Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers and Others

Heard on 23 and 24 April 2024

Lord Burrows AND Lady Simler ( WITH WHOM Lord Lloyd-Jones AGREES):

Standing back from the details of this case, it may be said that the claimants are seeking to establish that they fall within rare exceptions to two fundamental common law principles that are generally applicable in the realm of contracts of employment. The first is that an employer generally has the right, under contract law, to terminate a contract of employment by giving the requisite notice to the employee. The second is that an injunction, amounting to indirect specific performance, will generally not be ordered against an employer that, in substance, requires the employer to continue employing an employee.

The defendant and respondent is Tesco Stores Ltd (“Tesco”). The claimants and appellants are the Union of Shop, Distributive and Allied Workers (“USDAW”), as the relevant trade union recognised by Tesco for collective bargaining purposes, and three employees of Tesco who are also union representatives. Those three employees are employed by Tesco at three different distribution centres: Daventry (Clothing), Lichfield, and Daventry (Grocery). The proceedings were brought not only for the benefit of the three individual employees themselves but also on behalf of all 22 affected union members at Daventry (Clothing) and all 20 affected union members at Lichfield. The fourth appellant is the only union member affected at Daventry (Grocery) (having moved there from Daventry (Clothing) in 2014). In total, at the start of these proceedings in early 2021, there were approximately 367 union members affected across the UK (with 324 being at the Livingston distribution centre in Scotland).

Central to this appeal is the correct interpretation of an express term, concerning “retained pay”, agreed in a collective agreement. By reason of section 179 of the Trade Union and Labour Relations (Consolidation) Act 1992 (“the 1992 Act”) (and consistently with the general position at common law), a collective agreement is not legally binding as between the union and the employer unless in writing and containing a provision which (however expressed) states that the parties intend that the agreement shall be a legally enforceable contract. However, where apt for incorporation, terms agreed under the collective agreement will commonly be incorporated into the employees' contracts of employment and, if so, will be binding as between employer and individual employee: see, eg, National Coal Board v Galley [1958] 1 WLR 16; Alexander v Standard Telephones & Cables Ltd (No 2) [1991] IRLR 286; Henry v London General Transport Services Ltd [2002] ICR 910, [2002] IRLR 472; Kaur v MG Rover Group Ltd [2004] EWCA Civ 1507, [2005] ICR 625. It is common ground in this case that the retained pay term was incorporated, expressly or by established custom and practice, into the employees' contracts of employment.

Although this two-stage process (collective agreement followed by individual contracts of employment) differs from the usual way in which contracts are made, there is no particular difficulty in applying the usual objective and contextual approach to contractual interpretation. In his seminal speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (“ ICS”), at 912, Lord Hoffmann expressed the aim of contractual interpretation as being to ascertain “the meaning which [the contract] would convey to a reasonable person having all the [relevant] background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the contract.” In the collective bargaining setting, the same objective and contextual approach to interpretation applies. But, importantly, that objective and contextual approach applies to the interpretation of both the collective agreement (where the parties are the employer and the union) and the individual contracts of employment (where the parties are the employer and the employee). Put another way, at least where it is not being suggested that the union and the employee had different intentions, the objective intentions initially of employer and union and, subsequently, of employer and employee may all be relevant in deciding on the correct interpretation of a term that was agreed in a collective agreement and incorporated into a contract of employment. See, generally, Adams v British Airways plc [1996] IRLR 574, especially at para 22; and Anderson v London Fire & Emergency Planning Authority [2013] EWCA Civ 321, [2013] IRLR 459, especially at para 22.

Given the two-stage process that applies in the context of collective agreements, it would appear that the usual principles determining what, if any, extrinsic material is admissible as an aid to interpretation should be applied with a corresponding degree of flexibility. It was not in dispute between the parties in this case that various statements made, prior to the collective agreement, as explanations for employees of the express term in question, were admissible as aids to interpretation of that express term. Neither side regarded it as necessary for the lower courts or this court to examine leading cases, such as Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, in order to decide whether one of the exceptions to the general bar on using pre-contractual material to interpret the meaning of a particular provision was made out. In other words, counsel for the parties accepted, without detailed analysis, that the pre-contractual material relied on (and set out at paras 20 – 29 below) was admissible and merely disputed the weight that should be attached to it. In the light of the parties' submissions, but also because we acknowledge the need for flexibility in the context of collective agreements, we shall treat the pre-contractual material relied on as an admissible aid to interpretation. However, had it been necessary to do so, we would have regarded the pre-contractual material relied on as coming within the exception that explanatory material can be admissible in interpreting a contract: see Lewison, The Interpretation of Contracts, 8 ^th ed (2024), paras 3.38 – 3.42, citing, inter alia, the reliance on the explanatory notes that accompanied the contract in ICS.

There is another somewhat unusual feature of this case which differentiates it from the standard way in which a contractual term is negotiated and agreed. As set out in the main particulars of their written contracts, each individual claimant was receiving retained pay from the dates in September 2007 when they moved from their existing distribution centre at Crick in Northamptonshire to the distribution centres at Daventry (Clothing) and Lichfield. The pre-contractual material relied on pre-dated those moves. Yet the focus of the submissions by both parties has been on the interpretation of the express retained pay clause in a collective agreement that was only agreed some two years later in 2009 and signed on 18 February 2010. It was only at, or shortly after, that later date that that express term became incorporated into the individual contracts of employment. The best analysis of this sequence of events appears to be that, while the full articulation of retained pay was not incorporated into the individual contracts until 2010, the same meaning of retained pay applied throughout the relevant period. There is no suggestion that the meaning changed in 2010. The parties were therefore in agreement that the judicial task is to interpret the full retained pay provision taking into account the pre-contractual material that also pre-dated the moves in September 2007.

Tesco recognises USDAW for collective bargaining purposes within the meaning of section 178(3) of the 1992 Act. Tesco has a series of recognition and procedural agreements with USDAW, the practical effect of which is that USDAW is recognised by Tesco as the sole representative and negotiating trade union for certain staff at certain sites, and in particular, staff below the grade of Team Manager employed at distribution centres including those at Daventry (Clothing), Lichfield and Daventry (Grocery). There is an agreed process for negotiations between Tesco and USDAW concerning employment conditions (including pay) following which USDAW will ballot its members on whether to accept any offer made by Tesco. If accepted by the majority of union members voting, changes to contract terms are incorporated into the employment contracts of all employees at those centres.

In 2007, Tesco embarked on an expansion programme which resulted in the closure of certain existing distribution centres (including Crick), the expansion or restructuring of certain others, and the opening of new sites (including Lichfield). In relation to the sites which were to be closed, a redundancy situation arose for the purposes of section 139(1)(a)(ii) of the Employment Rights Act 1996, by reason of the fact that Tesco was going to cease, or intended to cease, “to carry on that business in the place where the employee was so employed”.

Retained pay was negotiated by representatives of USDAW and Tesco as an incentive to staff who worked at Crick (and other affected sites) to relocate to another site. This was an alternative to the offer of a lump sum redundancy...