Limiting an employer’s right to dismiss on notice

Aspden v Webbs Poultry and USDAW v Tesco

Commentary icon2 Mar 2023|Comment

Oliver Jackson

Barrister at 11KBW

1. Introduction and summary

It will come as a surprise to most lawyers to learn that a term may be implied into a contract that is inconsistent with an express term of that contract. Frankly, this proposition would probably surprise even the justices of the Supreme Court, who recently reaffirmed in Barton v Morris [2023] UKSC 3 (at [24], [25], [107], [165]-[167], and [221]) that the implication of such a term is prohibited.

It will come as less of a surprise to employment lawyers familiar with Aspden v Webbs Poultry & Meat Group (Holdings) Ltd [1996] IRLR 521 and the recent judgment of the Court of Appeal in Union of Shop, Distributive and Allied Workers (USDAW) v Tesco Stores Ltd [2022] EWCA Civ 978, [2022] ICR 1573. This article discusses these two cases in detail, focusing in particular on the reasoning employed by the courts relating to the employer’s express right to dismiss an employee on notice.

In Aspden, the claimant employee had been dismissed on notice while off sick from work. The High Court found an implied term in his employment contract that he would not be dismissed while off sick, despite the employer’s express contractual right to terminate his contract on notice.

Twenty-six years later, in USDAW, Tesco sought to fire-and-rehire various employees who refused a reduction in pay. They brought a claim, relying on Aspden, that despite Tesco’s express contractual right to dismiss, their employment contracts included an implied term that they could not be dismissed in order to reduce their pay. The Court of Appeal rejected their claim on the facts but held that Aspden remained good law.

This article argues that the reasoning in Aspden is wrong as a matter of principle. The Court of Appeal in USDAW was wrong to affirm this flawed reasoning. However, despite this, the outcomes in both Aspden and USDAW were clearly correct. The article therefore suggests a different route, not canvassed by the Court of Appeal, by which these outcomes can be set on a doctrinally sound foundation. The common law should extend the principle from Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661 such that an employer must exercise its contractual power to dismiss an employee on notice reasonably and rationally, and not arbitrarily or capriciously.

2. Aspden v Webbs Poultry & Meat Group (Holdings) Ltd

Aspden arose out of a dispute about permanent health insurance (‘PHI’). PHI provides income to an employee, paid by their employer’s insurer, if they are unable to work due to illness or injury. Depending on the scheme, the income may be paid directly to the employee, or paid to the employer to cover the cost of the employee’s salary during the period of their incapacity. The employee’s entitlement to the PHI income arises out of their employment contract and is therefore typically dependent on their continued employment. However, the employer still retains the usual express contractual right to terminate on notice. Though rare today, and considered extremely generous, PHI schemes were more common during the 1980s and 1990s and are still found in some employment contracts signed during that period.

Mr Aspden’s employment contract with Webbs Poultry included a generous PHI scheme. If prevented from working by sickness or injury, he would receive ¾ of his salary, paid by Webbs Poultry’s insurer, from 26 weeks after the start of his incapacity until his death, dismissal, or retirement. However, Mr Aspden’s contract also included an express provision granting Webbs Poultry the general right to terminate his employment (‘clause 12(B)’) and a separate express term specifically permitting termination in the event of incapacity (‘clause 11(c)’) (see [1996] IRLR 521 at [2]-[5]). Mr Aspden went off work sick. The managing director wrongly thought he was malingering and served his notice. Mr Aspden sought damages for wrongful dismissal, arguing that it was an implied term of his contract that his employment would not be terminated while he was incapacitated.

Sedley J made three important factual findings. First, when the parties agreed the termination provisions, they had “overlooked” the fact that Mr Aspden was entitled to the PHI scheme (at [18]). Secondly, the contract was also internally inconsistent: the PHI scheme “could only work if the employees whom it covered remained in employment for the duration of their incapacity”, and yet clause 11(c) provided for termination for incapacity (at [21]). Thirdly, the mutual intention of the parties at the time the contract was agreed was that the termination provisions would not be operated so as to remove Mr Aspden’s entitlement to the PHI benefits (at [15]).

