Oliver Segal KC and Stuart Brittenden KC appeared for USDAW, instructed by Neil Todd (Partner), Trade Union Law Group, Thompsons Solicitors LLP.
On 12 September 2024 the Supreme Court gave judgment in USDAW & Ors v Tesco Stores Ltd which involved the controversial practice of “fire and re-hire”. In summary, the SC allowed USDAW’s appeal, deciding that it was necessary to imply a term by fact in order to circumscribe Tesco’s otherwise unrestricted power to terminate employment on notice with the specific purpose of removing a contractual entitlement to pay protection (“retained pay” – described as a “permanent” entitlement which could only be changed by “mutual consent”). It also restored the declaratory and final injunctive relief granted by the High Court: [2022] ICR 722, [2022] IRLR 407.
The majority judgment was delivered by Lord Burrows and Lady Simler (with whom Lord Lloyd-Jones agreed), with separate concurring speeches from both Lords Leggatt and Reed.
The opening paragraph of the judgment of Lord Burrows and Lady Simler frames the important issues raised in this appeal: whether the facts of the case fell within “rare exceptions” to two fundamental common law principles that generally apply to contracts of employment. First, that an employer generally has the right under contract law to terminate a contract of employment by giving notice. Second, an injunction amounting to indirect specific performance will generally not be ordered against an employer which, in substance, requires the employer to continue employing an employee. The unusual facts in issue provided the SC an opportunity to examine the boundaries of these exceptions. The SC found that USDAW fell within both exceptions.
In terms of the headline points:
(1) Contractual interpretation – the SC clarified the correct approach to contractual interpretation where terms derive from collective agreements which are typically binding in honour only.
It was necessary to apply the usual objective and contextual approach to construction as set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. However, this required a slight pivot to reflect the two-stage process (collective agreement followed by incorporation into individual contracts of employment). The objective intentions of initially the employer and union, and subsequently the employer and employee may all be relevant in deciding on the correct interpretation of a term (at [4], [32]). Lord Reed agreed: “the intentions of the parties to an antecedent collective agreement can form part of the factual matrix” (at [150] – [152]).
A number of communications were sent to the members prior to being balloted on whether or not to accept the offer of retained pay which was later enshrined in a collective agreement. The pre-contractual communications to affected employees variously described the entitlement to retained pay as “protection for life at [the] new Tesco contract site”; that “Retained Pay” would “(remain) for as long as you are employed by Tesco in your current role”. It was said that “Your retained pay cannot be negotiated away by either Tesco, Usdaw or Usdaw Shop Stewards…” The benefit was said to be “guaranteed for life”.
Although neither party suggested that these pre-contractual documents were inadmissible as an aid to construction of the later collective agreement, the majority acknowledged “the need for flexibility in the context of collective agreements”. In any event, the communications were admissible because they fell within the explanatory material exception (at [5]).
(2) Implied term qualifying express power of dismissal – the SC confirmed that an otherwise unqualified power of dismissal could be circumscribed by a term implied by fact, subject to satisfying stringent conditions. For the first time, the SC endorsed the seminal judgment of Sedley J in Aspden v Webbs Poultry and Meat Group (Holdings) Ltd [1996] IRLR 521 and subsequent line authorities which followed to similar effect.
The SC rejected Tesco’s case on construction, to the effect that entitlement to retained pay remained a feature of the employees’ employment for as long as employment under that contract subsisted. The word “permanent”, it argued, ensured that retained pay could not be removed through collective bargaining, but gave no guarantee as to how long the contract of employment would endure. The majority of the Supreme Court considered that the “alarming consequence” of Tesco’s position would be that it would have been open to it to issue notice to terminate immediately after all the affected employees had relocated. That interpretation was “legally problematic and produces a potentially absurd consequence” (at [39]). That would not reflect the parties’ objective intentions.
The express term that retained pay “will remain a permanent feature of an individual’s contractual eligibility” had to be given substance as an express promise. A contractual benefit only ever lasts as long as the contract of employment. If that was all that the word “permanent” meant, it was otiose. Further, the promise was presented as a “foundational position” that was only qualified in prescribed circumstances. It was also significant that the term expressly provided that retained pay can only be changed by mutual consent (at [40]). Accordingly, the right to retained pay was not time-limited and would continue to be paid for as long as their employment continued in the same role (at [42]).
The pre-contractual material reinforced the Court’s construction of the retained pay term as set out in the collective agreement.
Having reached that conclusion on the issue of construction, the SC went on to consider the real question, i.e. whether there is a term implied by fact that qualified Tesco’s otherwise unrestricted contractual right to terminate the employment contracts on notice in order to deprive employees of the right to permanent retained pay.
