Nicholls v Greenwich [2003] EWCA Civ 416

Case No A1/2002/1400[2003] EWCA Civ 416
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT APPEAL
TRIBUNAL
Venue Royal Courts of Justice
Strand,
London, WC2A 2LL
Thursday 3 rd April 2003
Before
THE PRESIDENTLORD JUSTICE MUMMERYLORD JUSTICE MAY
Between
MRS RITA NICHOLLSAppellantLONDON BOROUGH OF GREENWICHRespondent
(Transcript of the Handed Down Judgment ofSmith Bernal Wordwave Limited, 190 Fleet StreetLondon EC4A 2AGTel No: 020 7421 4040, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
JAMES GOUDIE QC and NAOMI CUNNINGHAM (instructed by John Clinch, Employment Rights Unit, UNISON) for AppellantJOHN CAVANAGH QC and JANE McCAFFERTY (instructed by London Borough of Greenwich) for Respondent
JudgmentAs Approved by the CourtCrown Copyright ©Date 2003-04-03

The Issue

[1]This appeal raises a significant point on the application of a basic constitutional principle: in the absence of clear language to the contrary, legislation, in general, and subordinate legislation, in particular, should not be construed to operate retrospectively to the detriment of substantive private rights. In this case the substantive private right is that of an employee to be paid the full amount of a retirement gratuity validly promised by a public authority employer in a contract of employment. The contract pre-dated the subordinate legislation relied on by the employer as setting a statutory cap on the maximum amount now lawfully payable as a retirement gratuity.[2]The correct approach to statutory construction was stated by Lord Brightman in the Privy Council case of Yew Bon Tew v. Kenderaan Bas Mara [1983] 1 AC 553 at 558-559 in terms subsequently approved by the House of Lords in Arnold v. Central Electricity Generating Board [1988] AC 228: “ Apart from the provisions of the interpretation statutes, there is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation unless that result is unavoidable on the language used. A statute is retrospective if it takes away or impairs a vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability, in regard to events already past.” ( See also Halsbury’s Laws Vol 44(1) (4th Ed) at paragraph 1067)[3]It has been said that simple fairness is the basis of the “presumption” that Parliament does not intend to interfere retrospectively with established private rights. Simple fairness is not a bad starting point in this case.

The Facts

[4]On 1 April 1982 Mrs Rita Nicholls, the appellant, was taken on as a part-time school cleaner by the Inner London Education Authority (ILEA). Her normal working week was 22½ hours. She was not entitled to a pension on retirement, as the contractual minimum number of working hours for membership of the pension scheme was 30 hours each week.[5]On 6 April 1982 Mrs Nicholls was supplied with a written statement of her conditions of engagement. They incorporated the provisions of collective agreements from time to time set out by the Greater London Joint Council for Local Authority Service (Manual Workers), the Staff Code and local agreements. The provisions entitled her to a gratuity payment upon retirement in the sum of two weeks pay for every year of service.[6]Mrs Nicholls worked at Alderwood Junior Mixed and Infants School, Eltham until she retired. ILEA was her employer until it was abolished in April 1990. Her employment was then transferred to the respondent London Borough of Greenwich, Direct Services Organisation (the Council). She was issued with a Letter of Engagement dated 1 August 1991, repeating her entitlement to a gratuity payment upon retirement in accordance with the ILEA Scheme. It also stated that her continuous previous service commenced on 1 April 1982.[7]It is common ground that her employment was transferred from ILEA to the Council on 1 April 1990 under the Education (Inner London Education Authority) (Staff Transfer) Order 1990 (SI 1990/59) made under s 172 of the Education Reform Act 1988. The Council now concedes that the term in the contract of 1 April 1982 purporting to provide for a retirement gratuity was carried over to the Council and was in continuous existence from 1982 until her retirement in 2000.[8]On 15 February 2000 Mrs Nicholls retired at the age of 65. In purported exercise of powers under the Local Government (Discretionary Payments) Regulations 1996 (the 1996 Regulations) the Council made her a payment of £1,171.94 in May 2000. She was informed that the sum had been calculated “on the basis of the current regulations that govern gratuity payments.”. The understanding of the Council was that the effect of the decision of this court in Allsop v. North Tyneside MBC [1992] ICR 639 (Allsop) was that it did not have power to make any gratuity payments in excess of the limits set by regulations made in 1986, 1987 and 1996 under s 7 of the Superannuation Act 1972. Regrettably, this view was not communicated to Mrs Nicholls during the course of her employment by the Council.[9]Mrs Nicholls claims that she should have been paid a total of £4,075.58. That is the amount of the retirement gratuity due to her under her contract of employment based on her earnings of £119.87 per week at the date of her retirement.

