Midland Bank Plc v McCann [1998] UKEAT 1041_97_2307

EAT

Midland Bank Plc v McCann

[1998] UKEAT 1041_97_2307 · 1998-06-05

JUDGE HULL QC :

This is an appeal by Midland Bank Plc, the employer, against a decision of the Industrial Tribunal (Mr C N Ingham, Chairman, sitting at Stratford without industrial members) registered on 22nd July 1997. In the decision the Industrial Tribunal held that the Bank was liable for damages for breach of contract in failing to make a performance award to Mr McCann, who was dismissed by reason of redundancy on 30th April 1996.

Mr McCann was first employed by the Bank in 1962 and rose to "Grade M96" as a senior manager in Information Technology. In June 1995, after discussion with Mr Powell, Head of Information Technology Operations, he received a letter dated 7th June 1995:

"Dear Mr McCann

I refer to our recent discussions and write to confirm that the Bank is prepared to terminate your employment on the grounds of redundancy. This letter therefore gives you formal notice that your employment with the Bank will be terminated on 30th April 1996.

In due course you will receive a further letter which will give full details of the severance payment due to you under the provisions of the Security of Employment Agreement. Pensions Department will also contact you direct with details of any pension entitlement, if appropriate."

Mr McCann completed an important project for which he was responsible and his effort and skill shown in this (as in other earlier tasks) was exemplary; he was acknowledged by the Bank to be well above average in his Grade. From January 1996, after completing the project, he was allowed to stay at home on "gardening leave" and his employment duly terminated at the end of April, when he was aged 51.

On 29th February 1996 the Bank wrote to Mr McCann:

"Dear Mr McCann

I refer to Mr Powell's letter dated 7 June 1995 which gave you formal notice of the cessation of your employment with the Bank. I now write to advise you that your employment is to end on 30 April 1996. If you wish to appeal against the decision to make you redundant, you may do so by giving notice in writing within fourteen days to the immediate superior of the manager who decided to make you redundant (or, if he is not available, a manager of equal grade will hear your appeal).

You will receive a cash payment of £93,888.34 (ninety three thousand eight hundred and eighty eight pounds, thirty four pence) which includes the statutory amount of £5,250.00 (five thousand two hundred and fifty pounds). If your salary or relevant allowances alter before the date of termination then the figures quoted may be subject to alteration. ..."

The letter enclosed details of the calculation of the cash payment, being 79 weeks pay including bonus and allowances at 1995/96 rates.

On 28th March 1996 Mr Lawrence, the Bank's most senior Information Technology manager, wrote:

"Dear Mr McCann

In light of your impending redundancy, it is not deemed appropriate to award you either a further increase in salary or a performance award, under 1996 Senior Management Pay Review. You have my assurance that this policy is being applied consistently across the bank for those leaving the bank as a result of redundancy or early retirement.

You will, however, receive a Business Cash Bonus of 5% which recognises your contribution towards Midland's overall results for 1995.

The payment due under the terms of your redundancy, therefore remains as stated in Mike Davis' letter to you, dated 29 February 1996. ..."

On 2nd April 1996 Mr McCann replied:

"... I was very surprised to receive your advice that it is no longer 'deemed appropriate' to honour the entitlements of those Senior Managers who are leaving as a result of redundancy or early retirement. I would advise you:

( With regard to my departure all negotiations and discussions have been undertaken with the expectation that I would receive a salary increase/performance award for 1995, as in the past.

( Imposition of this policy will have a long term detrimental effect on my future pension entitlements.

( This sudden and unilateral pronouncement comes without any consultation or prior indication of a change of policy and is unacceptable.

As recently as 21 March I was given a further clear indication in discussion with Jim Fitzgerald, MITO Director, that I would be receiving a salary increase/performance award in line with my performance rating. This he submitted to you as 'O' - Outstanding, for 1995. Your letter now runs counter to his advice and my long held expectations in regard to the terms of my departure from the Bank.

I fully completed all my contractual commitments to the Bank in a manner reflected by the performance rating. The Brent Closure Project, for which I was responsible as Senior Project Manager, completed within time, within budget and with no detrimental User impact. For the Bank now, to attempt to change the rules at this eleventh hour is beyond justification.

I am appealing against your decision not to pay me a salary increase/performance award and accordingly request that you review the position. I am looking for the Bank to honour its commitments and obligations. I regard the late advice and departure from established procedures without consultation, as a breach of contractual terms."

