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OUTER HOUSE, COURT OF SESSION

[2016] CSOH 108

 

CA110/15

OPINION OF LORD MALCOLM

In the cause

GRANT FISHER

Pursuer;

against

APPLIED DRILLING TECHNOLOGY INTERNATIONAL LIMITED

Defender:

Pursuer:  Creally QC, Hay;  Lefevre Litigation

Defender:  Olson;  DLA Piper Scotland LLP

22 July 2016

[1]        In what is effectively a test case (against a background of 70 actions) the pursuer seeks payment of £11,380 by way of an enhanced redundancy package.  In the absence of an express provision in his contract of employment, the entitlement is claimed on the basis of an implied term arising from what is said to be a longstanding policy or practice to offer enhanced redundancy payments.  Until July 2015 the pursuer was employed by the defender as a well engineer, the defender being in the business of providing support activities for petroleum and natural gas extraction.  Prior to August 2013 the pursuer was in the same employment with Transocean Drilling UK Limited, which he avers forms part of a group of companies known as Transocean.  The defender was incorporated with the intention that the part of the Transocean group’s business concerned with support services for petroleum and natural gas extraction would be transferred to it.  That occurred in or around 1 December 2013 when the pursuer’s employment was transferred to the defender. 

[2]        The pursuer avers that the Transocean group consistently operated a practice or policy in respect of enhanced payments to shore based employees whose employment was terminated by reason of redundancy, calculated by payment of three weeks salary for every full year of service, subject to a maximum of twelve months salary.  It is stated that enhanced payments had been offered and paid to all redundant shore‑based employees of the Transocean Group since at least 1986.  The cap of twelve months salary was introduced in 2000.  All of this was “well known” amongst the Transocean group’s workforce and trade union representatives.  “It was common knowledge amongst the workforce through word of mouth”.  Amongst other things, the “Transocean severance package” featured as a topic of discussion during consultations between Transocean and its workforce prior to the transfer of staff, including the pursuer, to the defender during the period July to November 2013.  More detailed averment on this topic is made by reference to a meeting on 9 July, an email of 10 July, and another discussion on 19 August, all of 2013. 

[3]        It is claimed that the formula and the payment of enhanced sums upon signature of a standardised compromise agreement had become an implied term of the pursuer’s contract of employment through custom and practice from the period beginning in around 2000 and ending with the pursuer’s TUPE transfer to the defender, and that it remains a contractual entitlement enforceable against the defender.

[4]        As a result of economic difficulties the defender’s entire workforce is to be made redundant.  The pursuer and others have been advised that the defender will pay only the statutory redundancy payment provided for in section 162 of the Employment Rights Act 1996, being no more than one and half weeks pay for every full year of service, capped at a maximum of twenty years.  The pursuer has now been dismissed by reason of redundancy and paid £1,425 calculated in accordance with the statutory formula.  The defender is said to be in breach of an implied term in the pursuer’s contract concerning enhanced payments.

 

Submission for the defender
[5]        At a debate the defender sought dismissal of the action on the basis that the pleadings do not set out a relevant and sufficiently specific case.  It was acknowledged that the pursuer could refer to and rely upon various productions and witness statements, but it was submitted that they did not add anything of materiality.  Certain key elements were said to be either missing or expressed in such a vague and inspecific manner as to fail to give fair notice to the defender of the case it requires to answer.

[6]        Four reasons were put forward for dismissal of the action:

(1)        the absence of averments regarding a policy of payment of enhanced redundancy packages by the pursuer’s former employer, Transocean Drilling UK Limited,

(2)        no averments of a practice of the payment of such packages,

(3)        no averments giving fair notice that Transocean Drilling UK Limited did anything regarding the workforce that might, on an objective interpretation, give a contractual right to such payments, and

(4)        employers that did pay enhanced redundancy payments were separate companies and offered them in redundancy letters on condition that settlement agreements were entered into, all of which were to contain confidentiality clauses prohibiting disclosure of the settlement.

[7]        It was a major theme of the submissions for the defender that payments made under and in terms of the settlement agreements could not be attributed to an implied obligation in the contract of employment.  Furthermore, if the pursuer only came to know of the payments by way of a breach of the confidentiality terms of the settlement agreements, they could not be described as a contractual right as opposed to a compromise payment offered as a matter of discretion.  It was submitted that the averments as to a Transocean group were fundamentally lacking in specification.  The defender was never part of that group. 

