Custom and practice

Sometimes terms that have been regularly adopted in a particular trade or industry and have become standard practice are said to be implied through custom and practice. This happens when the point is reached at which both parties must be taken by their behaviour to have accepted that their practice has crystallised into a contractual obligation. This is often very difficult to prove. In CSC Computer Sciences Limited v McAlinden [2013] EWCA Civ 1435, the Court of Appeal criticised the language of “custom and practice’ as unhelpful. The basic test, said the Court of Appeal, is whether the parties’ behaviour, judged by an informed outside observer, reasonably suggests that they believe themselves to be bound by a legal obligation.

For a contract term to be implied based on custom and practice, it must be “reasonable, notorious and certain” (Devonald v Rosser & Sons [1906] (2) KB 728). This just means that there must be widespread knowledge of the term and a widespread expectation that it will be legally enforced (Garratt v Mirror Group Newspapers Limited [2011] ICR 880).

It is not enough to show that something has happened for a certain length of time. There must be evidence that both parties intended it to be part of the contract. For example, in North Lanarkshire Council v McDonald [2006] UKEATS/0036/06, the fact that workers had worked half an hour of overtime every day for a year did not make the extra hours a contractual right.

In Park Cakes Limited v Shumba [2013] EWCA Civ 934, a case about an implied right to enhanced redundancy pay, the Court of Appeal gave useful new guidance as to when a term will become incorporated into an employment contract through custom and practice. Here is a brief summary of that guidance:

• the more often and the longer benefits have been paid, the more likely it is that employees will reasonably regard them as a contractual right;

• if payments are always the same, this suggests a contractual right, but if an employer varies the amount, this suggests that the employer is exercising a discretion. However, an employer could bind itself to pay a minimum sum, while at the same time reserving the right to top it up on a discretionary basis;

• publicising the availability of enhanced benefits generally to the workforce (either directly or via a trade union) suggests that the employer acknowledges a legal obligation;

• using the contractual language of entitlement, for example “shall” and “must”, points to a contractual obligation, whereas discretionary language, for example “ex-gratia” or “policy” points the other way;

• no term can be implied, whether by custom or otherwise, that is inconsistent with the express contract terms, unless there is evidence that the parties intended to vary their contract;

• if the employer’s actions, viewed objectively, are equally consistent with a discretion rather than a legal obligation, a court is unlikely to find a contractual obligation based on custom and practice.

In CSC Computer Sciences Limited v McAlinden [2013] EWCA Civ 1435, the Court of Appeal said that an employer’s decision to negotiate with the recognised union to change an established practice was strong evidence that the employer regarded the practice as contractually binding.

In Horkulak v Cantor Fitzgerald International [2004] IRLR 942, a case about a discretionary bonus, the Court of Appeal held that where a term is discretionary, there is an implied term that the employer will exercise its discretion genuinely and rationally.

For more examples of terms implied based on custom and practice, and guidance on whether a term is likely to be judged discretionary or contractual in the context of enhanced redundancy pay, see Chapter 11: Redundancy pay.

Well established implied terms include the duty not to destroy mutual trust and confidence and the duty of good faith which bind both employer and employee. Neither party should, without “reasonable and proper cause” act in a manner that is likely to destroy the trust or confidence that exists between employer and employee. For example, an employee who gives away trade secrets would be in breach of this implied duty (Ticehurst and Thompson v BT [1992] IRLR 219).

Tribunal case law contains many examples of claims based on allegations of fundamental breach by the employer of the implied contractual duties, especially the duty of mutual trust and confidence. A fundamental breach of the employment contract can give rise to a right to resign and to claim constructive unfair dismissal in the employment tribunal, or wrongful dismissal in the civil courts. For more information, see Chapter 10: Constructive dismissal.

Employers can be in breach of an implied contract term if they negligently misrepresent a situation, leading employees to change their position. In Hagen v ICI Chemicals [2002] IRLR 31, employees agreed to transfer under TUPE (see Chapter 12) because they were told their pension rights would be broadly unaffected, but this was not correct and some employees lost out substantially. The High Court held that this was a breach of contract and that the employees could sue their old employer for damages.

In IBM UK Holdings Limited v Dalgleish [2014] EWHC 980, the Court of Appeal ruled that IBM breached the implied duty of mutual trust and confidence by failing to consult properly over important changes to its pension scheme. The court said that pension scheme members were entitled to be consulted in line with IBM’s own published statements of principle and “core values” which said, for example, that management must “never make misrepresentations” and that “honesty based on clear communication is integral”. IBM managers had misled scheme members, failed to consult them with an open mind and failed to reveal their true motives, and this, ruled the court, was a breach of its implied contractual duty.

Where a term has not been negotiated with an individual employee, the Supreme Court has held that the employer has an implied duty to take reasonable steps to bring that term to their attention (Scally and others v Southern Health Board [1991] IRLR 522). The ruling came in the case of four doctors who were unaware of their right to purchase additional years towards their pension entitlement (Ibekwe v London General Transport Services Ltd [2003] IRLR 697).

The duty to inform does not oblige the employer to advise employees of their best choice (University of Nottingham v Eyett [1999] IRLR 87) or to protect their economic well-being (Crossley v Faithful & Gould Holdings [2004] IRLR 377). If the employment contract gives the employer the right to choose how to terminate it, either at the end of its term or with a payment in lieu of notice, there is no implied term that the choice will be exercised in a way that would be most beneficial to the employee (Reda v Flag Ltd [2002] IRLR 747) (see also Chapter 10: Dismissal, page 268).