Appeal No. UKEAT/0505/09/JOJ

EMPLOYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 15 April 2010

Before

HIS HONOUR JUDGE PETER CLARK

MR K EDMONDSON JP

MR I EZEKIEL

MR K ARKLEY (APPELLANT)

SEA FISH INDUSTRY AUTHORITY (RESPONDENT)

Transcript of Proceedings

JUDGMENT

For the Appellant
MR N SIDDALL (of Counsel)

Instructed by:
Messrs Ridge McFarland Solicitors
8 Posterngate
Hull
HU1 2JN

For the Respondent
MR M WEST (Representative)

Peninsula Business Services Ltd
Litigation Department
Riverside
New Bailey Street
Manchester
M3 5PB

CONTRACT OF EMPLOYMENT: Damages for breach of contract

Claim for enhanced redundancy pay. Construction of contractual term. Employment Tribunal divided. Minority view of Chairman upheld; appeal against Employment Tribunal majority decision allowed.

1. The issue in this appeal is the proper construction of a contractual term as to enhanced redundancy pay. The parties are Mr Arkley, Claimant and Sea Fish Industry Authority, Respondent. This case has been proceeding in the Hull Employment Tribunal. The appeal is brought by the Claimant against the majority judgment of an Employment Tribunal chaired by Employment Judge Forrest, sitting with Mr Coxen and Mrs Benstead, promulgated with Reasons on 3 September 2009.

1. The facts are not controversial. The Claimant was employed by the Respondent from 19 August 1985 until his dismissal by reason of redundancy in December 2008. He was then aged 51 years.

1. The Claimant was employed under the terms of a written contract of employment, signed by the parties in February 2008. Within that document is a section headed 'Redundancy Payment Policy for staff employed before 1 April 2003' (the Policy).

1. The relevant provisions of the Policy are set out at paragraph 5 of the Tribunal's Reasons. We should repeat them in full:

"5. It is agreed that the relevant provision of Mr Arkley's contract of employment with which we are concerned is set out in that Statement of terms, under the heading Redundancy Payment Policy for Staff employed before 1 April 2003:

In the event of a redundancy situation occurring, your payment terms are set out below:

1. The Authority have decided that compensation in accordance with the scheme set out below will be payable to members of staff declared redundant.

(There follow various conditions which are not material to our consideration; the staff who are eligible for compensation under the scheme are set out in various categories; it is agreed that Mr Arkley falls within category 2(e)):

2(e) Staff with not less than 5 years contributory service aged 50 or more and currently members of the Authority's Superannuation Scheme will be entitled to an immediate payment of pension benefits based on reckonable service enhanced by not more than 10 additional years. Entitlement to additional years will also be limited to the period from the date of loss of employment to the employee's 65th birthday and may not exceed the employee's reckonable service with the Sea Fish Industry Authority (...) nor 40 years reckonable service. They will also receive a redundancy payment calculated in accordance with the following formula:

(There follows a formula based on the statutory scheme, but with payments enhanced in a number of ways, for example, basing a week's pay on the annual gross salary rather than the statutory maximum in force.)"

1. The Employment Tribunal go on to make findings as to the Respondent's past practice in the event of redundancies, leading up to the Claimant's dismissal at paragraphs 6-10 as follows:

"6. On the evidence, in past redundancies, particularly following the restructuring in 2006, the SFIA has always offered employees the option (subject to the three sub-conditions) of 10 years enhanced service. However that offer was not as generous as it may have appeared on the face of it, since until July 2008, in any situation where more than six and two third years enhancement was added to reckonable service, the Pension Fund (of which the SFIA was a member, the West Yorkshire Pension Fund) could claw back an element from the lump sum, payable under the Pension Scheme on retirement. Employees were therefore offered an option: they were offered either 10 years enhancement and a reduced lump sum; alternatively six and two thirds years enhancement (which meant a smaller pension than enhancement of 10 years generated) but a full lump sum. In 2006 the vast majority of employees presented with that option opted to take the six and two thirds route, accepting a slighter lesser pension but a full lump sum.

7. The explanation behind these complicated arrangements is that enhancing pension rights is expensive. The extra cost under the West Yorkshire Pension Scheme (WYPF) falls largely on the employer. The pension scheme requires the employer to pay both for the immediate pension payment and also for the enhancement. Both these payments could run to the tens of thousands of pounds. In practice, the amounts were calculated by the WYPF so that there was still a short fall left over, even after these additional payments had been made by the employer; and that shortfall was recovered by the WYPF from the employee by reducing the lump sum it would otherwise have paid out on retirement.

8. In 2006 new Regulations were introduced by Parliament which applied to this pension fund. Their effect was that pension funds could no longer operate the claw back described above, that is they could no longer reduce the final lump sum payment made to the employee on retirement. Those changes were implemented by theWYPF in July 2008.

9. Mr Arkley's was the first redundancy dealt with after the change. The WYPF informed the SFIA that the additional cost of 10 years enhancement would now, in effect, have to be borne entirely by the employer since the fund could no longer recover any part of the cost by reducing the lump sum payable to the employee. A by product of that change was that an employee in Mr Arkley's position was no longer faced with the option of having his 10 year enhanced pension reduced by a clawback. He could have both the 10 year enhancement and the full lump sum payable on retirement, so far as the Fund was concerned.

10. When Mr Rutherford, Chief Executive of the SFIA, saw the figures for Mr Arkley he decided the amount that the additional cost of affording the full 10 years enhancement requested, some £46,000, over and above the costs that might have been expected by the employer under the previous arrangements, was simply too great for the Sea Fish Authority to absorb. He decided therefore that the Authority would only offer Mr Arkley an enhancement of six and two third years. That was, after all, the option that in practice the vast majority of employees had chosen in the previous redundancy situation."

