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

An employer’s express power to terminate employment on notice may be qualified by a term implied in fact where its exercise for a particular purpose would defeat an important contractual promise. The implied restriction must satisfy the strict tests of business efficacy or obviousness, be clearly expressible, remain consistent with the express terms and go no further than necessary.

A court may exceptionally restrain dismissal even where the injunction amounts to indirect specific performance of an employment contract. Such relief may be granted where the employer retains sufficient confidence in the employees, it is otherwise just to make the order and damages are inadequate.

Tesco offered retained pay as an incentive for experienced employees to relocate when distribution centres closed. The collectively negotiated term, incorporated into individual employment contracts, described retained pay as permanent and changeable only by mutual consent, subject to specified exceptions. In 2021 Tesco proposed to remove it by dismissing employees who refused to agree and offering re-engagement without retained pay.

The High Court granted declarations and an injunction: [2022] EWHC 201 (QB). The Court of Appeal reversed that decision: [2022] EWCA Civ 978. The central issues were whether an implied term prevented dismissal for the purpose of removing retained pay and whether a final injunction could restrain that course.

1. The appeal was allowed unanimously and the High Court injunction was reinstated. Lord Burrows and Lady Simler delivered the principal judgment, with which Lord Lloyd-Jones agreed. Lord Leggatt and Lord Reed gave concurring judgments.

2. The retained-pay clause meant that the entitlement was not time-limited and would continue while employment in the same role continued, subject to its express qualifications. It was not a promise of permanent employment. Tesco’s construction would nevertheless deprive the promise of permanence of substance because Tesco could remove the benefit at any time by dismissal and re-engagement.

3. A term was necessarily implied in fact that Tesco’s power to terminate on notice could not be exercised for the purpose of removing or diminishing an employee’s right to retained pay. The term satisfied the business-efficacy test and, alternatively, the obviousness test. It was clear, no wider than necessary and qualified rather than contradicted the express termination power. Tesco remained free to dismiss for an unrelated reason, including capability, misconduct or genuine redundancy.

4. The circumstances and explanatory material showed that permanent retained pay induced employees to relocate rather than accept redundancy. The parties could not objectively have intended Tesco to retain a unilateral power to defeat that inducement whenever it suited its business purposes. The permanent-health-insurance cases and analogous decisions concerning contractual redundancy and loan-waiver benefits illustrated the broader principle that an implied term may restrict dismissal where necessary to prevent the employer defeating the very contractual benefit promised.

5. The injunction amounted in substance to indirect specific performance of Tesco’s obligation to continue employing the affected employees on retained-pay terms. Although employment contracts are generally not specifically enforced against employers, the rule permits exceptions. Relief was justified because Tesco retained confidence in the employees, as demonstrated by its offer to re-engage them on otherwise identical terms, and damages were inadequate. Damages would require speculation about future employment and mitigation and would exclude relevant non-pecuniary losses.

6. Lord Leggatt agreed that the restriction was the minimum term necessary to prevent an important contractual purpose from being defeated. Lord Reed agreed but declined to endorse Lord Leggatt’s wider discussion suggesting that contractual powers are generally subject to good-faith restrictions. That wider issue did not require determination.

1. United Kingdom Supreme Court: Allowed the appeal unanimously and restored the High Court injunction: [2024] UKSC 28.
2. Court of Appeal: Allowed Tesco’s appeal and set aside the High Court’s decision and injunction: [2022] EWCA Civ 978.
3. High Court: Ellenbogen J granted declaratory relief and a final injunction restraining termination for the purpose of removing or diminishing retained pay: [2022] EWHC 201 (QB).