Mr McCann instructed solicitors and made his application to the Industrial Tribunal on 14th July 1996. In this he pointed out that the failure to award him a performance award or increase in final salary would affect his contractual redundancy payment and (in the case of his salary) his pension.

The Industrial Tribunal found facts as follows:

"2 ...

e In 1989 the Respondent altered its pay system from one based on increments to a performance pay scheme. Details of this scheme are contained in documents provided by the Respondent, namely The Employee Handbook, The Senior Management Employment Guide, Guide to Remuneration Policy For Senior Management, and Senior Management Pay Review Guidelines.

f It is clear that pay awards under this scheme, either of a salary increase or lump sum or bonus, or a combination of the two, were discretionary. This means they were subject to an assessment based on the performance of the employee, and the ability or attitude of the Respondent to make a pay award to staff in any given year. The term "discretionary" was not defined, but it was clearly intended by the Respondent that the scheme would not be operated capriciously.

g The process of operating the performance pay scheme required senior Managers to be subject each financial year to an assessment of performance carried out in November/December by their Line Manager and more senior staff. In February of the following year Guidelines were issued indicating the amount of money available within the scheme and other terms and conditions. Payment of either a salary increase or lump sum bonus, or a combination of the two, would be paid to senior managers based on their performance.

h In November/December 1995 Mr McCann's performance was assessed as 'H', namely "High Achievement". In February 1996 the Respondent issued Senior Management Pay Review Guidelines for implementation which indicated at paragraph 4 that 'Leavers' were not eligible for any pay awards. The Respondent says that because Mr McCann was due to leave on grounds of redundancy on 30 April 1996 he was categorised as a "Leaver" and that therefore he was not entitled to any pay award under these Guidelines.

i Mr McCann was not provided with the copy of the 1996 Guidelines and only heard of them in April 1996 when realised he was not going to be eligible for any performance award for the year 1995/96."

After recording that the Bank submitted that Mr McCann had no contractual entitlement to a performance award; and that in the alternative, if the Guide and Guidelines did form part of a contract, then Mr McCann was a "Leaver" and therefore not entitled to such an award, the Industrial Tribunal continued:

"5 No authorities were cited to me. I took note that these claims were subject to the law of contract and the provisions of Section 13 of the Employment Rights Act 1996.

Unauthorised Deduction of Wages Claim

6 I have found it impossible to determine the amount of performance pay to which Mr McCann would be entitled. The Respondents failure to operate the scheme for him did not amount to a deduction. He was only entitled to be eligible for consideration for a bonus or salary increase. I therefore conclude that a claim under Section 13 of the Employment Rights Act 1996 is not appropriate and therefore fails.

Breach of Contract Claim

a What are the contractual terms?

I accept that the Respondents operate a discretionary performance pay scheme. Its details can be found in the Pay Handbook, The Senior Managers Employment Guide, The Guide to Remuneration Policy For Senior Management, and The Senior Management Pay Review Guidelines. I conclude that the latter two documents explain how the scheme operates. As such, they cannot be divorced from the scheme details as was argued by the Respondent. They therefore constitute contractual terms which are capable of interpretation by the Tribunal.

b Is there a breach of contract?

i The Respondent treated Mr McCann as a "Leaver" within the 1996 Senior Management Pay Review Guidelines. This term is not defined in that document, but was defined in a similar document issued the previous year in 1995. I heard evidence of a hardening of attitude by the Respondent towards employees taking redundancy receiving pay awards. It was conceded by Miss Wood, Head of Midland Compensation, for the Respondent that there was a lack of clarity and consistency in the Respondent's approach to the payment of awards to staff leaving on redundancy. I was impressed by Miss Wood's frankness in giving her evidence. She said that she had suggested that "Leaver" be defined in the 1996 document, but colleagues had argued that it did not need definition because everyone would understand what it meant.

ii The pay award covered by the Guidelines related to performance in the year 1995/96. Mr McCann left the following year 1996/97. Because the term "Leaver" is not defined I can only interpret it within the context of the document in which it appears, namely the Guidelines for 1995/96. During that year Mr McCann was not leaving the Respondent. I therefore conclude that the term "Leaver" does not apply to Mr McCann for these purposes. Under the performance pay scheme he is entitled to be considered for a salary increase and/or lump sum award.