The Proceedings

[10]On 8 May 2000 Mrs Nicholls presented an application to the employment tribunal complaining of breach of contract by the Council in failing to pay the full contractual entitlement in accordance with the ILEA scheme. She claimed £2,903.64 damages.[11]The Council denied that Mrs Nicholls was paid less than she was entitled to under the terms and conditions of her employment. It contended that the retirement gratuity term in the 1982 contract became unenforceable and that it was beyond its power to pay the promised sum, as it exceeded the statutory maximum payable under the regulations.[12]Mrs Nicholls lost her case in the employment tribunal. The extended reasons sent to the parties on 29 September 2000 concluded that the contractual term for the payment of the gratuity, though valid when it was entered into, had become unenforceable, as it was no longer lawful for the Council to make payments in excess of those prescribed by the regulations, as interpreted in Allsop. There was therefore no breach of contract. The employment tribunal concluded that the gratuity payment made by the Council to Mrs Nicholls was not made pursuant to the contract of employment, but pursuant to the Council’s exercise of its discretionary powers under regulations, which set the maximum payable.[13]Her appeal was unsuccessful for the reasons given in the judgement delivered by Bell J on behalf of the employment appeal tribunal on 14 June 2002. It was held that, on the binding authority of Allsop, the relevant regulations were to be interpreted as forbidding the Council to pay the agreed amount, as it was in excess of the maximum allowed by the regulations.[14]The appeal tribunal proceeded primarily on the basis that August 1991 was the relevant date for determining the lawfulness of the Council’s agreement to grant her a retirement gratuity exceeding the amount allowed by the regulations. On that approach the retrospectivity point did not assume the importance that it has on this appeal.[15]As noted in paragraph 7 above the Council now concedes that the term on which Mrs Nicholls bases her claim was in continuous existence from 1982 until her retirement and that it does not simply date from August 1991. But the Council relies on the comment of the appeal tribunal (paragraph 44 of its extended reasons) that the regulations, as interpreted in Allsop, forbade the Council from making, years later, payment in the amount agreed, so that “It would have made no difference if the agreement had been made, as it was with ILEA, before the 1987 Regulations came into effect.”[16]The employment appeal tribunal, like the employment tribunal, regretted that Mrs Nicholls had not been told by the Council about the change of position. It comes as no surprise that each tribunal expressed sympathy for her position. The appeal tribunal considered that her case justified further argument before the level of court which decided Allsop. So it granted her permission to appeal.

The Relevant Legislation

[17]It is convenient to set out at this stage and in one place all the material parts of the legislation.

Local Government Act 1933

[18]Section 105 contained the statutory power of local authorities prior to 26 October 1972 to pay to an “officer,” appointed under that section for the efficient discharge of the Council’s functions, “such reasonable remuneration as they may determine.”

Local Government Superannuation Act 1953

[19]Section 18 empowered local authorities to pay to their employees, on ceasing to be employed by them, a gratuity by way of a lump sum not exceeding an amount equal to twice that of the annual emoluments of the employment.

Local Government Act 1972

[20]Under s 111 local authorities had power to do any thing “which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions.”[21]Section 112 contains the statutory power of local authorities after 26 October 1972 to appoint and to pay employees. It provides that:
“(2) An officer appointed under subsection (1) above shall hold office on such reasonable terms and conditions, including conditions as to remuneration, as the authority appointing him think fit.”

