Edwards v Skyways Ltd

[1964] 1 ALLER 494

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(Judgment by: Megaw J)

Edwards
vSkyways Ltd

Court:

Judge:
Megaw J

Subject References:
Contract
Intention to create legal relationship
Agreement to make 'ex gratia' payment
Oral negotiations on redundancy of employees
Employing company agreeing to make 'ex gratia' payment to redundant employees
Consideration given by employees
Company subsequently rescinding agreement
Whether agreement legally binding
Uncertainty of terms
'Approximating to'
Whether agreement for payment of sum approximating to total of contributions to pension fund too vague.

Case References:
Balfour v Balfour - [1918-19] All ER Rep 860; [1919] 2 KB 571; 88 LJKB 1054; 121 LT 346
Rose and Frank Co v Crompton (JR) & Bros Ltd - [1924] All ER Rep 245; [1923] 2 KB 261; 92 LJKB 959; 129 LT 610
Thomas v Brown - (1876) 1 QBD 714
Central London Property Trust v High Trees House Ltd - [1956] 1 All ER 256; [1947] 1 KB 130
Robertson v Minister of Pensions - [1948] 2 All ER 767; [1949] 1 KB 227
Combe v Combe - [1951] 1 All ER 767; [1951] 2 KB 215

Hearing date: 1964 Jan. 15, 16, 17
Judgment date: 21 January 1964

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Judgment by:
Megaw J

The plaintiff, Captain Peter John Edwards, was employed as an aircraft pilot by the defendant company, Skyways from June, 1955, until 31 March 1962, with the rank of first officer for the first few months, and thereafter as captain. His terms of employment provided for three months' notice of termination. On 26 January 1962, the defendant company, being in financial difficulty and not having sufficient work to continue to employ all its staff, wrote a letter to the plaintiff, at the same time sending similar letters to other persons. The plaintiff was told that it would be "necessary to declare a redundancy of approximately fifteen per cent of our pilot strength", and he was given three months' notice. He was offered alternative employment either as a captain based at Lympne Airport with a subsidiary company (which would have involved him in moving his home) or as a first officer on the defendant company's four engined fleet (which would have involved reduction of pay and status).

The question of the threatened redundancy was taken up with the defendant company by the British Air Line Pilots Association, to which the plaintiff belonged. The association took the view that certain procedure which had been agreed in 1948 in the National Joint Council with regard to redundancies had not been observed by the defendant company. A meeting took place between representatives of the association and representatives of the defendant company on 8 February 1962. It is not in dispute that the representatives of the association were the duly authorised agents of the plaintiff, and that the representatives of the defendant company had full authority from that company in respect of all that was done and agreed at that meeting affecting the plaintiff. Two days before the meeting, on 6 February at a meeting of the board of directors of the defendant company, a resolution had been passed in these terms:

"The board approved that the secretary be empowered in his discussions with the British Air Line Pilots Association to agree should circumstances require to the payment to redundant aircrew members of ex gratia amount approximating to the company's contributions for each member of the Pension and Superannuation Fund."

It appears that the defendant company realised that the association would be seeking to secure some form of compensation for its members who were being declared redundant and that it was accordingly authorising the secretary, in advance, to deal with the question when it arose. The secretary of the defendant company, Mr David John Davies, himself drafted the resolution. It was based on what had been done at the time of an earlier redundancy in the defendant company in 1959, when, after discussions with the association, the defendant company had paid sums to redudant aircrew staff, the sums being at any rate closely related in amount to the total superannuation contributions made by the company in respect of the particular redundant employee.

At the meeting on 8 February 1962, the defendant company's representatives included, amongst others, Mr Davies, the secretary, and Mr Lees, the personnel officer. The association's representatives included, amongst others, Mr Follows, who was then the secretary, and Captain Clink, the chairman of the association's local committee with the defendant company, who was also an employee of the defendant company. The plaintiff himself was not present. As to what happened at the meeting, so far as is relevant to the issues in this action, there is no real dispute on any matter of substance. Each of the witnesses who gave evidence before me was truthful and fair in giving his recollection. Such minor differences as there were in their accounts of the conversations are not on matters of any real significance. I need not recount much of what took place at the meeting. The substance of it is accurately summarised in a document headed "Notes", which was prepared the next morning by Mr Follows with the assistance of Captain

Clink, on the basis of manuscript notes made during the meeting. There is no doubt that everyone present at the meeting thought that all major difficulties had been resolved and that various matters of principle had been agreed. I need mention only one of the matters discussed and agreed.