The Judge then reasoned that while it was a “basic principle of contract law” that a term could not be implied that would be inconsistent with an express term, that was subject to the “gloss” that a term could still be implied “if it had been overlooked” by the parties (at [16]-[17]) and where it resolved an internal contradiction (see [21]-[22]). He therefore implied a term that clauses 11(c) and 12(B) “would not be operated so as to remove the employee’s accruing or accrued entitlement” to the benefits of the PHI scheme (at [15] and [23]). He recognised that this had the effect of turning clause 11(c) “into its opposite, forbidding, where at present it permits”, Webbs Poultry from dismissing Mr Aspden due to incapacity, and “correspondingly limiting the operation of clause 12(B)” (at [20]). Nevertheless, Sedley J implied a term preventing the termination provisions from being operated while Mr Aspden was incapacitated in order to reflect the mutual intention of the parties and so that “effect can be given to the justice of the case” (at [23]). Webbs Poultry was thus unable to lawfully dismiss Mr Aspden under clauses 11(c) or 12(B) for the duration of his incapacity, and was required to pay the damages flowing from its unlawful breach of contract. Calculating the appropriate damages required an assessment of what income Mr Aspden would have received under the PHI scheme had he remained employed by Webbs Poultry for the duration of his incapacity (see [24]-[27]).

The justice of the case plainly stood in Mr Aspden’s favour, and it is to Sedley J’s credit that his unorthodox solution led to the correct outcome. But the reasoning is flawed. As a matter of cast-iron legal principle, a contractual term cannot be implied where it would contradict an express term. The term implied by the Judge should have been blocked by the presence of clauses 11(c) and 12(B). Sedley J took his “gloss” that implication was permitted if one or more express terms had been overlooked (at [17]) from Liverpool City Council v Irwin [1976] AC 239. It is doubtful whether Liverpool City Council was authority for such a proposition. But if ever it was, the point has been definitively resolved by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72, [2016] AC 742: “it is a cardinal rule that no term can be implied into a contract if it contradicts an express term” (at [28]). Once that cardinal rule is appreciated, the foundation of the reasoning in Aspden crumbles away. Clauses 11(c) and 12(B) expressly entitled Webbs Poultry to give Mr Aspden notice of termination. That could have been the beginning and end of the analysis (although, for a counter-argument to this position which supports the reasoning in Aspden, see Re-Thinking the Notice Rule (1998) 27 ILJ 220).

Of course, that would have been woefully unjust to an incapacitated employee who was capriciously dismissed by his ill-informed employer at a time when his continued employment put his employer to negligible (if any) cost. It is suggested that this is the reason why, despite the weaknesses in its doctrinal analysis, Aspden has soldiered on. It was affirmed by the Privy Council in Reda v Flag Ltd [2002] UKPC 38, [2002] IRLR 747, albeit in reluctant tones (Lord Millett referred to the “unusual circumstances” of the case and suggested that the “better course might have been to rectify the contract to include the term contended for as an express term” (at [51])). Going one better, in Awan v ICTS UK Ltd [2019] ICR 696, the Employment Appeal Tribunal lent Aspden its full-throated support: permitting dismissal would “be contrary to the functioning of a long-term disability scheme, and its purpose” and “deny the Claimant the very benefits which the scheme envisages will be paid” (at [55]). But this exhortation views the problem through the wrong end of the telescope. The problem is not how effect can be given to the PHI scheme. The problem is how the employer’s express contractual termination right can be abridged. This point is not purely of academic interest: if an employer’s exercise of its termination right can be thwarted by an employee’s PHI entitlements, there might be other contractual employee entitlements that could have the same effect. To put it the other way round, it was an open question whether Aspden was limited to PHI cases or could apply in other factual contexts.