Superannuation Act 1972

[22]There has always been a statutory maximum on the amount that a local authority could pay its employees on termination of their employment as a gratuity in recognition for past services. The 1972 Act repealed s 18 of the Local Government Superannuation Act 1953 and by s 7 conferred power on the Secretary of State to make regulations providing for the payment of pensions, allowances or gratuities:- “ (1) The Secretary of State may by regulations make provision with respect to the pensions, allowances or gratuities which, subject to the fulfilment of such requirements and conditions as may be prescribed by the regulations, are to be, or may be, paid to or in respect of such persons, or classes of persons, as may be so prescribed, being- (a) persons, or classes of person, employed in local government service…”[23]As no regulations were made under s7 until 1986, s 18 of the 1953 Act was deemed to remain in force and the statutory maximum was 104 weeks’ pay (i.e. a “lump sum not exceeding an amount equal to twice that of the annual emoluments of the employment.”). That was the maximum in force at the time the contract of employment was made with Mrs Nicholls. The maximum was not exceeded by the retirement gratuity provision in the contract.[24]According to the “two weeks per year” formula an employee would have to be employed for 52 years before the statutory maximum was exceeded. If the retirement age was 65 it was in practice impossible between 1953 and 1986 for the formula to produce a gratuity in excess of 104 weeks’ pay.[25]S 12 (1) provides that “ Any regulations made under section 7….of this Act may be framed so as to have effect as from a date earlier than the making of the regulations.”[26]The material parts of the regulations made under ss 7, 12 and 24 of the 1972 Superannuation Act provided that “K3 (1) The body who employed a person to whom this Part applies may grant to him….a gratuity which may consist of a lump sum or an annuity or both. K4 (1) The amount of a gratuity …is not to exceed [formula for calculation of maximum][27]So a new statutory maximum was set. The “two weeks per year formula” in Mrs Nicholls’ contract exceeded the maximum calculated in accordance with the new formula.[28]Regulation 41 consolidated the power to pay a gratuity on retirement in the following terms:- “41(1) Where a person – (a) who has been employed by a LGPS [Local Government Pension Scheme] employer for at least five years; or (b)…. ceases to be so employed….the LGPS employer may make him a discretionary grant (“a retirement gratuity”).(2) A retirement gratuity may consist of a lump sum or an annuity or both.(3) The amount of a retirement gratuity….must not exceed….[formula for calculation of maximum] (a) who has been employed by a LGPS [Local Government Pension Scheme] employer for at least five years; or (b)….

Education Reform Act 1988

[29]The agreed effect of s 172 and the Order made under it was that Mrs Nicholls’ contract of employment was not terminated on the abolition of ILEA, but had effect from the abolition date as if originally made between her and the Council as the successor authority.

Education (Inner London Education Authority)(Staff Transfer) Order 1990

[30]The agreed effect of the Order was that the Council was designated as the successor authority in relation to the school where Mrs Nicholls worked throughout her employment with ILEA and the Council.

Common Ground

[31]On this appeal there was some common ground between Mr Goudie QC, who appeared for Mrs Nicholls, and Mr Cavanagh QC, who appeared for the Council.(1) Mrs Nicholls was an “officer” for the purposes of s 112 of the 1972 Act, though it is denied by the Council that the “two weeks per year” retirement gratuity term of her contract of employment was a term on which she was appointed to “hold” office within the meaning of s 112(2) of the 1972 Local Government Act.(2) The Council can only do what it has statutory power to do. The Council can only lawfully make payments to Mrs Nicholls under an express or implied statutory power.(3) The “two weeks per year” term of Mrs Nicholls’ contract was lawful when it was agreed in April 1982 and that, not the document issued in August 1991, was the relevant contract of employment.

The Issues

[32]The crucial issue is whether the employment tribunal erred in law in holding that, on the retirement of Mrs Nicholls, the lawfully agreed retirement gratuity could not be lawfully paid to her in consequence of the regulations made under the 1972 Superannuation Act, as interpreted in Allsop. That raises the question whether the relevant regulations, correctly construed, operate retrospectively and, if they do, whether the primary legislation in the 1972 Act conferred on the Secretary of State power to make subordinate legislation with detrimental retrospective effect on vested private rights.

