Appeal No. EAT/0621/03/DA

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 31 October 2003
Judgment delivered on 20 November 2003

Before
THE HONOURABLE MR JUSTICE KEITH
MR A HARRIS
MR A E R MANNERS

THE LEARNING & SKILLS COUNCIL	APPELLANT

MRS S L BARFOOT & OTHERS	RESPONDENTS

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellant	MR S FLETCHER
(of Counsel)
Instructed By:
Messrs Field Fisher Waterhouse
Solicitors
35 Vine Street
London EC3N 2AA	
For the Respondents	MR A BAILEY
(of Counsel)
Instructed By:
Wortley Redmayne Kershaw
Stonebridge House
Stonebridge Walk
High Street
Chelmsford
Essex CM1 1EY	

THE HONOURABLE MR JUSTICE KEITH:

Introduction

1.   The appellant, the Learning & Skills Council (“the Council”), took over the contracts of employment of the 14 respondents (“the 14 employees”) when the undertaking in which the 14 employees had been employed was transferred to the Council.   The 14 employees presented complaints to the Employment Tribunal claiming that they had not been paid by the Council the bonuses to which they had been contractually entitled under their contracts of employment with their previous employer.   They alleged that the withholding of their bonuses amounted to an unauthorised deduction from their wages in breach of section 13(1) of the Employment Rights Act 1996.   An Employment Tribunal held at Stratford upheld their claims.   The Council now appeals against the upholding of their claims.

2.   At the conclusion of the hearing, we said that the appeal would be allowed, that the decision of the Employment Tribunal would be set aside, and that the 14 employees’ claims would be remitted to a differently constituted Employment Tribunal for re-hearing.   We said that we would put our reasons into writing, and this we now do.   

The facts

3.   The background to the dispute appears from the unchallenged evidence contained in the witness statements of the Council’s witnesses.   The 14 employees had been employed by the London East Technical and Enterprise Council (“LETEC”).   Technical and Enterprise Councils (“TECs”) had been established in the early 1990s to implement various education policies for the Department of Employment, to whom they were initially accountable.   In due course, the responsibility for TECs devolved upon Government Offices.   The Government Office for LETEC was the Government Office for London (“GOL”).   

4.   One of the teams within LETEC was responsible for approaching companies in London with a view to securing their recognition of a national initiative known as Investors in People (“IiP”).   The IiP team within LETEC had been failing to achieve the targets set by GOL for some time.   LETEC therefore decided to establish a contractual bonus scheme for the IiP team to replace an existing discretionary bonus scheme.   The 14 employees were all members of the IiP team.   

5.   Against that background, we turn to the primary facts which the Employment Tribunal found.   The new contractual bonus scheme was established in September 1998.   Letters setting out the terms of the new scheme were sent to members of the IiP team.   Copies of two such letters were before the Employment Tribunal.   They differed slightly from each other, but the parts of the letters which are relevant to the appeal are the same.   The material parts of the letters read as follows:

“It has been agreed that the Terms and Conditions of your employment should be varied so as to include an incentive bonus, the details of which are set out below:

•	The bonus is based on achievement of the following IiP…..Targets.”

The letters then set out the targets to be achieved and the levels of the bonuses, and continued (so far as is material):

•	[These bonuses] will be paid upon agreement by GOL that the target has been achieved ….. 
•	The bonus structure will be reviewed in March 1999 and in any event will cease at the end of the year 2000 or if you move to another post within LETEC.
•	While you are subject to this arrangement, you will not be eligible in addition for any payments under the discretionary company bonus scheme.
•	To receive the bonuses, you must still be employed by LETEC at the time of payment.”

The Employment Tribunal appears to have assumed that letters in identical terms were sent to the other members of the IiP team.   We have made the same assumption.   Evidence was given in the Employment Tribunal about why the “bonus structure” was to “cease at the end of the year 2000”, but the Employment Tribunal did not mention that evidence or make any findings about it.   It will be necessary to return to that evidence in due course.   

6.   In November 1999, further letters were sent to members of the IiP team.   A copy of two such letters were before the Employment Tribunal.   The material part of the letters read:
	
“As a member of the IiP team, under present arrangements, you have a separate bonus scheme in place until 31 March 2000.   At that time, new arrangements will be required.   These will be such that you are not disadvantaged in comparison with employees on the staff bonus scheme outlined above.”  