3. USDAW v Tesco in the High Court

This was the key issue in USDAW.In 2007 Tesco sought to close one distribution centre and open several new ones in different locations. It was critical to the success of this reorganisation that some of its experienced staff should agree to relocate, and so Tesco negotiated with the trade union that employees who agreed to relocate to the new centres would be entitled to a form of enhanced pay called ‘retained pay’. A joint statement by Tesco and the union explained that retained pay was “guaranteed for life”. Various employees agreed to relocate. An express contractual term, agreed by Tesco and the union through a collective agreement, was subsequently incorporated into the employees’ contracts that retained pay was a “permanent feature” of those contracts (see [2022] EWHC 201 (QB), [2022] ICR 722 at [11]-[14]).

Some years later, Tesco announced that it would be removing retained pay. Where employees did not agree to this, it would terminate their contracts on notice and offer to re-engage them on terms not including retained pay (i.e. fire-and-rehire) (see [16.2]). The union and three employees applied for an injunction to restrain Tesco from giving notice. They argued that their contracts included an express or an implied term (on the basis of Aspden)that Tesco would not terminate their contracts for the purpose of removing the right to retained pay (see [20]). Tesco responded that it had an express contractual right to terminate on notice for any reason (see [26]), and that Aspden was limited to PHI cases (see [29]).

In a marked development of the common law, Ellenbogen J found for the Claimants. She held that there was a conflict between the word “permanent” in the retained pay term and Tesco’s express termination right in circumstances where a fresh contract would be offered that did not include retained pay (at [40]). Aspden was not limited to PHI cases but was authority for the broad proposition that “the express right of dismissal may be limited by implication arising from the unusual circumstances in which the contracts had been entered into and the inherently contradictory terms which resulted” (at [43]). Applying that proposition, the Judge implied a term that Tesco’s “right to terminate the contract cannot be exercised for the purpose of removing or diminishing the right of that employee to Retained Pay” (at [42]). She did not need to consider the Claimant’s alternative argument that Tesco was prevented from dismissing them by a promissory estoppel (see [51]). Having found for the Claimants on liability, the Judge granted declaratory relief as to the true interpretation of the retained pay term as well as an injunction preventing Tesco from giving notice to the affected employees for the purpose of removing retained pay (see [54]-[55]).

Several criticisms can be made of this judgment, including that the Judge rejected a sensible alternative interpretation of the retained pay term that would have removed any internal inconsistency in the contract. But, assuming that there was indeed an internal inconsistency in the Claimants’ contracts, four significant problems arise.

First, and as in Aspden, the term implied by the Judge impermissibly contradicted Tesco’s express contractual termination right.

Second, it is unclear why the case fell within Aspden territory at all. On the proposition extracted by the Judge from Aspden and Reda, the contracts were required to have been signed in “unusual circumstances” (at [43]).It is unclear why the facts of USDAW met this threshold. There is nothing unusual about an employer offering pay inducements during negotiations with trade unions where it wishes to relocate part of its workforce for its own commercial reasons.

Third, and more fundamentally, the proposition that a court may imply contractual terms in that are inconsistent with express terms where the contract is agreed in unusual circumstances and contains contradictions is highly uncertain in its scope. For one thing, it is highly uncertain what constitutes ‘unusual circumstances’, as discussed above. For another, all lawyers know that, despite their best efforts, contracts regularly contain terms that hindsight reveals to be contradictory. The presence of these two vague and ill-defined criteria cannot be a licence for the court to remake the parties’ agreement in order to reach what it considers to be a fair result.

Fourth, the justification for the implied term was said to lie in Tesco’s termination “for the purpose of extinguishing or diminishing the right to Retained Pay” (at [46]). But many, if not all, fire-and-rehire disputes arise because the employer wishes to reduce its employees’ entitlements, and some of those entitlements may be expressed in similarly strong terms, e.g. as being “for life”. Wherever an employer seeks to reduce any “permanent” benefit, or benefit “for life”, by agreement, threatening to fire-and-rehire if no agreement can be reached, then any resulting termination is plainly for the purpose of extinguishing or diminishing the employee’s right to that benefit. On the Judge’s reasoning in USDAW, all such terminations would be prohibited. This may be viewed by many employees as a welcome political development, but it is not the current legal position.

