Pendragon Plc v Jackson [1998] UKEAT 108_97_3006

EAT
Pendragon Plc v Jackson
[1998] UKEAT 108_97_3006 · 1998-06-30

JUDGE PETER CLARK :

We have before us an appeal by the employer, Pendragon Ltd, against an award of damages for breach of contract made in favour of the employee, the Respondent, Mr Jackson, by the Leeds Industrial Tribunal, and a cross-appeal by the Respondent against the quantum of the award. The Industrial Tribunal decision with extended reasons was promulgated on 4 December 1996.The Respondent commenced employment with the Appellant on 8 February 1982. At all relevant times he held a senior executive post of General Manager. We have not seen a written contract of employment, but we have been shown the first page of a Statement of Terms and Conditions of employment. We understand that the document before us is incomplete.On 19 July 1990 the Chief Executive, Mr Finn wrote to the Respondent in these terms:

"Dear John

EXECUTIVE SHARE PRICE INCENTIVE SCHEME ('ESPIP')

The Board of Directors of Pendragon PLC has agreed to set up an Executive Share Price Incentive Scheme ('ESPIP') to give senior executives the opportunity to participate in an incentive scheme that is linked to the growth in the Pendragon share price over a three year period.I am pleased to inform you that the Board has decided to award you 10,000 units in the scheme. The base price for the scheme is 118p per share as at 18.07.1990. I enclose a copy of the Rules of the Scheme and a Certificate of Award which confirms the number of units which you have been given. I also enclose an example of the calculation of earnings per share which you may find useful.The Board hopes that the scheme will provide an incentive to each participant during the coming years in what will undoubtedly be an interesting and challenging phase of the Group's development. As this award is personal to you I would ask you to respect the confidential nature of this letter and not discuss it with anyone else."Enclosed with that letter was a document headed "Pendragon PLC, Executive Share Price Incentive Plan". The preamble reads:
"The Executive Share Price Incentive Plan ('ESPIP') has been set up to offer senior executives the opportunity to participate in an incentive scheme that is linked to the growth in the Pendragon share price over a three year period."
The Rules of the Scheme provide, so far as is material as follows:
"3. The incentive payment will be made approximately 3 months after the expiry of a three year period after the award accordingly to the calculation in 4 below, PROVIDED THAT the company's earnings per share growth has been greater than the increase in the Retail Price Index over each of the three years consecutively. If this rule is not satisfied in any year, then the three year period starts again until three consecutive years are achieved.
6. If the executive leaves the company for any reason whatsoever, then all rights under ESPIP lapse.7. The directors of the company may exercise discretion in payments under the plan if the executive retires due to ill health or dies during the period of operation.9. The plan is non-contractual.10. In the event of disputes of whatever nature, decision of the Board of Directors of Pendragon PLC shall be final and binding on all participants."The method of calculating the earnings per share (EPS) is then set out.On 1 May 1995 Mr Finn wrote to the Respondent to update him with the current position of the scheme. It was anticipated that on 31 December 1995, at the end of the relevant three year continuous period the Respondent's ESPIPSs would be worth £13,200 at a share price of £2.50 and £18,200 at £3 per share.The letter ends:
"I hope this fulfils its promise, and we can make the payments early next year!."
On 8 February 1996 the Respondent was dismissed by reason of redundancy with 12 weeks pay in lieu of notice.On 11 March 1996 the Respondent wrote to Mr Finn, asking for payment under the Plan.By a letter dated 25 March Mr Finn replied, stating that the Respondent was not entitled to payment under the Plan.By an amendment to his Originating Application, claiming unfair dismissal and breach of contract, the Respondent pleaded:
"Further, on 18th July 1990, I was granted 10,000 units pursuant to the Respondent's [Appellant's] Executive Share-Price Incentive Plan (ESPIP). Pursuant to my contract of employment and the rules of the Plan on 31st March 1996 I became entitled to an incentive payment."
In the course of giving their reasons for upholding the breach of contract claim the Industrial Tribunal said this at paragraph 9:
"The unanimous decision of the tribunal was that the ESPIP scheme was a contract made between the applicant and the respondent. There was an offer made by the respondent which was accepted by the applicant. The tribunal found unanimously that there was consideration to enforce the contract. It was an incentive scheme and the reason for the scheme was to encourage senior executives to remain with the company rather than to move on to other employment. This amounted to consideration. Rule (9) of the ESPIP scheme, stating that the plan was non-contractual, was interpreted by the Industrial Tribunal as not meaning that there [was] no intention to create legal relations between the parties. Taking into account what had been said by the respondent in the letter in July 1995 it was quite clear that the respondent did intend to create legal relations. It simply was not credible to interpret Rule (9) as meaning that the scheme was a gratuitous one."