We make two comments about those letters.   First, the reference to “the staff bonus scheme outlined above” was a reference to the discretionary bonus scheme still in place for other members of staff.   Secondly, the Employment Tribunal appears to have assumed that letters in identical terms were sent to the other members of the IiP team.   We have again made the same assumption.   

7.   In June 2000, a further letter was sent to members of the IiP team.   A copy of one such letter was before the Employment Tribunal.   The letter was headed: “IiP BONUS ARRANGEMENTS – 1 APRIL 2000 – 31 MARCH 2001.”   The material part of the letter read:

“The IiP bonus arrangements relating to you for this year are as follows.   These are non-pensionable:

£2,000 (gross) paid in September 2000, subject to achievement of mid-year target of 32 recognitions.   

£2,000 (gross) paid in March 2001, subject to achievement of end-year target of 135 recognitions.

These bonuses will be paid upon agreement by GOL that the targets have been achieved.   To receive the bonuses, you must still be employed by LETEC at the time of payment.   You will not be eligible in addition for any payments under the discretionary company bonus scheme during 2000–2001, apart from a pro-rata amount for the period 1 January to 31 March 2000.”

The letter was signed by the employee to whom it was sent, who thereby accepted its terms.   Once again, the Employment Tribunal appears to have assumed that letters in identical terms were sent to other members of the IiP team, and that these terms were accepted by them.   We have made the same assumption.   

8.   In the meantime, the Government had announced in July 1999 that TECs would be abolished.   LETEC’s functions were ultimately transferred to the Council with effect from 26 March 2001.   By virtue of reg. 5(1) of the Transfer of Undertakings (Protection of Employment) Regulations 1981, the contracts of employment of LETEC staff, including the 14 employees, had effect after the transfer as if they had originally been made with the Council.   The Tribunal found that prior to the transfer, Ian Tayler, LETEC’s Director of Corporate Services, had assured the 14 employees that “their bonus was contractual and would transfer”.   These are the Employment Tribunal’s words and we do not know whether the Employment Tribunal was finding that these were the words which Mr Tayler actually used, or whether they amount to what the Employment Tribunal thought he had meant.   The Employment Tribunal also found that Ms Mary Conneely, the Executive Director of the London East Learning & Skills Council (as it was to become), gave the members of the IiP team an assurance that “if [the bonus scheme] is contractual it will transfer”.   

9.   Following the transfer of LETEC’s functions to the Council, the Council was advised that although the bonus scheme had been contractual, the scheme had ceased at the end of 2000, even though the second tranche of bonuses earned in 2000 would not be paid until March 2001.   There was therefore no contractual bonus scheme in place at the time of the transfer.   The Council decided not to reintroduce a contractual bonus scheme, and the 14 employees were simply paid bonuses based on the discretionary scheme for the 2001–2002 operational year.   

The issues for the Employment Tribunal

10.   It was common ground that the bonus scheme to which the documents related was contractual.   Accordingly, on the face of it, the principal issue for the Employment Tribunal to address was whether, on the proper construction of the documents in which the provisions relating to the contractual bonus scheme were recorded, the scheme was still in place at the time of the transfer, or whether it had ceased to have effect (save for payment of bonuses already earned) at the end of 2000.   A number of subsidiary issues would arise.   Did the subsequent correspondence show that, even if the original bonus scheme was to cease to have effect at the end of 2000, it had subsequently been (a) varied or (b) revoked and replaced, so that it or its replacement continued to have effect at the time of the transfer?   To what extent were the assurances which Mr Tayler and Ms Conneely had given to the 14 employees a factor which could be taken into account as an aid to construction?   If they could not be taken into account as an aid to construction, did the assurances have the effect in law of preventing the Council from asserting that the bonus scheme had ceased to have effect at the end of 2000?   And if the bonus scheme had still been in place at the time of the transfer (whether the original scheme or a varied one or a new one) and had continued to have effect after 31 March 2001, what were its terms thereafter?   After all, it was only if it was possible to spell out its terms that it could be enforced.   Otherwise, it may have been unenforceable for uncertainty.   

The Employment Tribunal’s reasoning

11.   The Employment Tribunal construed the original letters, i.e. the ones sent to members of the IiP team at the time of the introduction of the contractual bonus scheme, as creating a contractual bonus scheme which was unlimited in time.   The assurances given by Mr Tayler and Ms Conneely supported that construction.   Although the original letters had referred to the “bonus structure” ceasing at the end of 2000, that only meant that the terms of the current bonus scheme would cease at the end of 2000: the contractual obligation to pay a bonus after that remained, though the amount of the bonus, how and when it would be payable and the targets to be achieved might well alter.   

