MM Packaging (UK) Ltd v Philip Potter & Ors

This appeal is about the interpretation of a formal settlement agreement made between the appellant company, which had closed a factory operated by it in Bootle, and the former employees and their trade union. One of the terms was that the employees would be paid ‘90 days of gross pay’. The employees say that that means that you work out what each was paid gross for one day’s work, and multiple that figure by 90. I would call that the ‘per diem approach’. The company says that it refers to 90 days on the calendar, which of course produces a lower figure because it will cover non-working days: I would call that the ‘calendar approach’.

It might be thought, applying the conventional approach to the construction of contracts, that that question could be resolved by a court simply reading the settlement agreement against the background of a largely undisputed matrix of facts known to the parties. However, the trial before HH Judge Graham Wood QC, sitting as a Deputy High Court Judge, lasted three days and involved a number of witnesses giving evidence, mostly about the progress of the negotiations leading to the making of the agreement. The judge was well aware that this was problematic, but he felt obliged to hear the evidence and make at least some factual findings about the negotiations, not least because there was an alternative claim by the company for rectification of the contract if its construction was not accepted. As will appear, although I am in no way critical of the judge, I believe that the issue can be resolved on the basis of a great deal less material than he referred to.

The company is represented before for us by Mr David Reade QC, leading Mr David Flood. The employees are represented by Mr Simon Gorton QC, leading Mr Charles Prior. Mr Gorton and Mr Flood appeared below, but not Mr Reade or Mr Prior.

The company is a subsidiary of a group based in Austria which manufactures packaging. In 2011 there was a perceived downturn in business in its Bootle plant, and the company made 49 employees redundant. Unite was the recognised trade union. It objected to the redundancies and there was strike action in early 2012. When managers undertook some work during the strike, the factory was occupied by a group of employees, and some machinery was damaged. As a result of that, four employees were summarily dismissed. Shortly afterwards, the factory was closed and the remainder of the workforce, some 109 employees, were also dismissed for redundancy. Employment Tribunal proceedings were brought, both by the dismissed employees and by the union. The employees’ claims were all for unfair dismissal, although the details varied according to the stage of the dispute at which they were dismissed. The union’s claim was for a protective award under Section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992.

Before I go any further, I should say something more about the nature of the claim for a protective award, which, although well understood by employment lawyers, is of a rather unusual nature. By Section 188 of the 1992 Act an employer who is proposing to dismiss at least 20 employees at any one establishment is obliged to enter into consultation with ‘appropriate representatives’ about the proposed redundancies. The appropriate representative is, typically, a recognised trade union, as here: I will accordingly simply refer to ‘the union’. If the employer is in breach of his obligation under Section 188 the union can bring proceedings in the Employment Tribunal under Section 189 and the Tribunal may make a protective award. A protective award is defined in section 189(3) as follows:

I resume the narrative. In addition to the legal claims by itself and the employees the union mounted a high-profile ‘leverage campaign’ which earned the company a good deal of damaging publicity. In May 1992 it decided to seek a settlement. There was an initial meeting in Vienna which made some progress, and the parties agreed to meet again in London on 21 May 2012. The negotiations took a full day, but eventually a handwritten note setting out the headline terms of an agreement was produced. The agreement there set out was approved by the relevant union members at a meeting the following day. The lawyers then drew up a more formal agreement which was finalised and signed at the end of June 2012 and scheduled to a COT 3 form.

The agreement starts by identifying the parties. These were, firstly, the company; secondly, the union; thirdly, all former employees of the company at the Bootle factory who had been made redundant or otherwise dismissed in March 2012, described as ‘the Employees’; and fourthly, the four employees who had been dismissed for alleged misconduct, described as ‘the dismissed employees’. That final label was slightly confusing, since all the employees had been dismissed, but the difference is that ‘the Employees’ have been dismissed for redundancy. It is slightly anomalous that the two groups of employees were split out in that way, but that was necessary for drafting reasons that I need not go into.

There are then four recitals. I need note only recitals B and C. Recital B records that all the employees save the dismissed employees have received redundancy payments; these were the basic statutory redundancy payments. Recital C identifies the tribunal claims brought by the union and the employees. These include the union’s claim, described as, ‘for protective awards on behalf of members employed by the company’.

