England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EAT (3 JUDGES)
MRS JUSTICE SLADE
REF: UKEAT/050511SM

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/04/2013

Lord Justice Maurice Kay :

1. In July 2007 the London Fire & Emergency Planning Authority (the Employer) concluded a collective agreement with GMB and Unison (the Unions), the material part of which was headed "General Pay Settlement 2007-09". It applied to craft, manual, main and principal officer grades. It was conceived as a three-year deal. The crucial provision stated:

"In recognition of the agreement of GMB and Unison to the terms set out in this agreement, the LFEPA shall increase the rates of pay of all employees covered by the ICCS by 2.9% with effect from 01/04/07. On 01/04/08 there will be a further pay uplift of 2.75% save for those covered by the pay protection arrangements set out in paragraph 11 below. On 01/04/09 pay will be increased by 2.5% or by the NJC for Local Government Services settlement plus any uplift required to ensure general pay increases for the period 2007-09 are 1% above the NJC settlements for the same period."

No dispute arose in relation to the years commencing April 2007 or April 2008. The dispute relates to the year commencing April 2009 which was the subject of the words I have emphasised.

2. By April 2009 the financial crisis had eventuated. The Employer took the view that it was under no obligation to implement an increase of 2.5%. It offered an increase of 1.825% which was rejected, whereupon it implemented an increase of 1.575% which was the amount required to ensure that general pay increases for the period 2007-09 were 1% above the NJC settlements for the same period.
3. The appellants are members of the Unions. They commenced proceedings in the Employment Tribunal (ET) claiming unlawful deductions from wages pursuant to Part II of the Employment Rights Act 1996. They claimed to be entitled to an increase of 2.5%. In the ET, it was common ground that the collective agreement was incorporated into the individual contracts of employment. However, the case for the Employer was that the provision in relation to 2009 was not apt for incorporation because (a) it was no more than an agreement to agree; (b) it was "incomplete"; (c) it was uncertain; and (d) there was no intention to create legal relations. Although the provisions in relation to 2007 and 2008 had been apt for incorporation, the wording for 2009 was not of that quality.
4. The ET concluded that because the wording for 2009 provided for two alternatives but did not state which had primacy, it was no more than an agreement to agree or an agreement to negotiate further for that year. Accordingly, there was no legal entitlement to an increase of 2.5%.
5. The appellants appealed to the Employment Appeal Tribunal (EAT). The appeal was dismissed but on the basis of a different legal analysis. Slade J said (at paragraph 32):

"In our judgment, the meaning of Clause 2 of the Collective Agreement is clear. It provides for a pay increase in 2009, the third year of the Collective Agreement, of 2.5% or the NJC settlement figure plus any uplift required to ensure pay increases for the period 2007-2009 were 1% above the NJC settlements for the same period. 'Or' means what it says. The [Employer] fulfilled their contractual obligation by paying in accordance with one alternative. They were not contractually obliged to pay 2.5% or whichever alternative would give the highest increase."

6. The appellants now appeal to this Court with the permission of Laws LJ. They contend for a contractual entitlement to a 2.5% increase as a matter of construction. By a Respondent's Notice the Employer continues to argue for the 2009 provision being non-contractual on the grounds it had advanced to the ET. Mr James Goudie QC says that that remains the Employer's primary case. His fallback position is to uphold the reasoning of the EAT. Of course, if the "no contract" analysis of the ET was correct, there was no basis for interference by the EAT. Accordingly, it is logical to address the "no contract" analysis first.

1. Was the 2009 provision contractual?

7. As between the Employer and the Unions, the collective agreement was not an enforceable contract: Trade Union and Labour Relations (Consolidation) Act 1992, section 178. On the other hand, it is common ground that it was incorporated into the contracts of employment of the intended employees and that, in relation to the first two years, 2007 and 2008, it gave rise to legally enforceable rights. The question is whether it gave rise to legally enforceable rights in the third year, 2009.

(a) An agreement to agree?