12.   The Employment Tribunal also considered the question whether, if the original letters could not be construed as creating a contractual bonus scheme which was unlimited in time, the 14 employees’ contracts of employment were subject to an implied term that the bonus scheme was unlimited in time.   It held that they were subject to such an implied term.   Such a term was necessary to give business efficacy to the contracts, i.e. to give effect to the business reasons for introducing a contractual bonus scheme in the first place, namely to ensure the IiP team’s continuity of service and to maintain its productivity.   Such a term could be implied from the assurances given to the members of the team, from the use of the word “structure” in the original letters, from the fact that the subsequent letters of June 2000 did not suggest a new termination date for the scheme but included what the Employment Tribunal described as “an ambiguous reference” to a pro-rata payment under the discretionary bonus scheme for the quarter from 1 January to 31 March 2000, and from the Employment Tribunal’s finding that “[i]n practice, [LETEC] paid the [14 employees] for a period from 1 January 2001 to 31 March 2001 in accordance with the existing incentive bonus scheme”.   

The criticisms of the Employment Tribunal’s approach

13.   In our judgment, the Employment Tribunal’s approach to the issue of construction was flawed for a number of reasons.   First, although we acknowledge the ambiguity in the language of the assurances given by Mr Tayler and Ms Conneely, we doubt whether the Employment Tribunal’s understanding of the nature of those assurances was correct.   A far more persuasive reading of what Ms Conneely said is that she was simply saying that any contractual bonus scheme in place at the time of the transfer would remain in place after the transfer.   It is difficult to read her words as amounting to an assurance about how long the contractual bonus scheme would last, and therefore whether it would still be in place at the time of the transfer.   Mr Tayler’s assurance is more problematic, because we do not know whether the Employment Tribunal’s finding was a finding of the words he used or merely the Employment Tribunal’s understanding of their effect.   But even if the words he used were that the bonus scheme was contractual and that it would transfer, we would have been inclined to read the words in the same way as those of Ms Conneely.   

14.   Secondly, even if the words used by Mr Tayler and Ms Conneely could be read as amounting to assurances that the contractual bonus scheme would still be in place at the time of the transfer, it is not possible to use those assurances as an aid to the construction of the original letters.   Events which take place after an agreement cannot be used to construe that agreement.   As Lord Reid said in James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd. [1970] AC 583 at p. 603:

“I must say that I had thought that it is now well settled that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made.   Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different in a month or a year later.”

15.   Thirdly, the modern approach to the construction of contractual documents was famously explained by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896 at pp. 912-913.   Contractual documents should be given the meaning which the documents would convey to a reasonable man having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.   The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.   Subject to that, the admissible background “includes absolutely anything which would have affected the way in which the language of the document[s] would have been understood by the reasonable man”.   

16.   As we have said, there was evidence given in the Employment Tribunal about why the “basic structure” was to “cease at the end of the year 2000”.   The effect of the evidence of Mr Tayler (para. 6 of his witness statement), Susan Fey, LETEC’s Chief Executive Officer (paras. 5, 8 and 9 of her witness statement), and Steven Crow, LETEC’s Deputy Chief Executive (para. 6 of his witness statement) was that at the time the contractual bonus scheme was introduced in September 1998 the GOL had set national IiP targets up to the end of 2000.   That was why the contractual bonus scheme was to end at the end of 2000, if not before.   A decision may well have been made to continue the bonus scheme, perhaps on different terms, if and when targets were set for 2001 and thereafter, but that decision was still some way off.   

17.   We have not discerned anything in the witness statements or the notes of the evidence of those of the 14 employees who gave evidence which contradicts the Council’s evidence about the background against which the original letters were sent.   The Employment Tribunal did not refer to any of this evidence, which was highly relevant and admissible to the construction of the original letters.   We should add that we have not overlooked the fact that Mr Tayler admitted in evidence that at some stage targets were set (presumably by GOL) for the year 2001.   But for the reasons we have given, the subsequent setting of targets by GOL for 2001 cannot be used as an aid to the proper construction of the original letters.   

