Contract terms

Courts will sometimes imply contract terms as a result of “custom and practice”. In Park Cakes Ltd v Shumba and ors, the Court of Appeal said that when deciding whether they were implied, the main thing was to ascertain what the parties had “understood from each other's conduct and words, applying ordinary contractual principles”.

The Bakers, Food and Allied Workers Union instructed Thompsons to act on their members’ behalf. 

Basic facts

Following their dismissal for redundancy in the spring of 2009, four section managers claimed they were unfairly dismissed and that they were owed “enhanced” redundancy payments under the terms of their contracts.

The union argued that the payments had been made over many years when there was a redundancy situation and that they had become part of their members’ contracts by way of custom and practice. For its part, the company argued that payment was a matter of policy (not of contractual entitlement), that the policy was not communicated to employees and that the enhanced payments were not "systematically" paid to everyone dismissed for redundancy.

Decisions of lower courts

The tribunal upheld the unfair dismissal claims but rejected the claims for enhanced redundancy payments. It held that there was no formal policy giving rise to the payments and no express term entitling the claimants to them. As it was not clear on how many occasions they had been paid in previous redundancy situations, the tribunal said that it could not infer that they had been made “without exception”. It concluded therefore that, on the balance of probabilities, the claimants had not proved there was an implied term entitling them to the payments.

The EAT disagreed. It found that the question as to whether an enhanced payment had been made consistently over a substantial period and applied to a substantial number of redundancies was crucial when deciding whether it was a contractual term.

In this case, the issue of whether there had been any exceptions in the past was not a matter of inference but of direct evidence. The union had put forward undisputed evidence that there were no exceptions, and the tribunal had not expressly rejected that evidence. In view of this, the EAT found that it did not make sense for the tribunal to reach the conclusion that it had.

Court of Appeal decision

The Court of Appeal upheld the EAT’s decision. It said that, when deciding cases involving benefits which are implied into a contract by custom and practice, tribunals have to ascertain what the parties had “understood from each other's conduct and words, applying ordinary contractual principles”.

Taking that approach, the essential question in this case was whether the employer had, by providing employees with enhanced redundancy payments over a period of time, given the impression that the benefit was theirs “as of right”. The focus therefore had to be on what the employer actually communicated to the employees, not what “he may have personally understood or intended”.

Given the evidence, the tribunal’s failure to find that the claimed benefits had been paid invariably constituted a material flaw in its reasoning and the Court of Appeal remitted the case for re-hearing by a different tribunal.

It also suggested that when deciding whether the right to an enhanced redundancy benefit was implied into a contract, tribunals need to take into account all of the relevant circumstances. Relevant factors might include:

• On how many occasions and over how long a period the benefits had been paid
• If the benefits were always the same
• To what extent the enhanced benefits were publicised generally
• How the terms were described (for instance, if the term “ex gratia” was used)
• What was stated in the express contract
• If the practice could be said to be “equivocal” or not.