England and Wales High Court (Administrative Court) Decisions

1. LORD JUSTICE AULD: This is an appeal by the plaintiffs against a decision of His Hon. Judge Brunning in the Nottingham County Court on 19th December 1997 awarding them sums considerably less than they had claimed against the defendant council, their employer, arising out of an agreed variation in 1991 to their respective contracts of employment.

2. The appeal concerns a public authority's allegation of and reliance on its own irrationality to overcome an earlier commitment to employees to compensate them for a reduction of earnings it has imposed upon them.

3. The agreed facts giving rise to the claims were as follows. The Council had employed the plaintiffs for many years as street cleansing drivers. Their contracts of employment entitled them, in addition to their normal wages, to £20 per week for standing by to carry out emergency work and two hours' pay at premium rates for every emergency call-out. In about July 1991, the parties agreed, pursuant to a contractual scheme negotiated with the relevant trade unions in 1987 and amended in 1989, that the plaintiffs would be "redeployed". That is, they were to continue doing essentially the same jobs, but their contracts of employment were varied to remove their entitlement to the stand-by and call-out payments. The variation was expected to reduce their earnings by about 40%. But, in accordance with the scheme, the Council agreed to compensate them by payment of lump sums equivalent to four times the annual difference between their former and new earnings, subject to a cap of one year's earnings. The exact figures were to be calculated and paid after the plaintiffs had worked under the new arrangements for six months so as to enable the true reductions in earnings to be assessed. In each case, and as assessed after the six months' trial period, the compensation should have been in the region of £10,000.

4. The scheme had its origin in proposals by the Council to enable it to redeploy employees with their agreement to lower paid work in return for a lump sum compensatory payment. The selection of the four year period for calculation appears to have been taken from national conditions of employment for reimbursement of additional travelling expenses following redeployment. As I have said, the scheme was amended in 1989. There is no suggestion that there was any material change of circumstances affecting its suitability for this purpose between then and the Council's and the plaintiffs' agreement to apply it to them in 1991.

5. In October 1991, after the redeployment agreement with the plaintiffs, but before payment to them of the agreed sums, the Council was prompted to look at the legality of its scheme by the Divisional Court's decision in Allsop v. North Tyneside MBC holding ultra vires payments made by a local authority under a voluntary redundancy scheme in excess of statutory maxima for which it was liable to make such payments. (The decision was affirmed by this Court in February 1992 [1992] ICR 639). The Council received an advice from leading counsel, Miss Elizabeth Slade, QC, who advised it that the payments made to the plaintiffs were not ultra vires in the Allsop sense of exceeding any statutory maxima. But she added that it would have to be able to show that the level of the payments was reasonable in the circumstances.

6. The Council later sought further and more specific advice from junior counsel, Mr. Mark Lowe, who advised in conference that "it would be dangerous and render the Council vulnerable to challenge" to calculate the lump sum payments on any longer multiplier than two years or subject to a cap in excess of half of their potential statutory redundancy pay. However, he did not advise that the 1989 scheme was unlawful. The Council, after consultation with the relevant trade unions, but in the teeth of their objections, revised the scheme so as to reduce the compensation for the loss of pay to two years only. On that basis it re-calculated the payments to be made to the plaintiffs at less than £3,000 each. The plaintiffs regarded that as a breach of the agreed 1991 variations. They continued to work under their contracts as varied, but under protest, and instituted these proceedings for damages for breach of contract.

7. The Judge accepted the contention of Mr Andrew McGrath, for the Council, that it could not ignore counsel's advice that to calculate the lump sums on more than a two year multiplier would be unreasonable. He also accepted his argument as to the disparity between what the plaintiffs would have received under the 1991 variations, whilst retaining their employment with the Council - about £!0,000 - and that to which they would have been statutorily entitled if they had been made redundant - just under £3,500. He commented that "[t]hat itself [was] an indication in any event that the policy was unreasonable and unlawful". On those two bases he held that the Council had acted ultra vires, in amending the scheme in 1989 and in purporting, with the agreement of the plaintiffs, to vary their contracts of employment in 1991. In the result, he appears to have concluded, not that the plaintiffs could fall back on their original contractual entitlement to stand-by and call-out pay, but that their contracts of employment had been retrospectively varied in 1992 so as to give effect to the 1991 purported variation at the 1992 figures. I say that "he appears" so to have concluded, because his reasoning is not clear. This is how he put it at page 9A-C of his judgment:

8. This is not a case like Allsop, in which a local authority voluntarily made redundancy payments substantially higher than those it was statutorily liable and specifically empowered to make. The scheme under consideration here is for the "buying out" of established and uneconomic working practices. It is not the subject of statutory control outside the general powers given to local authorities by sections 111(1) and 112 of the Local Government Act 1972.