The plaintiff (and there were other pilots in a similar position) would have been entitled under his terms of service, if he left his employment with the defendant company for any reason other than dismissal for misconduct, to take a paid-up pension; that is, a pension which would, without further contribution to be made by anyone, become payable when he reached the normal retiring age stated in the pension scheme. It would be calculated by reference to the total contributions paid, up to date, by himself and by the defendant company on his account. Alternatively, the plaintiff would be entitled to withdraw his own contributions in cash. Mr Follows had in mind what had happened in the 1959 redundancy when the company had agreed to pay, and had paid, redundant pilots sums of money equivalent, at least broadly, to the company's pension contributions in respect of them, in addition to the pilots' own contributions which they were contractually entitled to withdraw. He, therefore, at the meeting, asked that similar financial compensation should be paid by the defendant company, on this occasion. Mr Davies, on behalf of the defendant company, having already in anticipation received his board's authority, quickly and readily agreed.

This agreement is recorded as follows in notes to which I have referred:

"The following general principles were then accepted in relation to the redundancy and consequential matters";

and then, after certain other matters, this appears:

"Pilots declared redundant and leaving the company would be given an ex gratia payment equivalent to the company's contribution to the Pension Fund. They would, of course, be entitled to a refund of their own contributions to the fund."

The pilots affected were informed of the various decisions and agreements in a publication called "Newsletter", addressed by the association to its members on 9 February 1962. The agreement as to the defendant company's contributions is there recorded as follows:

"After considerable discussion, the following points were agreed between the company and the association: ... To those pilots who are finally declared redundant, the company will make an ex-gratia payment equivalent to their (the company's) own contributions to the Provident or Pension Scheme."

There is reason to believe that Mr Davies, the secretary, saw this "Newsletter", and did not challenge the accuracy of what was there recorded. Mr Davies' own account of what he said on the point at the meeting is as follows:

"Having the board's authority, I said we would make ex gratia payments approximating to the company's contributions for those pilots who chose to take their contributions rather than paid-up pension policies."

I think it is probable that Mr Davies's recollection is right when he says that he himself used the words "approximating to". It may well be that both that phrase and "equivalent to" were used during the discussion. No one attached any particular significance to the point, and I do not regard verbal niceties as being of importance. Mr Davies in evidence agreed that "equivalent to" is a reasonable interpretation of what he said. Mr Lees agreed that everyone left the meeting with a clear impression that the defendant company would pay an amount equal to the defendant company's contribution. I am satisfied that that is the substance of what was understood and agreed when the meeting ended.

The issue in this action is whether, as a result of what was agreed at the meeting, the plaintiff when he decided not to accept any of the offered alternatives but to leave the company's service and withdraw his own pension contributions, acquired a legal right, to be paid by the defendant company a sum equal to the contributions which they had paid to the pension fund on his behalf. The plaintiff says that there was a legally binding contractual right. The defendant company say that, while there may have been a moral right, or an obligation binding in honour, there was not a legally enforceable right. Before considering the issue, I should complete my outline of the history of the matter.

The plaintiff, not desiring to accept the defendant company's offer of continuing employment with the various disadvantages involved, sought and obtained other employment to begin on 1 April 1962, and the defendant company agreed that the plaintiff should leave their service on 31 March before the full three months' notice had run. On 15 April 1962, the plaintiff wrote to Mr Roberts, the assistant secretary of the defendant company, asking for information to enable him to make up his mind about the option between, on the one hand, his undoubted legal right to take the paid-up pension, and, on the other hand, the right which it had been agreed (whether or not as an obligation binding in law) that he should have, to withdraw his own contributions and receive what he described (no doubt following the wording of the "Newsletter" which he had seen) as, "the amount of the ex gratia payment which the company proposes to make in the event of my taking the cash refund". Mr Roberts replied on 17 April giving him approximate figures: a paid-up policy of about £180 per annum at the age of fifty; his own contributions of approximately £630, less tax of approximately £60; and "The ex gratia payment will be approximately half as much again as your own contributions, but as this is purely ex gratia there is no question of tax." The following day the plaintiff wrote to Mr Roberts telling him how he had decided to exercise what he believed to be his option: "I have decided to take the cash refund of my contributions, with the company's ex gratia payment". The plaintiff, with the complete frankness which was characteristic of his evidence, said that he could not now be sure whether he would have exercised the option the same way, if he had not though that the defendant company were going to pay him that which they had agreed to pay in respect of their own contributions. He would certainly have thought much more deeply about it. He might still have decided to take the immediate cash provided by the refund of his own contributions.