1. It appears that the Chairman was originally allocated this breach of contract claim sitting alone. However, he exercised his discretion to sit with members, only then to find himself in the minority. The lay majority dismissed the claim, the Chairman dissenting.

1. Having described the case as raising a finely balanced point to decide, the majority (Reasons paragraph 21) concluded that the use of the expression "not more than 10 years" in Clause 2(e) of the contract must import a discretion for the employer to pay less on occasions, that discretion always being exercisable by the employer. They attached significance to the words "will also be limited" which preface the three following exceptions in Clause 2(e), none of which apply to the Claimant. These three exceptions are simply preconditions to the employer's exercise of his discretion. The evidence of past practice, whereby redundant employees rarely accepted the 10 year option because of the lump sum claw-back rule did not show that that option was an entitlement. It was discretionary. The Respondent was not in breach of contract by limiting the Claimant's enhancement to 6.2/3 years.

1. The Chairman (paragraphs 22-23) took a different view. He thought that the word "entitled" in Clause 2(e) meant an entitlement to 10 years' enhancement, subject to the three immaterial exceptions which followed. The words "not more than 10 years" did not import a discretion on the employer but, we infer, placed an overall cap on the employee's entitlement to an enhanced payment to 10 years' additional service. The Chairman was fortified by that view in light of the clear evidence that prior to the Claimant's case the 10 year option was always offered to redundant employees, albeit that it was rarely taken due to the claw-back position which generally rendered the 6.2/3 year enhancement more attractive. That practice of offering either 6.2/3 or 10 years' enhancement was notorious and certain. The Respondent only departed from that well-established practice due to the greatly increased cost to the Respondent after the 2006 Regulations were introduced. He would have upheld the Claimant's claim and found that in failing to grant the Claimant the option of a 10 year' enhancement the Respondent was in breach of contract.

1. In supporting the majority's conclusion that the Respondent was not in breach of contract, Mr West relies on their reasoning at paragraph 21, referred to above, and in addition makes the valuable submission that whereas the previous practice involved offering redundant staff the option of 6.2/3 enhancement without claw-back or 10 years with claw-back, following the 2006 Regulations being passed that option no longer existed; the difference lay in the fact that the employer was no longer permitted to operate a claw-back on 10 years' enhancement. Consequently the Claimant is seeking, in the vernacular, to compare apples and pears.

1. In response to that particular argument Mr Siddall submits that the Chairman's reasoning is correct and accords with the approach of Lord Hoffmann to the construction of express contractual terms, first articulated in the West Bromwich case [1998] 1 WLR 896, 912-913 (HL) and recently restated by Lord Hoffmann in the Supreme Court decision in Chartbrook v Persimmon [2009] AC 1101, paras. 14-16, 20-21 and 24. Mr Siddall also draws attention to the judgment of Lord Woolf CJ in Dunlop Tyres Ltd v Blows [2001] IRLR 629 (CA), a case concerned with an employer unilaterally withdrawing triple time pay for bank holiday working after 30 years of paying that rate. An employment tribunal upheld the claimant employee's claim for unlawful deductions from wages when the rate of pay was reduced to double time; the Employment Appeal Tribunal allowed the employer's appeal; the Court of Appeal restored the Employment Tribunal decision. At paragraph 19 Lord Woolf said:

"Where the language of a contract of employment is ambiguous, that practice is self#evidently powerful evidence of the parties' intentions to which the court can turn in order to resolve the ambiguity. A contract can be brought to an end and new terms agreed, but until that is done the practice indicates the proper interpretation of the terms of the contract.

1. Based on those authorities Mr Siddall contends that here the practice was clear. Despite the advent of the 2006 Regulations the Respondent agreed the same redundancy policy with this Claimant in 2008. It had the opportunity to vary the relevant term, placing a cap of less than 10 years' enhancement in Clause 2(e) but failed to do so. It cannot now, he submits, depart from the earlier practice in Mr Arkley's case, absent a previous consensual variation of the contr4act.

1. We agree with Mr Siddall and with the approach of the Chairman below. The Policy it seems to us is couched in mandatory, not discretionary terms. Clause 1 speaks of "compensation in accordance with the scheme will be payable". Clause 2(e) provides for staff "entitlement to immediate payment of pension benefits". It does not stop there, as Mr West submitted; Clause 2(e) goes on to provide for a 10 years cap, together with three immaterial exceptions. The proper construction of the written contract is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean (see Chartbrook, para. 14).

1. Applying that test the reasonable person would conclude that redundant staff in the Claimant's position would be offered 10 years' enhancement. We note that at least one person took that option in 2006; see p. 51 of the EAT bundle.

1. The intervention of the 2006 Regulations did provide a reason for the employer to seek to consensually vary the contractual term so as to reduce the 10 year cap. This Respondent failed to take that opportunity. Thus, when made redundant, the Claimant had a reasonable expectation that he would be offered that option. It was unilaterally withdrawn by his employer. That amounted, in our unanimous judgment, to a breach of contract.

1. It follows that we shall allow this appeal and substitute a finding that the Respondent was in breach of contract in failing to permit the Claimant to exercise his entitlement to a 10 year' enhancement to his pension under clause 2(e) of his contract. The case will be remitted to an employment tribunal for assessment of compensation for that breach; if not agreed between the parties. It need not be the same employment tribunal.

1. Finally, the Claimant advanced a further ground of appeal relating to the Employment Tribunal's refusal to grant permission for an amendment to his claim to argue, in the alternative, breach of the implied term of mutual trust and confidence. That issue is now moot in light of our decision on the proper construction of the express term Clause 2(e) and consequently we express no view on that part of the appeal.