The implied duty of good faith and pension rights

The implied term of trust and confidence has long been accepted as part of the mutual obligations owed between employer and employee. Recently, its breadth and flexibility have been influential in a number of cases concerning pension rights. In the current climate of disappearing defined benefit schemes, the right of employees to claim damages arising from a breach of the implied term is likely to assume increasing importance, as will the need for employers to bear this duty in mind when taking steps to curtail their future pension costs.

Background

The mutual duty of good faith owed by employer and employee governs the parties' rights and obligations during employment. It has recently been authoritatively suggested that the duty extends at least into and, perhaps, beyond a disciplinary process resulting in a termination: Johnson v Unisys Ltd [2001] IRLR 279. The question of whether or not the duty extends to former employees is of obvious importance in the pension scheme context when considering the duties owed by an employer to deferred pensioners. Lord Steyn's alternative formulation of the duty in Johnson was to call it a duty on the employer to deal fairly. Deferred pensioners could say with justification that they have not had a fair deal in recent years.

In the context of pension schemes

The implied term was formally extended to the pension scheme context by the decision in Imperial Group Pensions Trust Limited v Imperial Tobacco [1991] 1 WLR 589. It was there given the short form of 'the implied obligation of good faith.'

In Imperial, the context was the employer's power to consent, or to withhold its consent, to an amendment to the scheme proposed by the trustees. It was held that this was not a fiduciary power, but nonetheless one which had to be exercised within the limits of the implied obligation of good faith. This preserves the entitlement of an employer to take into account its own interests, even where those interests conflict with those of active and pensioner members: National Grid Co Plc v Laws [1997] OPLR 207.

The duty as formulated in Imperial was endorsed by the House of Lords in Malik v Bank of Credit and Commerce International SA [1998] AC 20. Malik also confirms there is no reason why damages cannot be claimed, including damages for injury to employment prospects.

Development

The starting point in considering the way in which this flexible duty has been developed is the decision of the House of Lords in Scally v Southern Health and Social Services Board [1992] 1 AC 294.

Dr Scally had sued his employer for damages for breach of contract in failing adequately to inform him about the availability of a contingent right, introduced by a statutory instrument, which enabled him to purchase added years of pensionable service at advantageous rates.

The Court found that it was "not merely reasonable, but necessary, in the circumstances postulated, to imply an obligation on the employer to take reasonable steps to bring the term of the contract in question to the employee's attention, so that he may be in a position to enjoy its benefit."

The Court in Scally noted the limitations on its decision. The circumstances in which the implication will arise were defined with precision: (1) the terms of the contract must not have been negotiated with the individual employee but result from negotiation with a representative body or otherwise be incorporated by reference; (2) a particular term of the contract must make available to the employee a valuable right contingent upon action being taken by him to avail himself of its benefit; and (3) the employee cannot, in all the circumstances, reasonably be expected to be aware of the term unless it is drawn to his attention.

Scally was considered in University of Nottingham v Eyett [1999] 2 All ER 437. The scheme provisions entitled Mr Eyett to take early retirement in July 1994 and he asked his employer, the university, to inform him of his pension entitlement if he retired on 31 July 1994. The university did this, but did not inform him that his entitlement would have been higher if he retired on the next possible date, 31 August 1994. He retired on 31 July 1994 but afterwards complained to the Pensions Ombudsman about the failure by the university to inform him of the effect of the later retirement date.

The Ombudsman upheld the complaint, even though Mr Eyett could have discovered the position by reading the scheme booklet and even though the university was unaware of his misapprehension. On appeal, the Ombudsman argued that the university had breached the implied duty of good faith. The university contended that the implied term merely prohibited conduct calculated or likely to produce destructive or damaging consequences, and could not impose a positive obligation on the employer.

Hart J found that Scally did not assist the Ombudsman. He held that, where an employee proposed to exercise important rights in connection with his contract of employment, the implied term did not require the employer to warn him that there might be a more financially advan-tageous way of exercising that right. The Appeal was therefore allowed. However, it was observed that the principle underlying the implied term of mutual trust and confidence does not necessarily exclude the possibility that it might have positive content in appropriate circumstances.

Imperial, Scally and Eyett were all considered in Hagen and others v ICI Chemicals and Polymers Limited and others [2002] 2 PLR 1. The pensions issue concerned whether or not members of a purchaser's pension scheme had a legitimate complaint against either the purchaser or the vendor in circumstances where the pension rights available to the members were of materially less value than those that had been available prior to the transfer. In particular focus were communications issued by purchaser and vendor regarding the pension rights for members after the transfer.

The implied duty contended for in Hagen was that ICI would at all reasonable times take all reasonable steps to ensure that members were made aware of the true position with regard to their pension rights. Scally was cited in support. The Judge rejected the contention. He referred to Eyett, and pointed out that the Claim-ants in this case had an additional problem, in that they were alleging that their employer was obliged to give them information about someone else's scheme.

The future

The implied term has principally developed in the context of ongoing schemes. The current climate will see increasing litigation arising from attempts by employers to close defined benefit schemes and to contract out of debts arising under Section 75 Pension Schemes Act 1995: cf Bradstock Group Pension Scheme Trustees Ltd v Bradstock Group plc and others [2002] PLR 327. Every element of the decision, related consultation and subsequent implementation needs to be scrutinised to see whether the implied term comes into play. Individual contractual terms, and collective agreements, may well limit the freedom of the employer to close the scheme, even for future service. In a potential dispute parties must take care that in what is done and said (and not done and not said) the implied duty of good faith is borne in mind.