On 1 May 1962, the defendant company sent the plaintiff a cheque for £609 1s, in respect of his own contributions. On 2 May 1962, the very day after that payment had been made to, and accepted by, the plaintiff in the belief that a further sum was to follow-because the defendant company had so promised-the board of directors of the defendant company met and passed another resolution. It was in these terms:

"It was resolved that the company's previous decision to make ex gratia payments to redundant aircrew be rescinded because of the large number of staff involved and in view of the position that the company's contributions to the scheme which were returnable to the trustees could not, under the rules of the scheme, be utilised directly by the company. Mr. Ryland and Mr. Davies would draft a letter to the staff concerned explaining the position and Mr. Davies would arrange with the insurance company for an extension of the option period to be made for all aircrew members who had already opted for cash so that they could reconsider their decision."

I offer no comment, except to mention the explanation given on behalf of the company. It is said that they found themselves in financial difficulties, with various creditors, secured and unsecured, pressing them. Although at the time when they made the promise they intended to honour it, later they thought that in the existing financial situation they should decline to honour it because they believed that it was not legally binding, and because other creditors, with legal obligations, might have been prejudiced. The company has not gone into liquidation. The plaintiff has not been paid because it was merely, as I understood the company's view, a moral obligation which it repudiated.

It is not necessary for me to set out the subsequent history, since it does not affect the issue.

Was there a legal obligation on the part of the company?

The company admits, as I understand it, that at the meeting a promise was made on its behalf with its authority, although the actual word "promise" was not used. In the defence it was pleaded that no consideration moved from the plaintiff. That plea was expressly abandoned at the hearing. It was conceded that there was consideration. The company admits that it was its intention to carry out its promise when it was made, and that the plaintiff's representatives, and the plaintiff himself, believed, and acted in the belief, that the promise would be fulfilled. Everyone, at the end of the meeting, believed that there was an agreement which would be carried out. But the company says that the promise and the agreement have no legal effect, because there was no intention to enter into legal relations in respect of the promised payment.

It is clear from such cases as Rose and Frank Co. v. J. R. Crompton & Bros. Ltd. and Balfour v. Balfour that there are cases in which English law recognises that an agreement, in other respects duly made, does not give rise to legal rights, because the parties have not intended that their legal relations should be affected. Where the subject-matter of the agreement is some domestic or social relationship or transaction, as in Balfour v. Balfour, the law will often deny legal consequences to the agreement, because of the very nature of the subject-matter. Where the subject-matter of the agreement is not domestic or social, but is related to business affairs, the parties may, by using clear words, show that their intention is to make the transaction binding in honour only, and not in law; and the courts will give effect to the expressed intention.

Scrutton L.J. expressed it thus, in Rose and Frank Co. v. J. R. Crompton & Bros. Ltd.:

"Now it is quite possible for parties to come to an agreement by accepting a proposal with the result that the agreement concluded does not give rise to legal relations. The reason of this is that the parties do not intend that their agreement shall give rise to legal relations. This intention may be implied from the subject-matter of the agreement, but it may also be expressed by the parties. In social and family relations such an intention is readily implied, while in business matters the opposite result would ordinarily follow. But I can see no reason why, even in business matters, the parties should not intend to rely on each other's good faith and honour, and to exclude all idea of settling disputes by any outside intervention, with the accompanying necessity of expressing themselves so precisely that outsiders may have no difficulty in understanding what they mean. If they clearly express such an intention I can see no reason in public policy why effect should not be given to their intention."

In the same case, Atkin L.J. said:

"To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly. Such an intention ordinarily will be inferred when parties enter into an agreement which in other respects conforms to the rules of law as to the formation of contracts. It may be negatived impliedly by the nature of the agreed promise or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in the course of family life between members of a family as in Balfour v. Balfour. If the intention may be negatived impliedly it may be negatived expressly."

In the present case, the subject-matter of the agreement is business relations, not social or domestic matters. There was a meeting of minds - an intention to agree. There was, admittedly, consideration for the company's promise. I accept the propositions of counsel for the plaintiff that in a case of this nature the onus is on the party who asserts that no legal effect was intended, and the onus is a heavy one.

Counsel for the plaintiff also submitted, with the support of the well-known textbooks on the law of contract, Anson and Cheshire and Fifoot, that the test of intention to create or not to create legal relations is "objective." I am not sure that I know what that means in this context. I do, however, think that there are grave difficulties in trying to apply a test of the actual intention or understanding or knowledge of the parties: especially where the alleged agreement is arrived at between a limited liability company and a trade association; and especially where it is arrived at at a meeting attended by five or six representatives on each side. Whose knowledge, understanding or intention is relevant? But if it be the "objective" test of the reasonable man, what background knowledge is to be imputed to the reasonable man, when the background knowledge of the ten or twelve persons who took part in arriving at the decision no doubt varied greatly between one and another?