[8]        For the defender, Mr Olson accepted that it was not necessary for the pursuer to aver that he was aware of the precise terms of any enhanced redundancy scheme, however any implied term would be fixed as at the date when an employee entered into a contract.  It followed that events after 5 September 2011 were not relevant.  Counsel observed that the pursuer’s pleadings rely on a settled practice after 2000/2001, not on any variation after that date.  In so far as the pursuer relied upon enhanced packages for employees of companies other than, but associated with Transocean Drilling UK Ltd, those averments were not relevant.  The averments did not go beyond an alleged practice of the group.   In addition there was a lack of publication of any policy in the sense that, at a minimum, the employer must have done something which demonstrated to the workforce, on an objective interpretation, that payments were being made because of a contractual right. 

[9]        Reference was made to some of the paperwork regarding past claims settled by way of a compromise arrangement.  Mr Olson observed that in even the most amicable parting of ways, an employer will want a compromise agreement.  It was accepted that there was a practice of Transocean Onshore Support Services Ltd of making such payments;  but only as a matter of discretion, not contractual right.  Reference was made to a list of names provided by the pursuer as reflected in the terms of article 3 of the condescendence.  The list begins in 2009.  According to it, only two payments were made in 2009, and that by Transocean Onshore Support Services Ltd.  Mr Fisher’s employment commenced in September 2011.  Payments made after then, and certainly after 1 December 2013, can have no relevance.  A “practice” cannot be established by virtue of two payments.

[10]      Mr Olson stressed that the companies described by the pursuer as being part of the Transocean group are separate legal entities.  This would apply even in relation to subsidiary companies.  In effect the pursuer was asking the court to disregard the principles set down in Salomon v A Salomon & Co [1897] AC 22 by his reference to payments made by other companies said to be in the group.  The defender accepted that the various companies named in the agreements did make the payments, but there was no concession as to the reality of the suggested group.   There was no such thing as “a group collective will”.  The pleadings did not contain any relevant averment as to a practice or policy implemented by the company which employed the pursuer in 2011 and from whose employment he was transferred to the defender in 2013.  In any event there was insufficient definition of the alleged group.  For example, there was no mention of a parent or holding company.

[11]      Reference was made to Quinn & others v Calder Industrial Materials Ltd (1996) IRLR 126 and Park Cakes Ltd v Shumba & others [2013] EWCA Civ 974.   In Park Cakes the Court of Appeal confirmed that the ordinary contractual approach to the implication of terms into contracts is to be applied in employment law cases. 

“… the essential object is to ascertain what the parties must have, or must be taken to have, understood from each other’s conduct and words, applying ordinary contractual principles:  the terminology of ‘custom and practice’ should not be allowed to obscure that enquiry” – Underhill LJ at paragraph 34.

 

In the present case there are no averments from which it can be concluded that both parties must be taken to have accepted the payment of enhanced redundancy packages as a matter of right at the time of the contract of employment. 

[12]      For recent discussions of the law concerning the implication of terms into contracts, reference was made to a number of decisions, including Marks and Spencers plc v BNP Paribas Security Services Trust Co (Jersey) Ltd [2015] 3 WLR 1843.  For present purposes the pursuer needs to show that the proposed implied term was so obvious that it went without saying;  in other words that it was clearly the presumed intention of both parties.  Mention of phrases such as “custom and practice” should not obscure the essential task of ascertaining what the parties must be taken to have understood from each other’s conduct and words.  Thus, as per Underhill LJ in Park Cakes at paragraph 35:

“… 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.  If so, the benefit forms part of the remuneration which is offered to the employee for his work (or, perhaps more accurately in most cases, his willingness to work), and the employee works on that basis.  (The analysis by reference to offer and acceptance may seem rather artificial, as it sometimes does in this field;  but it was not argued before us that if the employer had indeed sufficiently conveyed an intention to afford the benefits claimed as a matter of contract he would not thereby be bound.)  It follows that the focus must be on what the employer has communicated to the employees.  What he may have personally understood or intended is irrelevant except to the extent that the employees are, or should reasonably have been, aware of it”.

 

Underhill LJ then listed some typically relevant factors including (a) on how many occasions and over how long a period the benefits in question have been paid, (b) whether the benefits are always the same, (c) the extent to which the enhanced benefits are publicised generally, (d) how the terms are described, and (e) what is said in the express contract.  The burden would be on the employee to show that a practice is pursued as a matter of legal obligation as opposed to an exercise of discretion.

 

Submissions for the pursuer
[13]      Turning to the submissions on behalf of the pursuer, Mr Creally QC’s main theme was that an inquiry is necessary before the court can determine the questions at issue.  He noted that all of the decisions cited were reached after evidence had been led.  Cases such as Marks and Spencers plc are not determinative.  This is not a case of an implied term which is said to be necessary to make the contract workable.  The correct starting point is Underhill LJ’s approach in Park Cakes.  The court requires to ask – what would an employee reasonably take from the employer’s communications and conduct?  Amongst other things, the pursuer offers to prove that in July 2013 a promise was made by executives of the parent company based in Houston for and on behalf of the companies in the group, including Transocean Drilling UK Limited.  There is no question of piercing the corporate veil.  The picture which would emerge after proof is not of separate and wholly discrete businesses, but of a group run as a group with a centralised HR department, and operating out of the same offices arranged on an open plan basis, with line managers who sit together. 