4. USDAW v Tesco in the Court of Appeal

Tesco appealed to the Court of Appeal. Bean LJ, with whom Newey and Lewis LJJ agreed (see [2022] EWCA Civ 978, [2022] ICR 1573), allowed the appeal. Their essential reasoning was as follows.

On the question of whether there was an express contractual term to prevent Tesco from dismissing the employees, Bean LJ held that the Judge had wrongly interpreted the word “permanent”. That word did not imply a mutual intention to limit the circumstances in which Tesco could terminate the contracts (see [36]-[37]). There was no express term preventing Tesco from exercising its termination rights. Tesco had the right “to give notice in the ordinary way” and “the entitlement to Retained Pay would only last as long as the particular contract” (at [40]). Nor was there any implied term to prevent Tesco from dismissing the employees. What was meant by the phrase “guaranteed for life” in the pre-contractual documents was too uncertain to ground such an implied term. In any event, the implication of such a term was not necessary for the operation of the contract and was also inconsistent with Tesco’s express right to terminate (at [44]-[45]). The Court also rejected the Claimants’ fallback promissory estoppel argument. There had been no clear and unequivocal promise, and nor had the Claimants relied on the promise to their detriment (see [52]-[55]). And for good measure, even if the Claimants had succeeded on liability, the grant of an injunction would have been inappropriate (see [55]-[56]). The appeal was dismissed (see [57]-[59]).

So far, the Court of Appeal’s reasoning cannot be faulted. But of more lasting concern is the Court’s treatment of Aspden. In a single sentence, Bean LJ explained that Aspden was correctly decided as the benefit of a PHI scheme to an incapacitated employee “would be rendered entirely valueless if the employer could dismiss him on the grounds of that same disability” (at [50]). He went on to say that, had the retained pay term in USDAW stated that “provided the site remains open Retained Pay will continue until you reach the age of 65”, then the case would have been “analogous to Aspden” (at [51]). That is, in this scenario, the Court would have implied a term to prevent Tesco from serving notice to terminate.

This is a surprising suggestion. First, the point that Aspden must have been correctly decided else the PHI scheme would be rendered valueless again addresses the wrong problem: the problem is not how effect can be given to the PHI scheme, but how the employer’s express termination right can be abridged. The Court of Appeal failed to realise that one of the very reasons it gave for rejecting the implied term sought by the Claimants – namely, because such an implied term would be inconsistent with Tesco’s express right to terminate – applied with equal force to the term implied by Sedley J in Aspden. The telescope was still the wrong way round. The correct analysis is that if Tesco served its notice to terminate, in line with its express right to do so, then the employment contract in question ceases to exist after the expiry of the notice period and any contractual entitlements (whether to Retained Pay or otherwise) also cease to exist, regardless of how those contractual entitlements are worded.

Second, and more concerningly, the alternative wording suggested at [51] will have wide-ranging consequences. It is the first suggestion in this jurisdiction at the level of the Court of Appeal or above that the reasoning in Aspden is not limited to PHI cases (albeit that there had been comments to this effect in the earlier High Court case of Jenvey v Australian Broadcasting Corporation [2002] EWHC 927, [2003] ICR 79). But if this is correct, what are its boundaries? To take the reasoning to an extreme, some employees may have a specific contractual entitlement to a minimum annual pay rise. They could argue on the basis of Aspden and USDAW that any ‘unusual circumstances’ in which their employment contracts were signed, coupled with an alleged inconsistency between their contractual entitlement to a minimum annual pay rise and their employer’s express right to terminate on notice, should lead to the implication of a term preventing the employer from dismissing them. Such an argument would be absurd. But what is missing from Aspden and USDAW is an explanation of why it would be absurd.