iii The Respondent argued that Mr McCann was under notice of dismissal in February 1996 and therefore was a "Leaver". However, when the Respondent appointed Mr McCann on 30 April 1987 as Head of Computer and Telecommunication Services, it was said that under notice of termination of employment he would continue to receive the remuneration and other applicable benefits for the period to which the notice of termination related. I therefore do not accept that the Respondent can argue that Mr McCann was outside the performance pay scheme because he was under notice of redundancy.

iv Furthermore, I conclude that the Respondent treated the contract capriciously. It failed to treat employees consistently, for example, two other employees, Mr Smith and Mr Harrison received pay awards the previous year even though their notice of redundancy did not take effect until the next financial year. Mr McCann was in the same position a year later and entitled to similar treatment in the absence of a clear and unequivocal communication to the contrary.

v I also conclude that the Respondent never communicated the purported variation in the terms of the scheme as set out in the 1996 Senior Management Pay Review Guidelines to Mr McCann, probably because he was on "gardening leave" at the time. However, the Respondent had an obligation to notify him as was conceded by Miss Wood in her evidence.

7 I therefore found that there had been a breach by the Respondent of Mr McCann's contract of employment."

Mr Swift, Counsel for the Bank, attacked the Industrial Tribunal's decision on a number of grounds. He referred to the Bank's documents: The Midland Bank Employee Handbook of February 1994 ["the Handbook"] at pages 20 to 27 of the bundle; The Senior Management Employment Guide of October 1989 ["the Guide"] at pages 36-52; The Guide to Remuneration Policy of December 1991 ["the Policy"] at pages 53-61; and The Senior Management Pay Review Guidelines ["The Annual Implementation Guidelines"] issued annually (pages 63 to 86). He invited our attention to other documents, and the Chairman's Notes of Evidence.

Mr McCann appeared in person, and supported the Industrial Tribunal's decision on the grounds set out in it. In addition, he referred to a number of parts of the evidence.

Mr Swift's primary submission was that the Handbook and the Guide were contractual documents, whereas the Policy and the Annual Implementation Guidelines were not. He challenged the last sentence of paragraph 6 a of the Industrial Tribunal's decision that, because the Policy and the Annual Implementation Guidelines explained how the scheme operated, "they therefore constitute contractual terms which are capable of interpretation by the Tribunal".

We have come to the conclusion that Mr Swift's submission on this fundamental point is correct. The Handbook makes it clear that it is a contractual document (page 20), although it also contains "general information". The Guide also sets out provisions which are of contractual force between Senior Management and the Bank; see, for example, the promise that salary will be reviewed in March each year (page 39), the provisions for a Pensions Option (page 43), the right to participate in Profit Sharing (page 44), the Bank's Pension Plan (page 46 onwards) and "Other Terms and Conditions" (page 50 onwards). The Guide, too, contains statements of general information including the Bank's policy in relation to the "Executive Bonus Scheme" and the reasons for it.

On the other hand the Policy and the Annual Implementation Guidelines are clearly policy documents directed to explaining the policy with regard to pay increases and bonuses, both to those who are required to advise on and determine these rewards and to those who are to receive them. They are in our view not contractual documents at all.

The Handbook provides (at page 22):

"Each year your performance will be appraised and, if an increment is applicable, this will be paid from the anniversary of your appointment to your grade.

Subject to you being in employment as at 31 October annually you will be eligible to receive a Bonus Payment of, currently, 2.5% of basic salary in November. This payment will be subject to statutory deductions. For new employees the first year's payment is a pro-rata amount to reflect service to the 31st of October in the current bonus year."

This bonus is nothing to do with the performance award with which the appeal to us is concerned. The Handbook also provides (at page 23):

"The bank operates a flexible performance related pay scheme for managers.

. ..

Each individual's performance against objectives is reviewed annually, the present review period being the calendar year. Individual pay awards take account of performance and comparisons with other jobs, peer groups both within Midland and externally, and are normally made in March for grade M96 and above; and in April for grades M93 to M95. Any awards made may take the form of an increase in salary and/or a cash payment."

The Guide provides (page 39):

" SALARY POLICY

2.1 Policy Objective

The Group salary policy objective is to ensure that the total remuneration paid to individuals is competitive, in order to attract, motivate and retain talented and effective Senior Managers. Total remuneration in this context means the total package of compensation and benefits paid to an individual. Comparative data will be obtained to ensure that we match competitive external total remuneration practice. Individual salaries will be related directly to performance against agreed objectives.