[14]      Mr Creally made reference to Quinn v Calder (cited earlier), and in particular the opinion of Lord Coulsfield at page 453:

“The question whether there is an implied term in the present case is really a different way of putting the question of what terms the parties have actually agreed.  In order to answer that question, it is necessary to consider the whole circumstances of the formation of the contract and the parties’ actings before, and, even, after the contract, to gather what terms they had actually agreed… the question is not whether the period for which a policy has been followed is ‘substantial’ in some abstract sense, but whether, in relation to the other circumstances, it is sufficient to support the inference that that policy has achieved the status of a contractual term.  Again, with regard to communication, the question seems to us to be not so much whether the policy has been made or become known directly to the employees or through intermediaries, but whether the circumstances in which it was made or has become known support the inference that the employers intended to become contractually bound by it”.

 

In Garratt v Mirror Group Newspapers Ltd [2011] ICR 880, at paragraph 43 Leveson LJ defined the concept of “notoriety” for present purposes as being “no more than widespread knowledge and understanding”, and that of “certainty” as relating to “the nature of the arrangement”, which in that case was enhanced payment in return for a compromise agreement.   

[15]      In support of the proposition that it is relevant to have regard to a practice of payment of enhanced severance packages to other employees within the workplace, albeit employed by different companies in the group, it was noted that, in addition to being based in the same workplace, they all received communications from the same HR department and by the same means, including an intranet portal.  All potentially relevant evidence as to contractual entitlement by way of custom and practice should be at large for the court to consider, without inappropriate restrictions based on how an employer chooses to structure its business.

[16]      Reference was made to section 218(6) of the Employment Rights Act 1996.  It was noted that the accrual of rights related to length of service, in particular entitlement to minimum periods of notice and statutory redundancy payments, are drawn from a broader source than the corporate body which is the current employer, and are determined by considerations beyond the application of a corporate veil in place at any one particular time.  It was not surprising that in Quinn v Calder the Employment Appeal Tribunal expressed no concern when regard was had to the practice of an employer across a group of companies, nor did it feature as a source of disquiet to the Court of Appeal in Park Cakes.

[17]      The court was taken through the terms of article 3 of the condescendence, all of which are said to be habile for inquiry.  In summary the pursuer offers to prove that a practice of enhanced redundancy payments was operated by Transocean over many years, and whilst each individual employee may not have been aware of the precise formula for calculation of the enhancement, it was known to be generous and calculated by reference to the amount of time that an employee had been employed within the group.  As a matter of fact, the calculation was formulaic.  It was a matter of discussion and approval at senior levels of Transocean management.  It was made in all but one case (where the employer refused to sign a compromise agreement).  It continues to operate.  The practice was well known amongst the workforce.  The absence of any evidence of Transocean having committed the practice to writing is not determinative of whether or not an intention to be bound can be demonstrated.

[18]      The fact that payment was on condition of signature of a standardised compromise agreement did not of itself render the payments ex gratia.  There was no suggestion of that in either Garratt or Park Cakes.  The full circumstances had to be considered, including the discussion about enhanced payments between the workforce and management during the consultation exercises which occurred prior to the TUPE transfer from Transocean Drilling UK Limited to the defender.  The presence of the practice was acknowledged by Transocean management. 

 

Discussion and decision

[19]      The pursuer offers to prove that for many years companies in what he calls the Transocean group, which included his former employer, offered shore-based employees an enhanced redundancy package (which was revised downwards in or about 2000) in return for their signature on a compromise agreement.  Assuming this is proved, there are two main questions.  Was this a contractual entitlement of the shore-based workforce?  If so, did it apply to Transocean Drilling UK Limited – or was it confined to other companies? 

[20]      In article 3 of the condescendence the pursuer has set out the building blocks of his case.  It is acknowledged that in a commercial action a strict approach to detailed pleading is inappropriate, and that before a proof both parties will have other means of identifying the key issues and the evidence to be deployed on both sides.  The submission for the defender is that it is clear that the pursuer’s case must fail.  In particular, the enhanced redundancy package is offered as part of a separate settlement agreement, therefore it cannot be a matter of right implied in the underlying contract of employment.  In any event, whatever evidence there might be of a practice or policy adopted in other Transocean companies, there is not enough to support such on the part of Transocean Drilling UK Limited. 

