(Tesco Stores Ltd v USDAW and others [2022] EWCA Civ 978)

Why the case matters

The outcome of this appeal, concerning an employer's right to dismiss on notice, has been keenly awaited for several reasons. 

• First, fire and rehire is very much in the spotlight, not least because the Government intends to redraft the current Acas Code of Practice on Dismissal and Re-engagement. 
• Secondly, the High Court's original decision to grant an injunction to prevent Tesco from dismissing staff, and which has now been reinstated, was very controversial in the first place. It represented a significant departure from the orthodox position to date. 
• Now, the Supreme Court has departed from the orthodox position again and agreed with the High Court that an injunction should be granted to prevent dismissal of staff.

The orthodox position says that it is rare for an employer's right to dismiss on notice to be interfered with by the courts. Also, injunctive relief for the contract to be performed is rarely granted in employment disputes, largely because the courts have recognised how difficult it is to order the continued performance of a contract which relies on good faith between the parties. When the Court of Appeal overturned the High Court's decision in 2022, employers breathed a sigh of relief. Employers now need to revisit their understanding of the risks, in light of the Supreme Court decision, in particular when express provisions of the contract seem in conflict and dismissal is contemplated. 

It is important to understand the unique set of facts which give rise to this decision and on one level, it is unlikely that many employers will find themselves in as tight a position as Tesco. However, it is also important to understand that many of the obiter comments made in the case leave open the possibility that an employer's right to dismiss may be subject to scrutiny and challenge in future, on the basis that an employer has acted in a capricious or arbitrary way when exercising the right to dismiss.  

Facts

In the context of mass redundancies in 2007, Tesco entered into negotiations with trade union, USDAW. To avoid redundancies, it wanted some staff to relocate to stores several miles away from their original store. Tesco agreed that in return for relocation, staff at Tesco would receive an enhanced rate of pay, known as 'Retained Pay'. This was set out in a collective agreement, being described as 'permanent', and later became part of individuals' employment contracts. Many staff accepted this offer and relocated. 

In 2017, Tesco decided it was time to phase out Retained Pay and entered into unsuccessful negotiations to withdraw it. When Tesco indicated it proposed to issue notices of termination to employees if the changes could not be agreed, then offer new terms and conditions but without the Retained Pay element, USDAW successfully obtained an injunction which prevented Tesco from dismissing the staff. 

The High Court held that there was an implied term that notice would not be given so as to defeat the entitlement to Retained Pay. Tesco successfully appealed against the decision of the Court of Appeal. The Court of Appeal held that there was no basis for implying a term, it was not necessary to do so to make sense of the contract. Further, there were good policy reasons not to grant an injunction, including there being considerable uncertainty about how the rights of the parties would be set out under the terms of an injunction. 

USDAW appealed to the Supreme Court.

Decision

The Supreme Court reinstated the High Court's decision to grant an injunction. It held that, construing the express terms of the contract, the parties had intended for the Retained Pay element to be permanent. The employer made clear that the Retained Pay element could not be brought to an end except by mutual consent (or if the person was promoted to a new role). The Court did not accept Tesco's argument that it was only guaranteeing that the term would not be changed by collective agreement. 

Where one express term in a contract seems to conflict with another (here, the right to permanent Retained Pay and the employer's express right to dismiss), the Court has to consider whether a term should be implied so as to make sense of the contract. The Supreme Court held that, in-keeping with a line of cases which limit an employer's ability to dismiss where someone is entitled to permanent health insurance, here a term should be implied that Tesco would not dismiss if its aim was to remove the entitlement to Retained Pay. It was necessary to imply this term so as not to defeat the core intention of the parties as to the express term relating to Retained Pay.  

The Supreme Court did not agree with the Court of Appeal, that an injunction would lack clarity in this case. Further, it could not see there were good policy reasons for not granting an injunction for the contract to continue, where, as here, the relationship of trust and confidence was intact. Damages were held not to be an adequate remedy (also being hard to quantify), so an injunction was appropriate.

The Court made clear that the effect of the implied term (not to dismiss) is limited. It does not prevent Tesco from terminating, for example, for lack of capability, misconduct or redundancy.   

Comment

The Court pointed out that it would have been open to Tesco to negotiate a longstop date for the Retained Pay, or to make clear that Retained Pay could be withdrawn if the employee was dismissed with notice, but it did neither. In light of this case, employers should bear in mind the following:

• Be clear in drafting contractual documents and do not offer something permanent and unconditional which could hamper the right to dismiss.
• Make clear in drafting that the right to dismiss will prevail, notwithstanding the existence of a contractual benefit.
• However, clear drafting will not completely protect an employer if it sets out to dismiss in order to defeat a contractual right (due to the possibility of a term being implied). For this reason, employers should take advice if it could be said that their reason for dismissing is to defeat a valuable contractual benefit.
• In this case, pre-contractual documents were admissible in court when construing the contract. Briefings to Staff and Q and As between management and the union were all considered when deciding whether the intention of the parties was to make the Retained Pay permanent. Therefore, employers need to take care that these documents are drafted with precision and caution.  

The obiter comments in this case are of great significance. They raise the possibility that in future cases, arguments will be made that the employer's right to dismiss should not be exercised in an arbitrary or capricious way. We are not there yet but the comments leave scope for this to be the direction of travel.