The Court of Appeal held that the practice of paying employees at least RPI wage increases could crystallise into a contractual term, even if the practice had been based on a mistaken belief by an employer that the employees had secured a contractual right to those increases at an earlier time. Per Underhill LJ: What is important is the effect of the communications by the employer to his employees, by words and by conduct. This must be viewed objectively. The employer's subjective understanding is irrelevant. As the ET had found that CSC's communications conveyed the impression to its employees that the contractual right contended for existed, the fact that it may have been acting on a mistaken belief was irrelevant.
The case concerned whether or not a term should be implied or, more properly, inferred into the employees' contracts of employment, to the effect that they were entitled to a guaranteed minimum annual pay increase equal to RPI. The employees in question transferred by way of a TUPE transfer to CSC Computer Sciences Ltd on 1 April 2000. The employees relied upon a pre and post transfer practice of paying such annual increases as well as communications from CSC that indicated that the employees had a contractual entitlement to such increases.
The ET held that CSC had consistently followed the policy of awarding RPI increases, had done so in the belief that it was legally obliged under the employees’ contracts of employment to do so, and that the policy was communicated to the employees and understood by them.
CSC appealed first to the EAT and then to the Court of Appeal. The appeal to the Court of Appeal was limited, in essence, to two grounds.
The first ground was that that the ET’s analysis was based upon CSC's subjective belief that it was contractually obliged to pay RPI increases and not what was communicated, by words or conduct, to the employees. The Court of Appeal rejected this, finding that the ET had expressly acknowledged the importance of what was communicated and that it was not correct that the ET had found that a mere policy as opposed to a legal obligation had been communicated to employees (paras 15-17).
The second ground was that CSC's belief that the right to an annual RPI increase had existed pre TUPE transfer was mistaken and that such a mistaken belief could not give rise to contractual obligations. In this connection CSC relied on the decision of The House of Lords in Harvela investments Ltd v Royal Trust of Canada  AC 207.
Accepting for the sake of argument that CSC's belief that the right existed pre TUPE transfer was a mistaken one, the Court of Appeal was not prepared to accept that that meant that no contractual entitlement could arise. The Court of Appeal pointed out that what the court was concerned with was the effect of communications by an employer to a class of its employees, partly by words and partly by conduct. The effect of those communications must be viewed objectively. The employer's subjective belief is irrelevant. Provided that those communications, as they did here, conveyed the impression to the employees that the RPI increases were a contractual right, then the fact that the employer may have been acted on a mistaken belief is irrelevant. Harvela Investments was concerned with a wholly different situation (paras 19-21).
The judgment is important because it confirms the renewed focus by the courts (in particular the Court of Appeal) on what is communicated between the parties when considering whether a contractual term is to be inferred by conduct. In doing so it affirmed its recent decision in Park Cakes Ltd v Shumba  EWCA Civ 974,  IRLR 800, another conduct case which included a TUPE transfer and in which Underhill LJ also gave the lead judgment. Per Underhill LJ at para 35 of the decision in Shumba "the essential question in a case of the present kind must be whether, by his conduct in making available a particular benefit to employees over a period, in the context of all the surrounding circumstances, the employer has evinced to the relevant employees an intention that they should enjoy that benefit as of right". Indeed the Lord Chief Justice in CSC went so far as to state that "references to "custom and practice" are rarely likely to be relevant in these disputes" (para 24).
Oliver Segal QC and Nicola Newbegin, instructed by Roger Ellis and Victoria Allum of Thompsons Solicitors, appeared for the successful Respondents before the Court of Appeal.
Simon Gorton QC, instructed by Clyde & Co, appeared for the Appellant.
For a full copy of the judgment click here.
The Court of Appeal held that the practice of paying employees at least RPI wage increases could crystallise into a contractual term, even if the practice had been based on a mistaken belief by an employer that the employees had secured a contractual right to those increases at an earlier time.