9. The first and main question that arises for decision is whether the Council's 1989 amendment of the scheme and/or its consensual application of it to each plaintiff in 1991 was irrationally generous to the plaintiffs so as to be outside those general statutory powers and, therefore, ineffective as a contractual variation. If the answer to that question is "yes", there is a second question, namely are the plaintiffs' claims for continuing loss of earnings under their original contracts of employment or did the Council's change of mind in 1992 have the effect of unilaterally varying the contracts? Third, and in any event, could a variation of their contracts in 1992 have operated retrospectively so as to deprive them up to 1992 of the compensatory payments for loss of stand-by and overtime payments flowing from the 1991 variation or, if there was no such variation, of their original contractual entitlement to stand-by and overtime payments?

10. As I have indicated, the statutory starting point for consideration of the first question, the validity of the scheme and of its application to the plaintiffs in 1991, is sections 111(1) and 112 of the 1972 Act. They provide:

11. Mr. Oliver Segal, for the plaintiffs, submitted that the proper test is whether the Council, in revising the scheme in 1989 and applying it to the plaintiffs in 1991, took all relevant factors and interests into consideration. He maintained that, on the material before the Judge, it had done so, and that the final decision as to whether its conduct facilitated or was conducive to the discharge of its functions was a matter for it and not for the court. He referred, in particular, to the following matters: the long-term advantage to the defendants in "buying-out" with one lump sum payment what could otherwise have been a continuing obligation to make uneconomic payments to the plaintiffs and other staff; the potential cost of claims for unfair dismissal or redundancy and of recruiting and training new staff if they had sought to remove that continuing obligation by dismissal of employees or by making them redundant ; the value of retaining tried and trusted staff and of maintaining good industrial relations through the medium of a carefully negotiated and contractually binding general scheme; its consideration, before settling on the 1989 revision, of representations from all interested parties and its express reconsideration of the reasonableness of the maximum proposed and the imposition of a cap to ensure it.

12. Mr. Segal criticised the Judge's use of the statutory redundancy entitlements of the plaintiffs, producing figures just under £3,500, as a contrast with the 1989 scheme figures of about £10,000, instead of taking their higher and less contrasting contractual redundancy entitlements of about £6,000 each. He also relied on the matters that I have summarised in the last paragraph as further factors reducing the starkness of the contrast.

13. Mr Andrew McGrath, for the Council, relied on the advice given by counsel and submitted that the 1989 four year multiplier applied in the 1991 variations to the plaintiffs' contracts of employment was irrationally over-generous and, therefore, ultra vires, so invalidating the 1991 variations. He maintained that its irrationality lay in its derivation, namely the national conditions of employment for reimbursement of additional travelling expenses following redeployment, and the Council's inappropriate application of it to "a redeployment/redundancy situation". He suggested that there was no evidence that the Council, in adopting the four year scheme in 1987 or in amending it in 1989 or in applying it to the plaintiffs, with their agreement, in 1991, had taken into account the matters referred to by Mr. Segal, notably the value of retaining experienced and loyal employees and of savings in potential unfair dismissal claims and in recruitment and training costs of replacement employees. He accepted that the contrast drawn by the Judge between the payments of £10,000 proposed in 1991 and the statutory redundancy figures of just under £3,500 was flawed, but submitted that that part of the Judge's reasoning was only a make-weight to his main conclusion that the 1991 scheme was irrational.

14. I say straightaway that I find that last part of Mr. McGrath's submission difficult to accept. The Judge, in rehearsing and accepting as he did Mr. McGrath's two main submissions, accepted that the disparity point in itself was sufficient to establish irrationality and, therefore, illegality; the only other basis to which that could be a "make-weight" was counsel's advice.

15. The fact that counsel may have advised the Council in 1992 that, to continue giving effect to the 1989 scheme, would be dangerous and render it vulnerable to challenge does not render the scheme or its application in 1991 irrational. Even if counsel had ventured the opinion that what had happened had been irrational, that would not have made it so. The onus lay on the Council to persuade the Judge that the 1989 scheme and/or its application to the plaintiffs in 1991 was irrationally generous to the plaintiffs so as to take it outside the general provisions of sections 111(1) and 112 of the 1972 Act and to free it from its commitment to them. That means the Council had to show, on a balance of probabilities, that no reasonably directed local authority could have reasonably adopted and applied the 1989 scheme.