2.2. Salary Levels

There are no specific salary ranges for the Senior Management category. Your salary will be reviewed in March each year by your Manager and agreed by your Chief Executive, but there will be no automatic individual increase. Any increase will reflect your performance appraisal and market salary position."

At page 40 the Guide provides:

"2.4 Assessment of Performance

The Group's objective based Annual Performance Appraisal system is intended to encourage open, frank and structured discussion between you and your line manager about your job performance and future development. It will also provide a considered basis for rewarding achievement."

At page 41 the Guide deals with the Executive Bonus Scheme and provides:

"3.3 Scheme Operation

( The bonus payment is wholly discretionary and will be determined by the exercise of the appropriate line management's judgement."

Basing himself on these provisions, Mr Swift submitted that Mr McCann, like every other manager within the scope of the Guide, was contractually entitled to have his performance appraised, but that any performance award, whether by way of increased salary or bonus, was wholly discretionary.

The policy of the Bank and its reasons are set out at length in the Guide, the Policy and the Annual Implementation Guidelines. At page 41 of the Guide it is stated:

"3.3 ... The amount of the bonus paid to an individual is based primarily on his/her performance and achievements and will be agreed by the Sector Chief Executive following a review by your Senior Line Manager. ..."

The Policy reiterates the passage we have quoted from page 39 of the Guide. At page 57 it is stated:

"( Midland's policy to shift the focus away from base salary towards a variable performance award is primarily cost driven, in that increases to base salary have a greater fixed cost consequence than lump sum awards. ...

( In the past, it was practice to assume that all management would receive a minimum cost of living salary increase - this tended to be paid regardless of market position or performance. The Bank has now become more sophisticated in the way it wishes to allocate funds and, along with many other organisations, has moved away from any "right" to a salary increase."

At pages 58 and 59 the document states:

"( Midland's remuneration policy is to manage its salary costs to achieve "value for money". Clearly, budget and/or profitability of the Bank will impact on the available spend in any pay review - but these constraints will not alter the direction of the basic strategies which are fundamental to the way in which pay is managed.

However, on an annual basis, specific and varying guidelines may be adopted to manage these strategies within the particular financial constraints of that year. These may limit, for instance, the number of people who will receive a performance award."

At page 61 the document defines "Performance Award":

"PERFORMANCE AWARD - this is a variable, discretionary lump sum payment related to individual performance in the previous year. (Previously known as "annual bonus")"

The Annual Implementation Guidelines reflect the Policy and change from year to year. We will consider these below.

The principal basis of the Industrial Tribunal's decision was that the Policy and the Annual Implementation Guidelines "constituted contractual terms". The reasoning for this conclusion, set out in the last three paragraphs of paragraph 6 of the extended reasons, appears to us to amount to a non sequitur. If an employer has discretion to give bonuses and performance awards and explains to his employees the basis on which he proposes to exercise his discretion, that cannot convert his policy documents into contractual terms. A contractual term is a binding promise, sufficiently certain for the opposite party to sue on it and quantify his claim. No employee of the Bank could in our view quantify his claim to a performance award, even after his performance had been appraised, until he was informed of the amount which (in the Bank's discretion) he was to receive.

No authorities were cited to the Industrial Tribunal, but we were referred to the decisions in White v Reflecting Roadstuds Ltd

[1991] ICR 733

and F C Gardner Ltd v Beresford

[1978] IRLR 63

. In our view, basing ourselves of course on these authorities, an employer who is exercising a discretion is under no obligation to do so "reasonably", but he must not exercise his discretion in such a way as to destroy the relationship of trust and confidence which must exist with his employees. Thus he must not exercise his discretion merely to give vent to spite, or in bad faith; it has been said he must not exercise it "capriciously", as, for example, by saying that pay rises will be confined to men with fair hair, or persons of a particular religious faith.