Yet that is not even the limit of Aspden’s reach. Once cut loose from its moorings in the PHI cases, there is no principled reason why the analysis in Aspden should be not apply across contract law more widely: where a party to a contract has an express contractual power to do something, that express power may be limited by an implied term arising out of internal inconsistencies in the contract and because the exercise of that power would prevent the contractual counterparty from receiving a benefit that they would otherwise receive. Again, this argument is plainly wrong. But, if the reasoning in Aspden is right, what is missing is an explanation of why this argument is incorrect.

These points lead to a conundrum. On what principled basis can the outcome of Aspden be defended, thereby protecting the rights of incapacitated employees to benefits under PHI schemes, while restraining the reasoning which led to that outcome from infecting employment law (and contract law) more widely?

5. The solution: Braganza v BP Shipping

The remainder of this article suggests a solution by which the outcome from Aspden can be preserved, the case set on a sound doctrinal footing, and sensible limits established. The common law should recognise that an employer’s decision to exercise its express contractual termination right is subject to a requirement that that decision be reasonable and rational, and not arbitrary or capricious. Aspden should be seen as a case where Webbs Poultry’s decision to dismiss Mr Aspden fell foul of this principle (for an alternative analysis, arguing amongst other things that the implied duty of trust and confidence should apply to employer’s exercise of its express right to terminate, see Ford “Re-thinking the Notice Rule” (1998) 27 ILJ 220).

It is now widely recognised in contract law that where a contract confers an apparently unfettered discretion on one contracting party, exercise of which may adversely affect the interests of the other, then, in the absence of clear language to the contrary, there is an implied term that that discretion must not be exercised arbitrarily or capriciously: see Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661 at [18]-[22]. The Braganza principle applies wherever the contract gives responsibility to one party to make an assessment, exercise a judgment, or choose from a range of options (which may only be two) on a matter which materially affects the other party’s interests and about which there is room for reasonable differences of view: Lewison, The Interpretation of Contracts, 7th edn (London: Sweet & Maxwell, 2020),paras 14.72-14.75.The limitation on the stronger party’s exercise of the discretion arises due to the “clear conflict of interest” which is “heightened where there is a significant imbalance of power between the contracting parties, as there often will be in an employment contract” ([2015] 1 WLR 1661 at [18]). It is a “necessary control mechanism” to protect against the abuse of the power conferred on one party: see Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200, [2013] BLR 265 at [136].

An employer considering whether to dismiss an employee on notice should fall within the scope of the Braganza principle. The employer has to exercise its judgment, or make a choice between a range of options. At the very least, it has to choose whether to terminate or not to terminate, but there will usually be other options available to it on the facts of a specific case (for instance, demoting the employee, or initiating disciplinary proceedings). That choice is exercised on a matter which significantly affects the employee’s interests and about which there will often be room for reasonable differences of view. The Braganza principle should therefore apply to that decision. Such a development of the common law was arguably foreshadowed by the House of Lords in Johnson v Unisys Ltd [2001] UKHL 13, [2003] 1 AC 518, where Lord Hoffmann stated at [46] that he saw the possibility of implying a term that “the power of dismissal will be exercised fairly and in good faith”. Indeed, in the context of PHI cases specifically, the justification for the Braganza principle – the need for a control mechanism to protect the weaker party in a contractual relationship – is particularly acute for an incapacitated employee whose continued employment costs the employer essentially nothing.