The Legal Position

[33]With the benefit of the excellent submissions from each side, I have reached the conclusion that the appeal should be allowed and that Mrs Nicholls is entitled to be paid damages by the Council for non-payment of the full amount of the retirement gratuity promised in her contact of employment. A. The Contract of Employment[34]It is agreed that ILEA had power under s 112(2) of the Local Government Act 1972 to make a contract of employment with Mrs Nicholls on 1 April 1982. The only issue on the initial validity of the contract is whether the term or condition for payment of a retirement gratuity was one on which she was appointed to “hold” office within the meaning of s 112(2), The Council argued that it had no power under s 112 (or, for that matter, under s 111) to agree to make payments to an employee on the termination of employment. It contended that Mrs Nicholls did not “hold” office on that term, as the object and effect of the retirement gratuity term was to provide for a payment which would only be made to her when she ceased to hold office.[35]I have no hesitation in rejecting this argument. The promise of payment of a retirement gratuity was a term or condition of the contract appointing Mrs Nicholls to hold office as a school cleaner. It was a part of her employment package. It cannot be said that it was a term which no reasonable local authority would have agreed on making such an appointment. It can fairly and reasonably be described as a term on which a person “holds” office, even though it relates to termination of employment. Contracts of employment almost invariably contain express provisions relating to the termination, as well as to the continuation, of employment, such as notice provisions, payments on termination and post-termination obligations.[36]Further, as will be explained in paragraphs 42 to 50 below, the decision of this court in Allsop is not, contrary to the Council’s contention, binding authority for the sweeping proposition that a local authority has no power under s 112 to agree contractual terms for termination payments upon leaving office. As will also appear Allsop is clearly distinguishable. B. Retrospectivity of the Regulation-making power[37]The Superannuation Act 1972 should not, unless the statutory language makes that result unavoidable, be construed as conferring power on the Secretary of State to make regulations prohibiting or disabling local authorities from honouring contracts, which have been validly entered into, and depriving employees of their vested contractual rights. It would be unusual for such a far reaching power to be delegated by Parliament. Mr Cavanagh found an example of a delegated power to make retrospective provision in s 2(4)(f) of the School Teachers’ Pay and Conditions Act 1991. It expressly confers power on the Secretary of State to make pay and conditions orders, including provision which is retrospective, though subject to limitations. He also referred to retrospective provisions in the Local Government Superannuation (Miscellaneous) Regulations 1987 (SI 1987 No 293) made under ss 7 and 12 of the Superannuation Act 1972. In the light of s 12 of the 1972 Act I am prepared to assume for the purposes of this judgment that the Secretary of State could exercise the power to make regulations with respect to contractual gratuities framed so as to take effect from a date earlier than the making of the regulations and prohibiting payments of gratuities from being made under existing contracts. C. Retrospectivity of the Regulations[38]At the date when regulations were first made under s 7 of the Superannuation Act 1972 Mrs Nicholls already had a vested contractual right to be paid a gratuity at a future date (i.e. on her retirement). If, correctly construed, the regulations prohibited or disabled the employer (be it ILEA or the Council) from making the promised payment, that would give the regulations a retrospective effect within the principle stated by Lord Brightman in paragraph 2 above. Do the regulations have that meaning and effect?[39]The Council submits that they do. It contends that the lawfulness of the payment of a retirement gratuity has to be judged according to the statutory scheme in effect at the time when the payment falls to be made. The 1996 Regulations governed the position in February 2000. Further, the Council is not entitled to rely on the general power in s 112 of the Local Government Act 1972 to pay a gratuity in excess of the maximum permitted by the 1996 Regulations.[40]In my judgment, the Council’s arguments do not begin to meet the crucial point that, as a matter of construction, the 1996 Regulations are not framed so as to operate retrospectively and to deprive Mrs Nicholls of her vested contractual right to be paid what was validly agreed in her contract of employment 14 years earlier. The regulations made under s 7 of the 1972 Act are capable of applying to contracts entered into after the regulations came into force; but I can find nothing in the language of the regulations clearly applying the new statutory cap retrospectively to a pre-existing entitlement which falls for payment after the regulations were made. The contract under which Mrs Nicholls makes her claim pre-dated the cap imposed by the regulations. It was validly made in respect of sums which did not exceed the statutory maximum in force at the date of the contract. Mrs Nicholls does not claim more than the maximum permitted at the time the promise to pay was made.[41]As I have formed the view that the Council’s defence relies on a retrospective effect which the regulations, properly construed, do not have, it is unnecessary to express a concluded view on the other points which have been debated on the construction of the regulations: in particular, whether contractual entitlements, as distinct from non-contractual discretionary grants, are caught by the provisions in the regulations relating to “pensions, allowances and gratuities” D. The Ratio of Allsop[42]In his written submissions Mr Goudie accepted that Allsop appeared to present him with “certain difficulties”, but contended that, correctly understood, the ratio of the decision does not prevent Mrs Nicholls from succeeding in her claim for damages for breach of contract. I agree.