16. In fixing on the appropriate "buy-out" figure the Council had to form a view, taking into account a number of factors of the sort to which Mr. Segal has referred, in summary, the long-term as well as the short-term savings in operating costs and the preservation of good industrial relations with its employees. It is plain from the papers before the Judge and this Court that, contrary to Mr. McGrath's submission, the Council gave anxious consideration to such factors; it is, in any event, inconceivable that they would not have been in the forefront of its deliberations. These are matters very much for the Council's own assessment and not for the Court; and the legality of its scheme and application of it in the section 111(1) sense of what will "facilitate" or be "conducive ... to" its functions cannot turn on arithmetical comparisons of the immediate effects of what is proposed and what might have been proposed in individual cases.

17. Two authorities illustrate this approach. The first is R v. Greater London Council, ex parte Burgess [1978] ICR 991, DC, in which the court held that a local authority's agreement with a number of trade unions to operate a closed shop was not irrational or, therefore, ultra vires, since it was a matter for it, not the court, whether such a system would facilitate the discharge of its functions. Lord Widgery CJ, with whom Boreham and Drake JJ agreed, said at 994G-:

18. The second is R v. Hertfordshire County Council, ex p. NUPE [1985] IRLR 258, to which the Judge referred. In it the court held that the fact that two local authorities' decisions to dismiss "dinner ladies" and re-employ them on less favourable terms to them than had been negotiated nationally were not irrational, since the authorities must have been fully aware of the implications of the national agreement and all other relevant considerations and to have fully considered them. See, in particular, per Sir John Donaldson MR, at paras. 10-14 and Mustill J, at paras 30-33.

19. The fact that the scheme may have been drawn from a national scheme providing for reimbursement of additional travelling expenses following redeployment does not make it irrational for the Council to apply and adapt it to other circumstances such as those here. The Council, as an experienced employer, must be taken to be aware of the suitability or otherwise of similar schemes for different purposes. In any event, as I have indicated, there was evidence before the Judge that the Council had carefully considered the compensatory scheme and its suitability for the purpose, both at its inception in 1987 and again on its revision in 1989.

20. There was also material before the Judge indicating the differences in the figures payable to the plaintiffs according to whether they received payments under the scheme or redundancy, the true differences in the plaintiffs' cases being, as I have mentioned, approximately £4,000 in their favour if they took the compensatory payments. On that material and the Council's consideration of it, I can see no basis on which the Judge was entitled to find that its conduct in adopting the revised scheme in 1989 or in applying it to the plaintiffs, with their agreement, in 1991 was irrational so as to relieve it of the commitment it thereby made to the plaintiffs. Even if it could be shown that the Council had not taken into account all the relevant considerations, the onus was still on the plaintiffs to show that the decision was unlawful in the sense that some matter was overlooked, which," when weighed with other relevant factors, [was], at least potentially decisive"; see R v. Hertfordshire County Council, ex p. NUPE, per Mustill J. at para. 34. In my firm view, it was an onus the Council did not discharge.

21. Mr Segal made two further and related alternative submissions which, if I am correct in my ruling on the first issue, are now academic. However, in deference to his and Mr McGrath's arguments on them, I shall deal with each shortly.

22. The first was that, even if the Judge had been correct in ruling that the 1989 revision and the 1991 variations were outside the defendants's power, he should have held that the original stand-by and call-out terms continued to apply and should have calculated their contractual entitlement accordingly. As Mr. Segal acknowledged, it is a paradox that, if the plaintiffs had been driven and able to rely on this, their secondary case, they would have recovered more in the form of continuing loss of earnings to date than they would under their primary case based on the validity of the 1991 variation. He relied on Rigby v. Ferodo [1988] ICR 29, CA, in which the court held that an unsuccessful attempt by an employer to secure an employee's agreement to a reduction in his wages, but without terminating his contract, left the original contract intact, notwithstanding that he remained in the employment and drawing the lower wage under protest.

23. Mr Segal's second alternative and related submission was that, assuming the invalidity of the 1991 variations and the validity of the 1992 unilateral variations, the latter could not, in any event, have operated retrospectively so as to deprive the plaintiffs of their contractual entitlement up to then.