18.   Fourthly, we acknowledge that the original letters were less clear than they should have been, but the meaning which the Employment Tribunal attributed to the words “bonus structure” is, in our judgment, an artificial one.   It may be that an employee receiving that letter and giving it a quick glance might think that it meant what the Employment Tribunal decided it meant.   But in our judgment no reasonable man, having given the letter mature thought and having all the background knowledge available to the parties at the time, would have thought that the sentence in which those words were included meant that, although the terms of the bonus scheme which was then being established would cease at the end of 2000, the IiP team’s entitlement to a contractual bonus under some other bonus structure would continue indefinitely.   The effect of such a construction would be that the terms of the scheme would simply be reviewed at the end of 2000, whereas the word “review” was used in the letter to apply to the exercise which would be carried out in March 1999 (and maybe at other times prior to the end of 2000).   If the word “cease” cannot mean “review” (otherwise there would have been no need to use a different word), it could only have meant that the entitlement to a bonus ceased at the end of 2000.   

19.   In his speech in the ICS case, Lord Hoffmann cautioned against the over-literal interpretation of the language of contractual documents.   At p. 913, he said:

“The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words.   The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.   The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax…..The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.   On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.”

We think that if the words “bonus structure” bore the meaning which the Employment Tribunal found, the parties would have had attributed to them an intention which they plainly did not have.   

20.   Moreover, the Employment Tribunal’s approach to the issue of the implication of a term was flawed as well, again for a number of reasons.   First, the Employment Tribunal addressed the question as to whether a term that the bonus scheme was unlimited in time could be implied into the 14 employees’ contracts of employment on the basis of a particular hypothesis.   That hypothesis was that the original letters should properly have been construed as not creating a bonus scheme which was unlimited in time.   The term which the Employment Tribunal therefore implied was one which, on the Employment Tribunal’s own hypothesis, was inconsistent with the express term to which the contracts were subject.   The Employment Tribunal was wrong to do that: a term can only be implied to address an issue which has not been expressly provided for.   

21.   Secondly, there was no basis for saying that the term had to be implied to give effect to the business reasons for introducing a bonus scheme in the first place.   The implication of contractual terms on the grounds of business efficacy only arises where the contract would be unworkable from a business point of view without their implication.   Contractual terms cannot be implied on this ground simply because the contracts would be more workable with them.   The 14 employees’ contracts of employment would have been just as workable if the contractual bonus scheme was to last only to the end of 2000, even though the 14 employees may have been less motivated to achieve targets after then.   

22.   Thirdly, none of the circumstances identified by the Employment Tribunal as giving rise to the implication were capable of doing so.   We have already commented on the assurances given to the members of the IiP team and the Employment Tribunal’s interpretation of the words “bonus structure” in the original letters.   It is true that the subsequent letters of June 2000 did not suggest a new termination date for the scheme, but that was because the letters were addressing only the amount of the bonuses and the targets for the period covered by the letters.   We shall deal with the Employment Tribunal’s observations about payments for the quarters 1 January–31 March 2000 and 1 January–31 March 2001 in due course.   

23.   For these reasons, we have concluded that the route by which the Employment Tribunal reached its conclusion that there had been an express or implied term of the 14 employees’ contracts of employment that the contractual bonus scheme introduced in 1998 would continue indefinitely (subject to LETEC’s, and later the Council’s, right to revise the terms of the bonus scheme) cannot stand.   But for the issue which we are about to address, we would have been inclined to decide for ourselves what was the proper construction of the letters which were issued when the contractual bonus scheme was introduced.   

The variation or revocation of the bonus scheme

24.   But that is not quite the end of the matter.   Even if, on the proper construction of the letters sent to the 14 employees when the bonus scheme was introduced, the bonus scheme was to come to an end at the end of 2000, the question then arises whether, before the end of 2000, either (a) the bonus scheme was varied by agreement so that it continued in force until after the date of the transfer, and was therefore in force at the date of the transfer, or (b) the bonus scheme was replaced by a new scheme which was still in force at the date of the transfer.   There is, in our judgment, an extremely respectable argument for saying that one or other of these two events occurred.   

25.   The starting point is the Council’s argument that the mechanism for reviewing the terms of the bonus scheme from time to time permitted LETEC not merely to revise the terms of the bonus scheme but to revoke it altogether.   Mr Andrew Bailey for the 14 employees did not seek to argue otherwise.   In the light of that, the language of the letters sent to the members of the IiP team in November 1999 is instructive:

“…..you have a separate bonus scheme in place until 31 March 2000.   At that time, new arrangements will be required.” (Emphasis supplied)

The language of that letter rather suggests that at that stage LETEC was contemplating the revocation of the bonus scheme at the end of March 2000 and replacing it with another scheme (no less advantageous than the discretionary bonus scheme which continued to apply to other members of staff).   