The SC accepted USDAW’s argument that it was necessary, by means of business efficacy, to imply a term to qualify the employer’s right to dismiss on notice for the purpose of depriving employees of their right to retained pay. Alternatively, it was so obvious that it goes without saying. It was material that retained pay was intended as an inducement to employees to relocate rather than accept redundancy, in order to satisfy Tesco’s need to retain experienced staff at a critical time of business expansion. Against that background, it was inconceivable that the mutual intention of the parties was that Tesco would retain a unilateral right to terminate to bring an end to retained pay whenever it suited its purpose. That would have been objectively viewed as “unrealistic and flouting industrial common sense by both sides” (at [44]). The implication of a term by fact was “essential” to the proper functioning of the contractual promise to give effect to its purpose (at [45]). Here, the implied term contended for qualified rather than contradicted the express right to terminate on notice. In all of the circumstances, the “stringent tests” applicable to the implication of a term in fact were satisfied.
The Court also endorsed what has been referred to as the PHI line of authorities (concerning permanent health insurance) where courts have concluded that an employer’s otherwise unrestricted power to terminate the employment on notice is qualified by an implied term that it shall not terminate the contract as a means of depriving the employee of such an entitlement under the terms of the PHI scheme. See Aspden v Webbs Poultry and Meat Group (Holdings) Ltd [1996] IRLR 521; Briscoe v Lubrizol [2002] IRLR 607; Awan v ICTS Ltd [2019] IRLR 212 and the analysis of Elias J (as he then was) in Jenvey v Australian Broadcasting Corporation [2002] IRLR 520 (the latter concerning a redundancy scheme rather than PHI). See the majority at [56] and Lord Leggatt at [131] – [136]. However, the Court cautioned that the principle established in the PHI cases should be “sparingly and cautiously used to avoid turning the traditional principles of contract upside down” (at [52]).
(3) Availability of injunctive relief – the SC confirmed that there was no absolute bar to injunctive relief in the employment context, even where this would amount to indirect specific performance. The Court provided clarification as to the circumstances in which a Court may exercise discretion to grant such relief.
The Court of Appeal decided that even if the claimants had succeeded in establishing that the proposed dismissals were wrongful, when it came to the question of remedy, the Court was unaware of a final injunction having ever been ordered preventing a private sector employer from dismissing an employee for an indefinite period: [2022] ICR 1573, [2022] IRLR 844. Accordingly, the CA observed that “the remedy for a wrongful dismissal at common law is almost invariably financial” (at [53]). If matters had rested there, this would have significantly curtailed the equitable remedies available to an employee at the final hearing of any action.
The general position at common law is that a contract of employment is not specifically enforceable. This is enshrined in s. 236 of the Trade Union and Labour Relations (Consolidation) Act 1992. Here the terms of the injunction granted by the High Court, although expressed in negative terms, amounted to indirect specific performance compelling Tesco to continue to employ affected employees on retained pay terms.
Notwithstanding this, the SC decision is significant in confirming that the rule against indirect specific performance was not absolute, at least where (i) damages were an inadequate remedy; and (ii) there was no loss of trust and confidence as between employer and employee (applying Hill v C A Parsons & Co Ltd [1972] Ch 305 CA; Powell v Brent London Borough Council [1988] ICR 176 CA; and the authorities referred to at [71]). Lord Leggatt agreed: “there is no rule of law that a court should not compel an employer to perform a contract of employment” – rather the principle is that a court should not compel the employer to continue to employ an individual in whom the employer has lost confidence (at [137]).
On these facts, there was no loss of trust as evidenced by the intention to offer re-engagement on revised terms.
(4) Adequacy of damages – the SC considered whether or not damages are an adequate remedy so as to operate as a bar to the grant of injunctive relief.
The SC decided that damages were not an adequate remedy because of the inherently speculative nature of the exercise as to (i) how long employees would have otherwise remained employed by Tesco; and (ii) the prospects of mitigating their losses. Further, (iii) damages would not reflect non-pecuniary losses attendant on the loss of job satisfaction, and the “anxiety and upheaval caused by losing one’s job”. Although if there was no alternative, a court would assess damages as best it could, an injunction avoided all of these difficulties: see [77] – [78], [81]. To the extent that this pragmatic solution was seen as “side-stepping” Addis v Gramophone Co Ltd, then “so be it”.
This approach, including the emphasis on non-pecuniary losses, should apply with equal force in applications for interim injunctions under the American Cyanamid principles where the Court has to also consider whether damages are an adequate remedy.
Postscript
Lord Leggatt’s speech tantalisingly leaves open the issue of whether the common law requires further evolution. In particular, Lord Leggatt questioned whether it is now time to revisit the old common law rule that an employer “can act unreasonably or capriciously if he so chooses but the dismissal is valid”. Lord Leggatt questioned whether or not this approach remained consistent with “community expectations and values”. The issue is whether this should now give way to the implication as a matter of law of a good faith term as recognised in Braganza (at [128]). Lord Reed did not consider that it was necessary to decide this evolutionary question on this appeal. The point remains there to be considered in the future.
Click here for the full judgment.