[43]In Allsop the district auditor declared that payments made by the North Tyneside Metropolitan Borough Council under an “enhanced voluntary severance scheme”, established by it in connection with its policy of not making employees compulsorily redundant, were unlawful. The payments were considerably in excess of the amounts which the council was obliged to pay under the employment legislation (s 81 Employment Protection (Consolidation) Act 1978) and of amounts which it was obliged or empowered to pay under the regulations made under ss 111 and 112 of the Local Government Act 1972. There was no obligation under any existing contract of employment between the council and its employees pre-dating the introduction of the scheme.[44]The Court of Appeal held that s 112 did not authorise the local authority to make the enhanced payments under its scheme and that the payments were unlawful. The ratio of the case, which can be derived from the judgment of Parker LJ (concurred in by McCowan LJ and Sir John Megaw), was that the powers of the local authority to make payments to employees under either ss 111 or 112 of the Local Government Act 1972 were subject to the regulations made by the Secretary of State pursuant to sections 7 and 24 of the Superannuation Act 1972; that the payments under the scheme were for redundancy; and that the regulations under the Superannuation Act did not authorise the council to make payments for redundancy in excess of redundancy payments provided for in the employment legislation.[45]The Appellate Committee of the House of Lords rejected the council’s petition for leave to appeal against the decision.[46]There was no issue in Allsop on the retrospective effect of the regulations under the 1972 Act on the established rights of employees under pre-existing contracts of employment. As Parker LJ made clear, the preliminary issue for decision was whether the payments upon redundancy, for which the scheme provided, were payments which the council had power to make under the regulations in excess of what it was obliged to make under the employment legislation: see pp. 643D and 649B. The whole of the judgement, including statements about the degree of control over superannuation given to the Secretary of State in regulations made under s7, must be read in that context.[47]Mr Cavanagh contended that Allsop is binding authority for the proposition that, by virtue of s 7 of the Superannuation Act 1972 and the regulations made under it, Parliament intended to give to the Secretary of State, as distinct from local authorities, complete control of matters of retirement benefits falling within its ambit and that included control over the matter whether a person in the position of Mrs Nicholls was entitled to be paid the full amount of her retirement gratuity in accordance with a contract ante-dating the regulations. The comprehensiveness of the Secretary of State’s control over local government expenditure in the form of “pensions, allowances and gratuities” was intended to extend to the post-regulations performance of pre-regulations contractual obligations to pay retirement gratuities. He cited examples, such as s 72 of the Race Relations Act 1976, s 1 and 49 of the Minimum Wage Act 1998 and the Working Time Regulations 1998, of obligations under existing contracts of employment being varied or affected by new legislation. He submitted that the existence and extent of the power to make a payment to which the regulations applied must be tested at the time of the payment, not just at the time of contract. The amount payable had to be calculated by reference to the years of service worked down to the date of retirement when payment fell due. The payment to Mrs Nicholls could only be made lawfully if and to the extent that it was permitted by the regulations made under s 7 of the Superannuation Act 1972.[48]Mr Cavanagh cited the passage from the judgment of Parker LJ at p. 647H-648A:
“ …the plain intention of Parliament [was] that the Secretary of State , subject to Parliamentary power to annul regulations in accordance with the Act, should be in complete charge of what is to be or may be paid on redundancy in addition to the payments provided for by the Act of 1978 [Employment Protection (Consolidation) Act 1978].”
[49]Those general statements about the powers of the Secretary of State must, of course, be read in the context of the decision on the disputed legitimacy of the council’s attempt to use the local government legislation to do indirectly what it was not obliged to do directly under the redundancy payments provisions of the employment legislation.[50]Allsop is clearly distinguishable from the instant case. It was not concerned with contractual payments at all, whereas the instant case is brought to enforce a term in a contract preceding the making of the regulations under s 7. The contract and the particular term for a retirement gratuity were fully valid and binding when made. The contractual ceiling on the amount of the lump sum was the same as the statutory ceiling in force at the time that the contract was made. The decision in Allsop does not bind this court to reject a claim to enforce a vested right under a pre-regulations contract.

Conclusion

[51]I would allow the appeal, set aside the decision of the employment tribunal and substitute a decision that the Council is liable to pay damages to Mrs Nicholls for breach of contract. If no agreement can be reached on the amount payable, the matter should be remitted for determination at a remedies hearing in the employment tribunal.[52]I agree that this appeal should be allowed for the reasons given by Mummery LJ.[53]I also agree.

Order:

[1]The appeal be allowed and the decision of the employment tribunal be set aside.[2]The respondent is to pay the appellant the sum of £2,903.64[3]The respondent is to pay the appellant’s costs of this appeal to the Court of Appeal on the standard basis, to be assessed if not agreed. (Order does not form part of the approved judgment)