Once this analysis is accepted, the Braganza principle then provides a principled explanation for why Webbs Poultry’s decision to terminate Mr Aspden’s employment was unlawful. Webbs Poultry was obliged not to exercise its powers to terminate under clauses 11(c) and 12(B) in a capricious or arbitrary manner. But as Sedley J’s judgment makes clear, that is exactly what it did. This analysis explains the outcome in Aspden without resorting to the implication of terms which are inconsistent with express terms, while also introducing sensible and narrow limits to the spread of employer liability. For instance, in USDAW, Tesco did not act capriciously or arbitrarily. It had first sought to obtain staff agreement to its proposal to remove retained pay, including offering them a lump sum payment equal to 18 months of retained pay (at [16.2] of [2022] ICR 1573). Fire-and-rehire was a last resort. Bean LJ was wrong (at [51]) to suggest that any different wording in the retained pay term could have affected Tesco’s termination rights. The only issue should have been whether Tesco’s decision to terminate was irrational, arbitrary, or capricious which, on the facts, it was not. It was therefore entitled to terminate the Claimants’ employment contracts. The Braganza analysis views the problem through the right end of the telescope.

Two possible counter-arguments could be raised to this analysis. First, it has been suggested that “where a party to a contract to a contract has a right to terminate it, the principles applicable to the exercise of a contractual discretion do not apply”: Lewison, The Interpretation of Contracts, para 14.74; also see generally Foxton, “A good faith goodbye? Good faith obligations and contractual termination rights” [2017] LMCLQ 360. But the cases cited by Lewison and Foxton in support of this proposition do not go that far. For instance, Taqa Bratani Ltd v Rockrose UKC8 LLC [2020] EWHC 58 (Comm); [2020] 2 Lloyds’ Rep 64 only states that the Braganza principle is an “incrementally developing area of the law” such that it only does not apply to termination provisions included in “expertly drawn complex commercial agreements between sophisticated commercial parties” (at [46]). Employment contracts do not fit this description. Further, and more fundamentally, there is no principled reason why the exercise of a discretionary power to terminate an employment relationship should be treated differently to any other contractual discretion to which Braganza applies, namely, apparently unfettered discretions on the part of a stronger contracting party, the exercise of which may adversely affect the interests of the weaker contracting party. The old common law rule that a master can dismiss his servant for any reason or none requires updating in light of Braganza.Even the critics of this position appreciate that “the case for attaching discretion obligations to a contractual right of termination would seem to be stronger for employment contracts than for any other type of contract”: see Foxton “A good faith goodbye? Good faith obligations and contractual termination rights”, 375. And in his judgment in Braganza at [54], Lord Hodge noted that “contracts of employment have specialties that do not normally exist in commercial contracts”. One such specialty is the employer’s typical unilateral right to terminate on notice. This first objection, then, is not persuasive

Second, it could be argued that the common law’s development along this path is prevented by Johnson v Unisys. This counter-argument carries more weight, but it is not insurmountable. In Johnson v Unisys, the House of Lords held that damages for wrongful dismissal at common law cannot include compensation for harm arising out of the manner of the dismissal, as that would sidestep the rules governing unfair dismissal in the legislative scheme introduced by Parliament. But the application of Braganza to an employer’s decision to terminate on notice should be viewed differently as it does not involve consideration of the manner of dismissal, but the decision to dismiss in the first place. It is that decision which should be taken reasonably and rationally, and not arbitrarily or capriciously. Given the development of the common law which has taken place in Braganza, the earlier decision of Johnson should not form a barrier to the common law recognising that the Braganza principle should apply to an employer’s decision to dismiss an employee on notice.

6. Conclusion

The Court of Appeal in USDAW was correct to reject the injunction sought by the Claimants, but wrong to uphold the reasoning in Aspden. The better analysis is that Aspden is an example of the Braganza principle in action. The common law should expressly recognise that, in line with Braganza, an employer’s decision to exercise its contractual right to terminate on notice must be reasonable and rational, and not arbitrary or capricious. This principle would provide a doctrinally sound explanation for the outcome in Aspden and other PHI cases, without resorting to the implication of terms which are inconsistent with express terms. It would also explain why the employees’ claims in USDAW should fail and place sensible and narrow boundaries on employers’ liability. Viewed in this way, Aspden and USDAW come as less of a surprise.

This article was first published on UK Labour Law blog

Oliver Jackson

Oliver Jackson is a barrister at 11KBW, specialising in employment, public and commercial law. From 2020 to 2021 he was a... Read more »