[21]      The second main argument is based on the general prohibition on “piercing the corporate veil”.  However, as I understand the pursuer’s case, it does not require a breach of this injunction.  The pursuer does not claim that a policy or practice endorsed by one company should be applied to another which has made no such endorsement.  Rather the averments are designed to show that all of the companies in what is described as the Transocean group, including Transocean Drilling UK Limited, in effect promised to offer the enhanced redundancy package to shore-based employees.  An important element of this is said to be undertakings given by senior executives of the parent company, acting on behalf of the other entities in the group.  As part of this, the pursuer offers to prove that there is such a thing as the Transocean group.  Having regard to the averments in article 3 alone, and thus even unsupported by the other material relied upon, I do not consider that I can uphold the submission that, on this part of his case, the pursuer is bound to fail.

[22]      The other main argument for the defender flows from the apparent fact that the package is only given in return for entering into a separate settlement or compromise agreement, which, amongst other things, imposes a confidentiality obligation on the redundant employee.  There is an attraction to the straightforward proposition that there cannot be the contended for implied term in a contract of employment when any entitlement depends upon a new agreement.  However, in my view this ignores the nature of the suggested term.  It is not one of entitlement pure and simple – it is of entitlement to be offered the enhancement in return for entering into a compromise agreement, the terms of which appear to have become fairly standard.  The pursuer offers to prove that the only time an enhanced package was not paid was when the employee concerned refused to sign such an agreement.  I note the similarity with the circumstances in the case of Garratt, where the requirement of a compromise agreement was treated as part of the implied contractual term in the sense that, so long as the employee was willing to sign it, he was entitled to an enhanced payment.  What the employee could not do was obtain the enhanced payment without compromising other potential claims.  In the whole circumstances I am not prepared to hold that the requirement to sign a settlement agreement necessarily defeats the case which the pursuer offers to prove.

[23]      Looking at matters more broadly, a review of the relevant authorities demonstrates how fact sensitive these decisions are.  For example, in Quinn v Calder it was of significance that on each occasion when a package was paid, there had been a discrete decision to do so by higher management.  The cases show that, contrary to one submission on behalf of the defender, the inquiry is not limited to the circumstances prevailing up to and at the time of a particular employee entering into a contract of employment.  The key question is whether, viewed objectively, the circumstances show that the employer intended to be bound as a matter of contractual obligation.  Relevant to this will be factors such as communications from and on behalf of the employer;  whether the package was offered without exception for a substantial period and the number of such occasions;  and the reasonable inference which employees could draw from all of this.  Thus, as it has been put, the point may be reached where a custom or established practice applied with sufficient regularity may, when viewed objectively in the full context of all the relevant circumstances of the particular case, have crystallised into a contractual right. 

[24]      In Park Cakes (paragraph 35) it was noted that an analysis by way of offer and acceptance “may seem rather artificial, as it sometimes does in this field”.  In Scotland, unlike south of the border, we might discuss this in terms of an enforceable unilateral promise created by an inference from facts and circumstances which bar an employer from denying liability.  In any event, it seems plain that no hard and fast rules can be laid down.  Every case will depend upon its own facts, with phrases such as “reasonableness”, “notoriety”, “certainty” and “widespread knowledge and understanding” regularly figuring in judges’ opinions.  The open-ended nature of the description of the proper approach to questions of this nature, as outlined in the cases referred to at the hearing, militates against dismissal without evidence.

[25]      As to the complaint of a lack of fair notice, I see no merit in that.  The pursuer’s pleadings, especially when supported by the other extensive material now available, give sufficient specification of the case which the defender is required to meet.  Mr Olson made certain criticisms of parts of the supplementary material;  for example Mr Lefevre’s affidavit and a list of names of employees which refers to only two payments in 2009 by a different company.  However the court must judge the application for dismissal by reference to all that the pursuer offers to prove, including that of a regular and consistent practice over many years.  As to the averments as to the make up of “the Transocean group”, I consider that there is more than enough to make the pursuer’s position on this clear, and in any event, if required more detail can be provided in due course by way of affidavit or otherwise as part of the normal practice in a commercial action during the lead up to a proof.

[26]      I do not consider it necessary to embark upon a discussion of the general principles to be derived from cases such as Marks and Spencers plc (cited earlier), Attorney General of Belize and others v Belize Telecom Ltd and another [2009] 1 WLR 1988, and Royal Bank of Scotland v Carlyle 2015 SC (UKSC) 93, none of which arose in an employment context.  That said, for reasons mentioned earlier, paragraph 35 in Lord Hodge’s judgment in Royal Bank of Scotland is of interest.  It highlights that Scots law will enforce a unilateral undertaking that is intended to have legal effect, notwithstanding an absence of consideration.  Such an undertaking may, but need not be, collateral to a separate contract, and will be subject to an objective test, ie that which a reasonable outside observer would infer from all the circumstances. 

[27]      For the above reasons the defender’s application for dismissal of the action is refused.  The case will be put out by order for discussion as to further procedure.