24. Mr McGrath submitted that, though the Judge's reasoning was hard to follow, he was correct in his primary ruling that the plaintiffs' claim was under the Council's 1992 unilateral variation, not their original contracts. He accepted that the variation in 1991, if invalid, would have left their original contracts intact. However, he submitted that those contracts, in their inclusion of a provision that they were to be "supplemented by the City Council's rules, agreements ... as amended from time to time", entitled the Council unilaterally to vary the contracts and that the 1992 variation was a valid exercise of that entitlement. That provision, the invalidity of the 1991 variations and the fact that the employer here is a public body, he submitted, were the important factors that distinguish this case from Rigby v. Ferodo.

25. In my view, if the 1991 variations had been outside the power of the Council, the effect would have been to leave intact the original contracts of employment, giving the plaintiffs a continuing entitlement to the stand-by and over-time payments for which they provided. The Council could only avoid that outcome if it could show that the contracts entitled them to vary them unilaterally, as it purported to do, in 1992. In addition, in relation to the period between the 1991 variations when they stopped paying the plaintiffs stand-by and over-time money and the claimed unilateral variation in 1992, they would also have to show that the latter operated retrospectively.

26. There are a number of obstacles to the Council's suggested unilateral variation. First, even if the words "supplemented by the City Council's rules, agreements ... as amended from time to time" were capable of enabling it, the 1992 variation was clearly not an "agreement", and it is doubtful whether it could be regarded as a "rule". Second, such a provision, if it is to enable unilateral variation of a contract, requires utmost clarity. See e.g. Wandsworth Borough Council v. D'Silva [1998] IRLR 193, CA, in which the Court held that provisions in an employer's code of practice on staff sickness were not contractually binding and could be altered by the employer unilaterally. However, Lord Woolf MR, giving the judgment of the Court, also gave the following general, albeit obiter, guidance as to the position where a contractual provision purports to contain a power of unilateral variation. He said, at paragraph 31:

27. Third, and a fortiori, in the absence of the clearest terms, such a variation could not have operated retrospectively so as to divest the plaintiffs of their pre-existing contractual entitlement. In my view, if the Council had wished to reserve a right of unilateral retrospective variations it would have had to use much clearer words than those on which it relies here.

28. Accordingly, my view is that, even if the 1991 variations were invalid, the Council's purported unilateral variation in 1992 could not have deprived the plaintiffs of their accrued rights under their original contracts to date.

29. I would allow the appeals and order payment to each of the plaintiffs the appropriate sum due under the 1991 variations.

30. Lord Justice Thorpe:

31. I have had the advantage of reading in draft the judgments of my lords and am in complete agreement with all that they say.

32. Lord Justice Simon Brown:

33. I agree with Auld LJ’s conclusion on each of the three issues he identifies and add only a brief judgment of my own to highlight one particular aspect of the matter.

34. It appears at first blush a remarkable proposition that a public authority can escape what on its face is a clear contractual liability to employees by asserting that the contract in question (here the application of the 1989 scheme to the plaintiffs in 1991) was excessively generous to the plaintiffs and thus outside its powers. It is not every day of the week that a local authority defends a private law claim against them by seeking to prove its own Wednesbury irrationality.

35. The proposition becomes yet the more remarkable when one recognises that the legal consequence of establishing this defence would be to leave intact the employees’ original contracts, contracts even more generous to them - as My Lord has explained, the whole point of the 1991 variation was to buy out established and uneconomic working practices. No one has sought to argue that to have left in place the original uneconomic contracts was itself ultra vires for irrational overgenerosity. But why not? . Logic would suggest that this should have followed.

36. It is with these thoughts in mind that I come to consider the application in this context of authorities like Allsop v North Tyneside MBC [1992] ICR 639 and Hazell v Hammersmith LBC [1992] 2 AC 1. Allsop, as My Lord has explained, is plainly distinguishable because the redundancy payments made there were higher than the local authority had specifically been empowered to make. The governing regulation authorised the authority to pay “compensation which does not exceed the difference between [two specified amounts]”. But Allsop is distinguishable also in this respect, that the proceedings there were brought by the auditor who was applying against the council for relief under s.19 of the Local Government Finance Act 1982. The redundant employees had long since been paid off and no one was suggesting that the payments were recoverable from them.

37. That should particularly be the case where, as here, legitimate expectations have been aroused in the other party (who clearly entered the contract in good faith), where the relationship between the parties is essentially of a private law character, where it is the authority itself which is seeking to assert and pray in aid its own lack of vires, and where that lack of vires is suggested to result not from the true construction of its statutory powers but rather from its own Wednesbury irrationality. The burden upon the authority in such a case must be a heavy one indeed. It does not seem to me that the respondent council came within measurable distance of discharging it here.

38. ORDER: The appeals are allowed with costs. [This order is not part of the approved transcript].