26.   That, then, is the context in which the letters sent to the members of the IiP team in June 2000 have to be read.   One way of reading them is to say that they related to the bonus earned in the 2000 calendar year, with the payment of that bonus being made in two tranches – the first in September 2000, the second in March 2001.   That would be consistent with the bonus scheme ceasing at the end of 2000.   But that does not explain why the letters were headed in the way they were.   The heading suggests that a far preferable reading of the letter is that it relates to bonus earned in the period from 1 April 2000 to 31 March 2001.   That would explain why the letter said that the members of the IiP team would not be eligible for payments under the discretionary bonus scheme during 2000-2001: for the period to which the heading on the letters related, they would be paid under this new contractual bonus scheme.   This reading of the letters would also explain why the members of the IiP team would be paid “a pro-rata amount for the period 1 January to 31 March 2000”.    The previous contractual bonus scheme had been revoked with effect from the end of 1999, and the members of the IiP team had to be paid the discretionary bonus in the period between the revocation of the old scheme and the coming into effect of the new scheme on 1 April 2000.   

27.   If that is the correct reading of the letters of June 2000, there would have been a new contractual bonus scheme in place from 1 April 2000, it would have continued until 31 March 2001, and it would therefore have been in place at the date of the transfer.   This is not an issue which the Employment Tribunal addressed, though that may have been because the issue was not analysed then in the way in which we have in this judgment.   

Conclusion

28.   We do not think that it is appropriate for us to determine whether there was a cessation of the bonus scheme at the end of 2000 (if not before) as the Council contends, or whether there was either a variation of the bonus scheme or its replacement by another bonus scheme, in which in either case the scheme continued until at least 31 March 2001, as the 14 employees, we assume, would contend in the light of our analysis.   In those circumstances, the claims will have to be remitted to the Employment Tribunal for that issue to be addressed.   It is because the Employment Tribunal would have to address that issue that we think that it is appropriate for the Employment Tribunal to revisit the proper construction of the letters which created the original bonus scheme in September 1998, in the light of our view that the Employment Tribunal’s assessment of that issue was flawed.   We considered whether we should remit the case back to the same Employment Tribunal for it to consider the new issue which we have identified, but we concluded that that would not be appropriate.   The members of that Employment Tribunal have already reached a concluded view on the proper construction of the letters which created the original bonus scheme in September 1998, and they might be tempted, albeit completely unconsciously, on revisiting that issue and considering the new issue which we have identified, to decide those issues in a way which would not alter their ultimate view of the outcome of the case.   We therefore concluded that the case should be re-heard by a differently constituted Employment Tribunal.   We very much regret the inconvenience and expense which this will cause, but we did not think that we had any other alternative.   

29.   There are two final points we should make.   First, if the Employment Tribunal concludes that there was a contractual bonus scheme in place on the date of the transfer (whether because the original bonus scheme was unlimited in time subject to LETEC’s right to revoke it, or because the original bonus scheme was extended to 31 March 2001, or because a new bonus scheme for the year ending 31 March 2001 had been created), the question will then arise whether the bonus scheme continued after 31 March 2001.   It is only if it did so that there would have been any significant unauthorised deduction from the wages of the 14 employees.   And if it did continue after 31 March 2001, the Employment Tribunal will have to decide for how long and on what terms.   The previous Employment Tribunal must be taken to have decided that it continued on the terms set out in the June 2000 letters, but we have not discerned the basis on which the Employment Tribunal came to that conclusion.   Secondly, we have to say that we were unimpressed by the lack of precision in the language of the relevant documents and in the assurances said to have been given by Mr Tayler and to a lesser extent by Ms Conneely.   If the language had been more precise, the uncertainty over the 14 employees’ legal rights would not have arisen.   The Council is not to blame for that since the relevant documents all came into existence and the assurances were given during LETEC’s stewardship of the undertaking.   But if the lack of precision in the documents and in the assurances has led the 14 employees to think that they would be entitled to significant bonuses, the Council may think that it would be proper to redress their grievances by making such ex gratia payments as it thinks appropriate to the 14 employees.   We trust that the Council will give due consideration to these observations.