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

The Supreme Court held that a term should be implied into the claimants' contracts of employment so as to prevent the employer from exercising its contractual right to terminate by notice for the purpose of removing or diminishing a separately promised "permanent" retained pay entitlement. The court applied the ordinary objective and contextual approach to contractual interpretation and, on the facts, found the implied term necessary to give business efficacy and to avoid defeating the purpose of the retained-pay promise. The court further concluded that an injunction amounting to indirect specific performance was available because (i) there was no breakdown of mutual confidence, and (ii) damages would be an inadequate remedy given the difficulties of assessment and unrecoverable non-pecuniary losses.

This was an appeal against the Court of Appeal's decision overturning Ellenbogen J, who had found that Tesco could not lawfully terminate the employment of certain employees in order to remove a contractual retained-pay entitlement. The dispute concerned the interpretation and effect of a retained pay clause incorporated from a 2010 collective agreement into individual employment contracts for employees who had relocated in 2007. The retained pay constituted a substantial part of pay and had been described in pre-contractual materials as "guaranteed for life" or a "permanent feature" of contractual eligibility.

Nature of the claim: the claimants sought declarations as to the contractual nature and extent of the retained pay entitlement and injunctive relief to restrain Tesco from removing retained pay by dismissal and re-engagement.

Procedural history: Ellenbogen J (High Court) found for the claimants and granted a permanent injunction ([2022] EWHC 201 (QB)); the Court of Appeal ([2022] EWCA Civ 978) overturned that decision; the appeal came to the Supreme Court.

Issues framed:

• whether the retained pay clause should be interpreted so as to prevent Tesco exercising its contractual right to dismiss on notice for the purpose of removing retained pay;
• whether, if necessary to give effect to the retained-pay promise, a term is to be implied by fact into the contracts (business efficacy/obviousness tests);
• whether injunctive relief amounting to indirect specific performance should be granted despite the general rule disfavoring specific performance of contracts for personal service.

Court’s reasoning: the court applied the usual objective and contextual approach to interpretation and accepted the parties' concession that pre-contractual explanatory materials were admissible and relevant. The word "permanent" in the retained-pay clause was held to mean more than mere continuation while the contract subsisted: it was an inducement to relocate and must have been intended to endure subject only to the expressly stated qualifications. Without an implied term preventing dismissal for the purpose of defeating retained pay, the promise of permanence would be illusory. Applying established tests for implication (business efficacy and obviousness) the court concluded that the implied term was necessary and compatible with the express terms. The court also held that an injunction amounting to indirect specific performance was appropriate: there was no loss of mutual confidence, damages would be difficult to assess and inadequate in principle, and the injunction did not improperly rewrite the parties' bargain.

Wider context: the court treated the case as an unusual but principled application of the line of authority on implied terms in employment contracts (including permanent health insurance cases) and confirmed that, in limited circumstances, indirect specific performance can be ordered against an employer where necessary to give effect to contractual promises.

Appeal allowed. The Supreme Court held that a term must be implied into the affected employees’ contracts preventing Tesco from exercising its contractual right to terminate on notice where the purpose was to remove or diminish the right to permanent retained pay; the injunction granted by Ellenbogen J was reinstated because damages would be inadequate and there was no lack of mutual confidence.

High Court (Ellenbogen J) [2022] EWHC 201 (QB) — claimants succeeded; Court of Appeal (Bean LJ, Newey & Lewis LJJ) [2022] EWCA Civ 978 — appeal allowed by Tesco, Ellenbogen J's decision overturned; Supreme Court [2024] UKSC 28 — appeal allowed and Ellenbogen J's injunction reinstated.