seen as incorporated into the contracts of employment. That wording made prior approval a pre-condition. Here one has both the word "normally" and the phrase "as adopted by the authority from time to time". The word "normally" obviously allows for departures from the norm; but at the same time it also suggests that the norm is that the NJC rates will be followed and applied. A departure from those rates is therefore an exception, an abnormal situation, as the Employment Tribunal described it.
16. What is meant by the phrase "as adopted by the authority from time to time" is more difficult to ascertain. The appellant's contention is that it means that the employer had to "approve" each and every pay rise contained in an NJC agreement before it would become applicable. Even if that were right, the form which such adoption or approval would take would remain somewhat unclear. It might be it could take the form merely of making the payment at the new rate, rather than requiring a formal resolution by the authority, or one of its committees, or a formal decision by the private employer.
17. In any event, I do not accept that one should construe the wording of this paragraph as if it were an agreed term in a written commercial contract between two companies. The task of interpretation has to be undertaken bearing mind that these are the employer's particulars of employment which provide evidence of the agreement between the employer and employee and no more. The conduct of the parties is also relevant in establishing what was agreed and what the particulars of employment meant. It is here that the evidence of Mrs Powell properly comes into the picture because she deals with that conduct.
18. As I read the Employment Tribunal's decision, especially paragraph 14, it found that there was no evidence that the Borough Council formally adopted the NJC pay awards year by year before paying them, or that it communicated any such formal adoption to its employees. Instead, it simply paid the increased rates. That is not only part of the relevant background knowledge which the parties would have had at the time of the particulars of employment in April 1998 relevant to the interpretation of the contract in accordance with the House of Lords' decision in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, but it also demonstrates how both the Borough Council and its employees regarded their contractual obligations at all relevant times. Both sides clearly treated their agreement as one under which the NJC pay rises would normally be paid without the need for any positive or formal act of approval or adoption on the part of the Borough Council.
19. There was, in my judgment, no error on the part of the Tribunal in having regard to the evidence of Mrs Powell. The decision in James Miller & Partners v Whitworth Street Estates (Manchester) Ltd, upon which the appellant relies, was only to the effect that subsequent conduct is inadmissible to construe a purely written contract: see the House of Lords decision in Carmichael v National Power Plc [1999] ICR 1226 at 1235B-C. I emphasise again that these contracts of employment were not purely written contracts, the particulars supplied by the employer being merely evidence of the terms agreed and not necessarily the totality of the evidence. Therefore the Tribunal did not err in law in having regard to Mrs Powell's evidence, which enabled the Tribunal to find that NJC pay increases were regularly paid without a formal decision by the authority. That conduct properly shed light on what the parties intended by their agreement.
20. In essence, both sides gave considerable force to the word "normally" in those particulars of employment and did not act as if NJC pay rises would only be paid if each such rise was formally approved by the employer.
21. I conclude, therefore, as did the specialist tribunals below, that under these contracts of employment it was not a pre-condition that the employer had positively to approve any NJC pay rise before it became payable. The employer could, however, make a positive decision to depart from that normal state of affairs. But such a decision must be seen in the context of the duties owed by employer and employee under a contract of employment. It is, of course, well established that such a contract will normally be regarded as containing an implied term that the employer will not act so as to destroy the mutual trust and confidence necessary between employer and employee: see Malik v BCCI International [1998] AC 20. It was said by Phillips J in FC Gardner Ltd v Beresford [1978] IRLR 63 that there will normally be an implied term in contracts of employment that an employer will not treat his employees arbitrarily, capriciously or inequitably in respect of matters of pay. I see that as being simply one part of the more general obligation not to destroy the mutual trust and confidence between employer and employee. In the present case, where the contract provides, in effect, that NJC rates will normally be paid, it must be implicit that, at the very least, the employer must inform the employee if and when there is to be a departure from that norm. I would regard that as a term obviously intended by the parties in such circumstances and, therefore, to be implied on the "obvious bystander" test. That, in my view, is the proper basis upon which notice was required from the employer before he could decline to pay a nationally agreed pay increase. If the normal situation is not to apply, it is an implied term that the employee must be informed that that is to happen. Here, it was not done, and in those circumstances the respondents were, and are, entitled to the pay increases of April 2000 and April 2001.
22. The ground which relates to the contra proferentum principle is of little importance, given the conclusion which I have reached on the proper interpretation of the contracts of employment in this case. It was always a subsidiary point in the Tribunal's reasoning and I do not propose, therefore, to deal with it further in this judgment.
23. For my part, I would dismiss this appeal.
24. LORD JUSTICE TUCKEY: I agree.
25. LORD JUSTICE PETER GIBSON: The short point of construction on this appeal has been argued with corresponding and appropriate economy by both Mr Sheldon for the employer and Mr Brown for the employees. The words to be construed are not the terms of a contract of employment, but the employer's statement of those terms. The issue boils down to the significance of the words "normally" and "as adopted by the authority from time to time". The latter phrase, Mr Sheldon submits, has been given no meaning by the Tribunal by its construction. He submits that the effect of the phrase is the same as the relevant contractual term in the Bradley case to which Keene LJ has referred. He further submits that the Tribunal should have held that the NJC award would only be incorporated into the contract of employment if the award had been adopted by the employer, and that as this had not been done, there was no obligation to pay the increased rate provided by the NJC terms.
26. I am not able to accept that submission.
27. The words used in paragraph 3 of the statement in our case are materially different from those in the Bradley case. In the Bradley case it is quite clear that it was only after approval by the county council that agreements reached nationally were to be incorporated into the contract of employment. I cannot read the word "as", in "as adopted by the authority from time to time", as meaning "if adopted by the authority from time to time" any more than I could read "as", in the phrase "as supplemented and applied by the authority's staffing code, regulations, personnel policies", as meaning that there had to be a prior supplementing and application by the authority's staffing code, etc. In my judgment, the meaning of paragraph 3 makes perfectly good sense in the way it has been interpreted by the Tribunal and the EAT.
28. For these, as well as the reasons given by Keene LJ, I too would dismiss this appeal.

Order: Appeal dismissed