However that may be, the company says, first, as I understand it, that the mere use of the phrase "ex gratia" by itself, as a part of the promise to pay, shows that the parties contemplated that the promise, when accepted, should have no binding force in law. It says, secondly, that even if the first proposition is not correct as a general proposition, nevertheless here there was certain background knowledge, present in the minds of everyone, which gave unambiguous significance to "ex gratia" as excluding legal relationship.

As to the first proposition, the words "ex gratia," in my judgment, do not carry a necessary, or even a probable, implication that the agreement is to be without legal effect. It is, I think, common experience amongst practitioners of the law that litigation or threatened litigation is frequently compromised on the terms that one party shall make to the other a payment described in express terms as "ex gratia" or "without admission of liability." The two phrases are, I think, synonymous. No one would imagine that a settlement, so made, is unenforceable at law. The words "ex gratia" or "without admission of liability" are used simply to indicate - it may be as a matter of amour propre, or it may be to avoid a precedent in subsequent cases - that the party agreeing to pay does not admit any pre-existing liability on his part; but he is certainly not seeking to preclude the legal enforceability of the settlement itself by describing the contemplated payment as "ex gratia." So here. There are obvious reasons why the phrase might have been used by the company in just such a way. It might have desired to avoid conceding that any such payment was due under the employers' contract of service. It might have wished - perhaps ironically in the event - to show, by using the phrase, its generosity in making a payment beyond what was required by the contract of service. I see nothing in the mere use of the words "ex gratia," unless in the circumstances some very special meaning has to be given to them, to warrant the conclusion that this promise, duly made and accepted, for valid consideration, was not intended by the parties to be enforceable in law.

The company's second proposition seeks to show that in the circumstances here the words "ex gratia" had a special meaning. What is said is this: when a payment such as this is made by an employer to a dismissed employee the question whether it is subject to income tax in the hands of the recipient is important. It was understood by the company and by the association, and by all their respective representatives at the meeting, that if the company's payment were made as the result of a legally binding obligation, it would be taxable in the hands of the recipient; whereas, if it were to be made without legal obligation on the part of the company, it would not be taxable. It was not argued before me whether this assertion is right or wrong in law. It was said by the company that that is quite immaterial; what is material is that the parties so believed. Thus, it is said, the phrase "ex gratia" was used, and was understood by all present to be used, deliberately and advisedly as a formula to achieve that there would be no binding legal obligation on the company to pay, and hence to save the recipient from a tax liability. It is said that the offer was accepted by the association with full knowledge and understanding of these matters. Hence, it is said, the agreement by tacit consent, a consent evidenced by the use of the words "ex gratia" against this background of common understanding, was an agreement from which legal sanction and consequences were excluded.

In my judgment, that submission also fails because the evidence falls far short of showing that this supposed background of avoidance of tax liability was present as an important element in the minds of all, or indeed any, of the persons who attended the meeting of February 8; or, if this be something different, in the minds of the company or of the association; or that they all, or any of them, directed their minds to the significance of the words "ex gratia" which is now suggested on behalf of the company. The question of the liability, and the possible influence thereon of the use of the words "ex gratia," may indeed have been present in some degree, and as one element, in the minds of some of the persons present at the meeting. That, however, is far from sufficient to establish that the parties - both of them - affirmatively intended not to enter into legal relations in respect of the company's promise to pay.

Lastly, the company say that, even if the agreement were otherwise in all respects a binding agreement, it is not enforceable because its terms are too vague. This is founded on the submission that the precise words used by Davies at the meeting were "approximating to"; that these precise words are a part of the agreement; that they leave a discretion to the company; that therefore there is no enforceable agreement, and they can refuse to pay anything. I have already indicated my conclusion on the evidence as to what was indeed agreed at the end of the meeting. If this be right, there is nothing in this point. Even if it were wrong, I do not think that English law provides that in such circumstances the plaintiff would be entitled to nothing. At most "approximating to," if that were the contractual term, would on the evidence connote a rounding off of a few pounds downwards to a round figure. If a contract for the sale of goods is valid and binding when it provides for "about 1000 tons in seller's option," or "1000 tons, up to 10 per cent. more or less in buyer's option," it would seem hard to justify treating such a contract as this as a nullity, and I do not think that the law so requires.

I do not have to consider a further issue of alleged failure to mitigate damages, as this was expressly abandoned by the company at the hearing.