We accept that for the purpose of seeing whether it can be said that the employer has exercised a discretion "capriciously" it may be permissible, indeed desirable, to look at policy documents such as the Policy and the Annual Implementation Guidelines. The first and obvious comment is that the Bank's policy with regard to performance awards is self-evidently directed to its own interests, to reducing the cost of "across the board" pay rises and "to attract, motivate and retain talented and effective Senior Managers"; and no doubt, as a corollary, to speed the departure of those who are not talented and effective. How can such a policy be applied to Senior Managers who are leaving or will shortly leave the Bank? However talented and effective they may be there can be no point in "attracting, motivating and retaining" them. On the basis that the Bank is concerned with its own interests, to deny a performance award to such leavers might be characterised as hard-hearted, or even cynical, but it could in our view not be called irrational or capricious.

The Industrial Tribunal concluded that the Bank "treated the contract capriciously" (see paragraphs 6 b iv of the decision). Our Tribunal asked the learned Chairman what he meant by this and he wrote (see page 179):

"3 ...

a) I used the term "capriciously" in the sense of inconsistency. The allegation of capriciousness was made by the representative for the Applicant in his closing submission - see paragraphs 8 and 9 on page 22 of my Notes of Evidence.

...

d) Mr Harrison and Mr Smith, who were also senior managers with the Bank, were in similar circumstances to that of Mr McCann, namely they retired in the following financial year although the relevant arrangements were agreed in the previous financial year. They both received an increase. Although their individual circumstances were obviously different from Mr McCanns' I was satisfied that they were in principle in a similar position to Mr McCann."

Merely to treat different employees in different ways may (depending on the facts) lead to a charge of inconsistency, but by itself cannot in our view be "capricious". In addition, it appears that there were considerable differences between Mr McCann and the two alleged comparators. The Chairman has told us that both of them left in the previous year. In addition, Mr Swift told us that Mr Harrison had left for reasons of ill health. Moreover, it appears to us that even to establish inconsistency (let alone capriciousness) it would be necessary to examine a far larger class of comparators. This is suggested by Miss Wood's evidence at page 148 onwards (paragraphs 11 and 12).

According to the Shorter Oxford English Dictionary , "capricious" means "guided by caprice; readily swayed by whim or fancy; inconstant" and "caprice" means "an unaccountable change of mind or conduct; a whim; a freakish fancy". We can find no basis, whether in the extended reasons or in the Notes of Evidence, for describing the Bank's treatment of Mr McCann's contract as "capricious".

We have looked at the Annual Implementation Guidelines for 1995 and 1996, since the Industrial Tribunal evidently considered that the former document was a guide to the construction of the latter, and held that both were contractual documents. The Annual Implementation Guidelines for the Senior Management Pay Review for 1996 (at page 85) provide:

" Leavers

Leavers are not eligible for any awards."

The corresponding provisions for 1995 (page 79) were:

"Leavers

Employees who have left the Bank during the 1994 calendar year due to the following:

- redundancy

- normal, early or ill health retirement

- resignation on account of pregnancy or from maternity leave

- death in service

should be considered for a performance award only. ..."

It appears that the Industrial Tribunal considered that this reference to "Leavers" in the 1995 document was a "definition"; that it defined leavers as those who had left for the reasons stated in 1994, thus excluding those who had left or were leaving in 1995, or had left in 1994 for any other reason; that the 1996 document must mean the same mutatis mutandis, notwithstanding that it omitted any reference to the categories of persons mentioned in the 1995 document; and that Mr McCann was therefore not a "leaver" within the 1996 document. It seems to us that there is lacuna in every single step of this particular piece of reasoning. Mr Swift submitted, in our view correctly, that when the performance awards and pay increases had been awarded in any year, the Annual Implementation Guidelines for that year were spent. He also submitted, again correctly in our view, that in the ordinary sense of the word Mr McCann was a "leaver" in March 1996, when the pay awards for 1996/97 were to be made. We would add that the construction of the 1996 Annual Implementation Guidelines, since those were not a contractual document, was a matter for the Bank and not for the Industrial Tribunal or for us, subject of course to the Bank's duty not to construe its own document capriciously.

For these reasons we have concluded that Mr McCann had no contractual entitlement to a performance award for 1996/97; that the Bank had exercised its discretion not to make a performance award to him; that there is no basis in the Industrial Tribunal's findings of fact or in law for a conclusion that the Bank acted capriciously in exercising its discretion; and that the appeal must be allowed.

Since we have concluded that the Bank has not broken its contract with Mr McCann, we allow the appeal, substitute our own decision for that of the Industrial Tribunal and order that Mr McCann's application be dismissed.