Transco plc v O’Brien (BG plc v O’Brien)

The implied term of mutual trust and confidence may, in appropriate circumstances, require an employer to offer an employee a variation of contract or a new contract. The issue is one of substance and context, not whether the proposed arrangement is formally a new contract.

Where improved terms are offered to a workforce, withholding them from one employee without reasonable and proper cause may breach that term. A genuine but erroneous belief about the employee’s contractual status does not justify depriving that employee of terms which would otherwise have been offered. Tribunals should apply the established trust-and-confidence test, rather than treat fairness or even-handedness as a separate contractual standard.

Transco offered most employees engaged in its property-disposal business improved contractual terms, including an enhanced redundancy package. Mr O’Brien was excluded because Transco believed that he was not a permanent employee. An Employment Tribunal had already found unanimously that he was an employee. A majority later held that he was also a permanent employee and that Transco’s failure to offer him the improved terms breached his contract.

The Employment Appeal Tribunal dismissed Transco’s appeal. Transco appealed to the Court of Appeal, contending that the implied term of mutual trust and confidence could not require an employer to offer a new contract and that its genuine belief about Mr O’Brien’s status supplied reasonable and proper cause. The central issue was whether that implied term applied to the selective withholding of the improved terms.

1. Appeal dismissed unanimously. Pill LJ gave the principal judgment, with which Longmore LJ agreed. Sir Martin Nourse agreed and added observations. Transco was ordered to pay Mr O’Brien’s costs of the appeal.

2. The implied term of mutual trust and confidence may be breached by an employer’s refusal to offer an employee a new contract or a favourable variation. The term is part of the contract from its outset. It may therefore impose a positive obligation when the employer’s conduct makes such an obligation necessary. The relevant inquiry concerns the substance and context of the employer’s proposal, rather than its formal character as a new contract or a variation.

3. Transco had offered improved arrangements to a workforce of more than 70 employees. In principle, singling out one employee and refusing the same offer on capricious grounds would be conduct likely seriously to damage trust and confidence. That conclusion accorded with the established formulation of the implied term in [1998] AC 20.

4. On the findings below, Mr O’Brien was in fact a permanent employee. Transco’s genuine, and arguably reasonable, but erroneous belief that he was not permanent did not provide sufficient cause for withholding benefits which would otherwise have been offered. The failure was therefore a breach of contract. He was to be placed in the position he would have occupied had the offer been made. Questions of loss and causation were not before the court.

5. The Employment Tribunal’s reference to treating employees fairly and even-handedly did not affect the result. Pill LJ considered that phrase surplusage and warned that it should not be used to extend, or appear to extend, the scope of the implied term. Employment tribunals should instead apply the established trust-and-confidence test.

• Court of Appeal: dismissed Transco’s appeal in [2002] EWCA Civ 379.
• Employment Appeal Tribunal: on 14 May 2001, dismissed Transco’s appeal and upheld the majority Employment Tribunal decision.
• Employment Tribunal: on 9 August 1999, by a majority, held that Transco had breached Mr O’Brien’s contract by failing to offer the improved terms and relisted the matter for remedy. An earlier tribunal had unanimously found on 19 February 1999 that he was an employee.