Pausing there, the Tribunal's reference to the letter of July 1995 is a misdescription. Either they were referring to the letter of 19 July 1990 or the letter of 1 May 1995 from Mr Finn to the Respondent.By paragraph 6 (2) of the Notice of Appeal the Appellant pleads:
"The Tribunal wrongly held that ESPIP was contractual notwithstanding Rule 9 of the Rules."
We have taken that contention as a preliminary point and heard argument on it from both parties. Having done so we have concluded that the Appellant was under no legally enforceable obligation to make any payment to the Respondent under the Plan. Our reasons for so finding are as follows:There is no express term of the contract of employment incorporating the ESPIP scheme. Can the Plan itself constitute a legally binding contract between the parties? In our judgment the express words of the Plan negative contractual intention.Contrary to Mr Graham's first submission we find that the words of Rule 9 are plain and unambiguous. The Plan is non-contractual. Those words mean what they say. It is well-established that it is open to the parties, assuming without deciding that the ESPIP did constitute an agreement between them, to expressly negative an intention to create legal relations. See Rose & Frank Co v J.R. Crompton & Bros Ltd [1925] AC 445 , affirming the judgments of the CA [1923] 2 KB 261, particularly the observations of Scrutton and Atkin LJJ. The principle was applied by the Court of Appeal in Appleson v H. Littlewood Ltd [1939] 1 AER 464, approving the judgment of Atkinson J in Jones v Vernon's Pools Ltd [1938] 2 AER 626. In Edwards & Skyways Ltd [1964] 1 WLR 349, Megaw J held that the use of the expression "ex gratia" did not of itself negative an intention to create a legally enforceable obligation, pointing out the heavy burden on a party seeking to allege that a commercial agreement was not intended to be legally binding. We have applied that heavy burden to the Appellant's contention in this case and find that the burden is discharged on the wording of the Plan.The position in our judgment is as stated by the Court of Appeal in Lavarack v Woods of Colchester Ltd [1966] 3 AER 683. We need refer only to two passages in the judgment. First, Diplock LJ at page 690 F - G:
"The general rule as stated by Scrutton LJ in Abrahams v Herbert Reiach Ltd [(1922) 1 KB 477] that in an action for breach of contract a defendant is not liable for not doing that which he is not bound to do, has been generally accepted as correct and in my experience at the Bar and on the Bench has been repeatedly applied in subsequent cases. The law is concerned with legal obligations only and the law of contract only with legal obligations created by mutual agreement between contractors - not with the expectations, however reasonable, of one contractor that the other will do something that he has assumed no legal obligation to do. ..."
And Russell LJ at page 693 B - C:
"It was argued that cases such as Abrahams v Herbert Reiach Ltd supported the view that damages for wrongful dismissal could include extra benefits which the contract did not oblige the employer to confer on the plaintiff, but which he might have reasonably expected them to confer on him in due course otherwise and in the course of performing the contract. I do not accept that reading of the case, nor of any judgment in it. The question was what would reasonably be expected to accrue to the plaintiff by force of the contract had the publishers fulfilled their obligation under the contract, which was construed as an obligation to make such a publication in book form as would be reasonable in all the circumstances. ..."
Those observations were made in the context of a claim for damages for wrongful dismissal, in which one head of damage awarded by the Master consisted of loss of a discretionary bonus payment.More recently, in O'Lairore v Jackel International Ltd (No.2) [1991] ICR 718, a case concerned with damages for wrongful dismissal, Sir Nicholas Browne-Wilkinson, V C., dealing with a head of claim based on the loss of stock options following dismissal, said this at page 730 C - E:

"Damages

In computing the damages at common law, the plaintiff would have to show either that he had a right to the stock options (in which case he would have recovered the value of such options) or alternatively that he had lost the hope of obtaining such options. Under the terms of the group executive share option scheme the board of the holding company had a discretion whether or not to grant the options at all. The options, if granted, were only exercisable on the death of the executive or upon his ceasing to be employed. If the executive ceased to be employed by reason of injury, disability or redundancy, the executive had an absolute right to exercise the options. But in all other cases the option was only exercisable with the consent of the board. Therefore, the plaintiff had no enforceable legal right either to the options or to the exercise thereof. Accordingly he cannot be entitled to the value of the options."In our judgment there is nothing in the surrounding circumstances, relied upon by Mr Graham, and in particular in the letters of 19 July 1990 and 1 May 1995, which alters the plain words of Rule 9 of the Plan. Payment under the Plan was not intended by the parties to be legally enforceable, although we have no doubt that Mr Jackson had a reasonable expectation that he would receive payment. That is an end of the claim for damages for breach of contract, whether based on the contract of employment or the Plan itself.In these circumstances we have concluded that as a matter of construction the Industrial Tribunal fell into error. The decision must be set aside; the appeal allowed and the claim dismissed.