8. The ET held that no contractual rights accrued in 2009 because the terms of the collective agreement left it open as to which of the two alternatives – 2.5% or NJC plus 1% would apply. It said:

"The Tribunal on the evidence conclude that the agreement reached for 2009 was an agreement to agree …

… the parties had concluded an agreement to agree the final figure in 2009, after the NJC settlement had been concluded. There was no evidence … that the agreement contained a further guarantee that this would be not less than 2.5%. There was also no evidence that the parties had agreed a formula, stating which option was to take primacy over the other. In the event of agreement not being reached, all the parties had was an agreement to enter into further negotiations."

9. The EAT considered this analysis to be erroneous. So do I. The collective parties plainly did not think that pay in 2009 remained at large. Their central purpose was to achieve a three-year deal. They expected that the next negotiation would be for 2010. Indeed, in a "Questions and Answers" document circulated in June 2007 in order to explain the proposed deal, the Employer, having referred to a "pay settlement over a three year period", stated that the two sides would "meet to negotiate a new pay agreement to be effective from 1 April 2010". The provision for 2009 was not an agreement to agree or an agreement to negotiate. It was an agreement for a rate of pay to be determined in accordance with the agreed terms, properly construed.

(b) Uncertainty

10. The next argument against legal enforceability is that the 2009 provision was void for uncertainty on the ground that it contained two alternative methods of calculating the increase without giving precedence to either. This is another way of expressing the "agreement to agree" analysis. If it were the case that the agreement, properly construed, did not provide for precedence (as to which, see paragraph 22, below), that would not be fatal to its being enforceable. It would still be susceptible to the analysis favoured by the EAT (at paragraph 26):

"Each option was clear. So too was it clear that it was for the paying party, [the Employer], to choose between the two. The existence of choice in an agreement does not render that agreement uncertain if the choices are clear. Contracts in different contexts may give an option to one party leaving the other party uncertain as to whether the option will be exercised. In the employment context a contract may give the employer the right to terminate on giving notice or pay in lieu of notice. The existence of choice in an agreement does not render that agreement enforceable as a contract."

11. If the EAT's construction of the contract is correct, that analysis would be impeccable. However, as I shall explain, I do not consider the construction to be correct.

(c) "Not apt for incorporation"

12. As Mr James Goudie QC accepts, this is another variation on his theme of unenforceability. He seeks to rely on authorities such as Alexander v Standard Telephones and Cables Ltd (No 2) [1991] IRLR 286 and Lee v GEC Plessey Telecommunications [1993] IRLR 383. However, the answer to his submission is obvious. If the provision relating to 2009 is not void for uncertainty but is susceptible to meaningful construction, it is no less apt for incorporation than were the provisions relating to 2007 and 2008. That is implicit in the objective of the three-year deal.
13. Accordingly, I do not find any doctrinal obstacles to legal enforceability. The real issue is construction.

2. Construction

14. The modern approach to the construction of contracts is to be found in the exposition of principles by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912H – 913E (which he further elucidated in Bank of Credit and Commerce International v Ali [2002] 1 AC 251 at paragraph 39). The following passages from his speech in the Investors Compensation Scheme case are of particular relevance in the present case:

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract …

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent …

(4) The meaning which a document … would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax …

(5) … if one would conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Campania Naviera v Salen Rederierna [1985] AC 191, 201:

'if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense'."

15. The context in the present case is not one of a commercial contract but of contracts of employment between an employer and employees which contain terms incorporated from a collective agreement.
16. Even before the Investors Compensation Scheme case, Sir Thomas Bingham MR had set out the approach to the construction of contracts of employment which contain terms incorporated from a collective agreement in Adams v British Airways PLC [1996] IRLR 574. His judgment anticipated and was consistent with the speech of Lord Hoffmann. Having referred to the need to construe the argument "in its factual setting as known to the parties at the time", he said (at paragraph 22):

"On the facts here, it was a collective agreement which was incorporated into the contracts of the individual plaintiffs. A collective agreement has special characteristics, being made between an employer or employers' organisation on one side and a trade union or trade union representative of employees on the other, usually following a negotiation. Thus it represents an industrial bargain, and probably represents a compromise between the conflicting aims of the parties, or 'sides' as in this context they are revealingly called. But despite these special characteristics, a collective agreement must be construed like any other, giving a fair meaning to the words used in the factual context (known to the parties) which gave rise to the agreement."

