News

20/11/2024

Supreme Court judgment upholding union’s right to bring claim as a third party for the removal of check-off by government departments

News

On 20 November 2024, the Supreme Court handed down judgment in the case of Secretary of State for the Department for Environment, Food and Rural Affairs (and others) v PCS [2024] UKSC 41.

This is an appeal arising out of a claim by the Public and Commercial Services Union (‘PCS’) to claim damages as a third-party under the Contracts (Rights of Third Parties) Act 1999 (‘the 1999 Act’) for the breach by various government departments of a term (the ‘check-off term’) contained in the contracts of individual employees, which provided that union subscriptions would be deducted by the employer at source and paid by them directly to the union on behalf of the relevant employees.

In this judgment, the Supreme Court has:

• Upheld the appeal brought by PCS, confirming it does have the right to claim damages as a third party for breach of the check-off term contained in the contracts between employer and relevant employees, even though the check-off term emanated from an unenforceable collective agreement.
• Clarified, in the first Supreme Court judgment on the 1999 Act since its passing, the correct approach to be taken to section 1(1)(b) and section 1(2) of that Act. In doing so, it has confirmed that where a contract purports to benefit an identified third-party, there is then a ‘strong’ presumption that the third party has the right to enforce the contract, which will be difficult to rebut.

Section 1 of the 1999 Act

The relevant parts of section 1 of the 1999 Act read as follows:

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if—

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

Background

Historically, as a result of a collective agreement made between the government and unions in the distant past, many government departments agreed that their employees were able to pay their union subscriptions by way of an arrangement known as check-off (involving the employer deducting the subscription from their monthly salary and paying it directly to the union).

Following a notice from the Cabinet Office in 2013, several government departments took the step of unilaterally removing the check-off mechanism between 2014 and 2016. Following this removal, various employees in each of the relevant government departments brought claims of breach of contract. They have been supported by their union, PCS. PCS also brought its own claim against each government department seeking damages for the loss of membership subscriptions it sustained because of the employers’ breach of contract, pursuant to the Contract (Rights of Third Parties) Act 1999 (‘the 1999 Act’).

At first instance in claims against the Home Office, DEFRA and HMRC, the individual employees were successful in establishing a contractual right to check-off and in resisting an argument by the government departments that they had impliedly agreed to the removal of check-off or otherwise waived the breach. PCS was also successful in its claim under the 1999 Act, with the judges at first instance considering that the government departments had not rebutted the presumption under s.1(2) of the 1999 Act so as to show that the parties did not intend the check-off term to be enforceable by a third party.

On appeal in the Court of Appeal, however, a majority consisting of Lewis LJ and Underhill LJ upheld the appeal by the government departments on the question of whether PCS could claim as a third-party. They considered that the rebuttable presumption pursuant to s.1(2) of the 1999 Act was unlikely to materially affect the outcome in a particular case, and that the question in each case was whether the parties to the contract had a common intention, objectively ascertained, as to whether the third party should be able to enforce the contract. The majority considered that the collective agreement background of the check-off term, together with the wording of the contractual term and the fact that other bodies such as lotteries and social clubs benefitted from check-off facilities, meant that the common intention of the parties was that the check-off term was not enforceable by the union.

Stuart-Smith LJ, dissenting, disagreed on this point, and considered that the critical question was whether the presumption created by s.1(1)(b) and s.1(2) of the 1999 Act had been rebutted on an interpretation of the terms of the employment contract. On the facts, Stuart-Smith LJ considered this presumption had not been rebutted because, inter alia, the intentions of the parties to the collective agreement did not assist in identifying the common intention of the (different) parties to the contract of employment.

The Supreme Court judgment

The Supreme Court has upheld PCS’ claim as a third party for breach of the check-off term, overturning the decision of the majority in the Court of Appeal. The Supreme Court has held:

• At [89], ‘the task of the court under the 1999 Act is first to gather together the express terms of the contract…Once all the express terms have been identified, the court’s task is then to construe those express terms and to consider whether any additional terms should be implied. The principles set out in ICS, Wood v Capita and Arnold v Britton on construing contracts are directed at determining the meaning of ambiguous words in the express terms of the contract. They are not directed at and do not permit or require a wide-ranging look at surrounding circumstances beyond the express and implied terms of the contract as a way of determining what rights are created…’
• At [92], and on the facts of this case, ‘The mere fact that the check-off term was not intended by the parties to the relevant collective agreement to be enforceable as a term of that agreement does not necessarily ground an inference as to the objective intention of the different parties to the individual contracts of employment as to whether it should be enforceable as a term of those contracts’.
• At [96], ‘where the criteria in section 1(1)(b) and (3) of the 1999 Act are satisfied, a presumption arises that the relevant term in favour of the identified third party is enforceable. We agree with the view expressed in those commentaries that the presumption is a strong one. That is because, ex hypothesi, there is no express term stating the contrary, so in order to conclude as a matter of proper construction of the individual contracts of employment that the parties did not intend that the check-off term should be enforceable by the Union, it would be necessary to find that there was an implied term to that effect. As stated above, the test to imply a term where the contract is silent is a demanding one.’

By affirming that the presumption created by s.1(1)(b) of the 1999 Act is a strong one which will not be rebutted except by an express term, or an implied term (utilising the normal, strict, tests for the implication of terms of fact), the Supreme Court has provided much-needed certainty in the wake of the Court of Appeal’s judgment. In practice, this means that contracts that purport to confer a benefit on a third party, but which are silent on the issue of third-party enforceability will likely be found to be enforceable by the third party.

In the employment sphere, this ruling makes clear that unions have the ability to bring claims as third parties against employers who breach contracts of employment which contain terms purporting to confer a benefit on the unions, even if those terms derive from an unenforceable collective agreement. That said, the Supreme Court expressly stepped back from saying that the employer’s and union’s intentions at the collective level would never be relevant to the proper construction of the terms of the individual contracts of employment (see paragraphs 93- 94). Lord Burrows went further, stating that in his view, the collective bargaining context may be relevant in deciding the interpretation of a term subsequently incorporated (at paragraph 143, and drawing on his judgment in the case of Tesco Stores Ltd v USDAW [2024] UKSC 28).

The Supreme Court’s judgment can be read here.

Oliver Segal KC and Darshan Patel were instructed by Ann Rooney and Inderjit Lota, Thompsons, on behalf of PCS.