That sets the scene for all such cases.

17. I now turn to the specific factual context of the present case. At this stage, I shall not refer to earlier documents to which we were taken. The crucial document is dated 26 July 2007. It is in the form of an internal report to the Employer seeking approval of "the proposed Pay and Conditions Agreement". In other words, the respective negotiators had reached a collective agreement for which approval was being sought and was, in the event, obtained. The report enclosed Appendix A (the Pay and Conditions Agreement), Appendix A(A) (the Implementation Arrangements) and other Appendices relating to Job Evaluation. The report set out six "core principles", including:

"(a) a three year pay agreement guaranteeing an additional 1% above the National Joint Council for Local Government Services Agreement."

18. It made clear that Appendix A had been agreed by the respective negotiators and, in summarising the agreed terms, it referred to "a three year pay deal" and "a guarantee of an additional 1% above the [NJC] agreement over the lifetime of the agreement". It explained that the three year pay deal had been proposed "in response to the concerns raised by the trade unions regarding the removal of the current increment salary progression arrangement and the introduction of the job evaluation scheme". It stated that the three year deal provided for general pay increases specified for each year, culminating in:

"2.5% or the balance of the value of the NJC … for the same period (April 2007 – March 2009) plus 1%."

It also adopted the language of "long-term pay deal".

19. Appendix A, the Pay and Conditions Agreement, set out the agreed terms under the heading General Pay Settlement 2007-2009, including the provision which is in issue and which I set out again:

"On 01/04/09 pay will be increased by 2.5% or by the NJC … settlement plus any uplift required to ensure general pay increases for the period 2007-09 are 1% above the NJC settlements for the same period."

20. Thus, although the report had referred to the NJC plus 1% element in the language of "guarantee", the actual Agreement which it was describing used the words "required to ensure". As between the two bases of calculation, no words such as "whichever is the greater" or "whichever is the lesser" were included although, in other parts of the Pay and Conditions Agreement and the Implementation Arrangements, both of those formulations were deployed in relation to different issues.
21. These documents are not negotiation documents. They represent a concluded agreement, accompanied by a report created after the agreement had been concluded.
22. What meaning would the Pay and Conditions Agreement convey to "a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were" at the time of the agreement? It is clear beyond all doubt that the parties to the collective agreement and the parties to the contracts of employment (no point is taken to the effect that the latter, in particular the employees, may have seen the matter differently from the former) had as their central purpose a three-year pay deal. Whereas the provisions for 2007 and 2008 were simple, the provision for 2009 was more complicated. The construction of it adopted by the EAT seems to me to be wholly improbable. The idea that the Unions would agree to a three-year deal in which the third year was covered by two alternatives, and that the Employer should have the unfettered right to choose between them strikes me as fanciful. I am quite sure that it would have struck the Employer as equally unrealistic. I am not surprised that Mr Goudie has never espoused it, save as his fallback position in this Court. Such a construction flouts industrial common sense.
23. To the extent that Mr Goudie relies on the fact that the disputed provision does not have an express "whichever is the greater" qualification, I regard that as at most a neutral point. Whilst it is true that such language is deployed elsewhere, particularly in the Implementation Arrangements, so is "whichever is the lesser". By itself, the omission to deploy either in relation to 2009 pay is not significant.
24. It is suggested on behalf of the Employer that the reference to 2.5% in the 2009 provision was included merely on an indicative basis in order to provide employees with a helpful but non-binding estimate of what their pay increase for that year might be once the NJC plus 1% formula came to be applied. I unhesitatingly reject that suggestion. It is not what the provision says. Indeed, in the drafting, the 2.5% precedes the NJC plus 1% formula. I cannot believe that the parties included it just as a piece of imprecise economic forecasting.
25. So what is the real meaning of the 2009 provision? In my judgment, it means that in that year the employees would receive an increase of 2.5% or NJC plus 1%, whichever was the greater. Looking at the matter objectively, no other meaning made or would have made industrial sense. No other meaning would have represented a three-year deal which the Unions would have contemplated and, objectively, that must have been obvious to the Employer. A provision which begins with the words "will be increased by 2.5% or …" cannot be given a meaning whereby the award might fail to reach 2.5%. Indeed, on the Employer's construction, it is difficult to see what purpose the inclusion of 2.5% might have unless it is simply indicative or is one of two alternatives left to the discretion of the Employer (both of which interpretations I have rejected). Nor can 2.5% be said to be included as a maximum for the obvious reason that, if NJC plus 1% had turned out to exceed 2.5%, which was not fanciful in the happier financial climate of 2007, the employees would have been entitled to it, even on the Employer's construction.
26. For all these reasons, I am satisfied that, properly construed, the 2009 provision entitled the employees to a 2.5% increase in 2009.

Conclusion

27. I would allow this appeal.

Lord Justice Moses:

28. I agree. Since Lord Justice Davis has chosen to add a judgement of his own, there is no need for me to do so. I agree with Maurice Kay LJ that the only sensible meaning to be ascribed to the agreed provision for the third year is that the employers were to increase the pay of the relevant employees by a minimum of 2.5%. I do not think it necessary to add any words to the clause to achieve that result or to look to any of the surrounding material in a manner to which Davis LJ takes objection. It is clear that the employers sought, in their own interest, a three-year agreement. In that context, it is surprising that they should have sought to advance an argument that no deal was done for the third year at all as an alternative to the equally startling suggestion that for the third year they had an unfettered choice between 2.5% or NJC + 1%.

Lord Justice Davis:

29. I agree that the appeal should be allowed for the reasons given by Maurice Kay LJ.
30. I was very doubtful if some of the materials sought to be put before the court by Mr Segal on the issue of construction were properly admissible for that purpose. His argument in this regard seemed to me in places to be delving into the subjective intentions of the parties or into the pre-contract negotiations in a way not sanctioned by authority: even allowing for the relaxations in the permissible approach to the construction of contracts adopted by the courts in more recent years. Indeed at one stage his argument came close to inviting the court to construe the written records of the negotiations themselves.
31. But in my view the appeal succeeds simply on an interpretation of the words actually used in this clause, set in this pay-related context and where a three year deal was evidently being negotiated.
32. The EAT adopted essentially a literal approach to the words used. Slade J's approach thus was to say, in essence, that the use of the word "or" gave the employer a choice. It is true that as a general rule where a contract gives a party a choice as to the manner in which a contract may be performed that party ordinarily is free to choose the one most convenient to himself. But in the present context, the "choice" would here be devoid of all meaningful content. It would also come down to the employees themselves in effect being given a "guaranteed maximum". I simply cannot get my head around such a concept in a case of this kind. It makes no real sense. A "guaranteed minimum", on the other hand, makes every kind of sense.
33. If that involves notionally reading into this clause at its end the words "(whichever is the greater)" then I have no difficulty with that: that seems to me simply to spell out what is obvious. I am not in the slightest deterred by the fact that at places elsewhere in the contract the phrases "whichever is the greater" and "whichever is the lesser" are explicitly used, whereas such words do not explicitly appear in this particular clause.
34. Such an interpretation is also wholly consistent with the Pay and Grading Ratification Report submitted on 26 July 2007, which Mr Goudie accepted was admissible on the issue of construction. There is certainly nothing in that Report to suggest that the 2.5% was perceived simply as an indicative estimate or as a cap – to the contrary.
35. If one possible interpretation gives rise to a result which makes a lot of sense and another possible interpretation (even if at first sight the more linguistically precise interpretation) gives rise to a result which makes – put into context – little sense then the former, all other things being equal, should prevail. In my view, in the present case, the language of the clause does permit such an interpretation.
36. As to the arguments propounded in the Respondent's Notice and as developed by Mr Goudie in his oral argument – he giving more primacy to them than to the actual reasoning of the EAT – I agree with Maurice Kay LJ that they cannot succeed. One should, so far as possible, try and make what was plainly intended to be a binding contractual promise, covering a three year period, prevail as a contract. It is not difficult to do that here.