I should set out the terms of the Clause 1, in full. This reads:

I can deal with the remaining provisions much more summarily. Clause 2 deals specifically with the position of the four ‘dismissed employees’. Clause 3 provides for the withdrawal of the tribunal proceedings. Clause 4 confirms that the agreement is in full and final settlement of ‘all possible claims’, save for latent personal injury claims. Clauses 5-10 contain other provisions which are of no materiality for our purposes.

Within a short time it became clear that the company on the one hand and the employees and the union on the other had a different understanding of the effect of Clause 1.2(ii). As I have already said, the employees and the union believe that the payments due under it should be calculated on the per diem approach and the company that they should be calculated on a calendar approach. When payments were made on the latter basis four of the employees, with the support of the union, commenced the present proceedings. It is common ground that the outcome of the proceedings will be in practice binding as between the company and the remainder of the employees.

The proceedings were commenced in March 2014. I need not trouble with the pleadings, which essentially sought a declaration as to the construction of Clause 1.2(ii) and payments in accordance with it. However, I should note that the company also made a counterclaim for rectification of the agreement if it were held by the court to have the meaning contended for by the claimants.

The trial took place, as I have said, over three days in June 2015. The judgment was handed down on 6 August. I can summarise the judge’s reasoning and conclusions for present purposes as follows. I need not refer to the earlier part in which he set out the facts and the parties’ submissions, save only that I should set out his self-direction as to the law at paragraph 49, which reads:

“Thus in considering this particular clause, I ask the question not want was in the subjective consideration of the parties at the time they concluded the agreement, such as bottom or top line figures beyond which any deal was unacceptable, as this would required the kind of in-depth enquiry into goals and objectives, and the progress of the negotiations, but what were the objective facts, which in this context would be the declared positions of both parties as they came to the negotiating table, and thus known to each other. In simple terms, although I will expand upon this in my discussion, for the workers it was to obtain maximum compensation if they could not reopen the factory, and for the company it was to keep the financial package to a minimum and avoid further disruption through the leverage campaign.”

The judge’s positive reasoning is to be found at paragraph 68 to 78, headed ‘Discussion’. He started by expressing the view that the natural reading of the words ‘90 days of gross pay’, taken in isolation, was that it was necessary ‘to work out the average payment made to an individual worker for each day that he worked’ and multiply it by 90 (see paragraph 71). He acknowledged that that was not necessarily the end of the matter because it was necessary to take into account the context for the agreement and in particular the fact that, one of the claims being settled was the claim for a protective award and, pregnant within that, a claim for each of the employees to receive 90 days’ pay, which would have fallen to be calculated on the calendar method. However, he held that that did not displace what he believed to be the natural meaning of the words. He said, at paragraph 73:

At paragraph 74 the Judge emphasised that the claim under the 1992 Act was only one of several matters that had to be settled. Not only were there the other tribunal claims but the company was anxious to put an end to the union’s campaign. He developed that point in the succeeding paragraphs. At paragraphs 75 to 76, he said this:

At paragraph 77 the Judge considered and rejected an argument that the reference to ‘gross’ pay was relevant to the construction issue. Since counsel agree that he was right about that, I need not set it out.

Finally, at paragraph 78 he said:

It will be seen that although the judge had made detailed findings about what was said in negotiations, he followed his earlier self-direction in excluding them from his consideration of the question of construction.

There are seven pleaded grounds of appeal, but the essential points, so far as concerned the construction of the agreement as opposed to rectification, are really only two: 1) that the judge wrongly excluded things said in the negotiations which would have supported the company’s construction; and 2) that even if he was a right to exclude those matters his construction was nevertheless wrong.

We asked to hear argument from both counsel first on the construction question, on the basis that we would consider at the end of that whether we would need to hear argument on rectification, and in the event that did not prove necessary. We also made it clear to Mr Reade that we were provisionally unattracted by the argument that the judge could and should have had regard to things said in the course of the negotiations. In his oral submissions Mr Reade was content to proceed on the conventional basis that that evidence was indeed inadmissible.

I should also say by way of preliminary that, although it was a leimotif of the skeleton argument of Mr Gorton and Mr Prior that the meaning of the agreement was a question which the judge had to decide as a matter of fact, and accordingly that his decision could not be overturned unless it was perverse, Mr Gorton in his oral submissions acknowledged that the construction of a written agreement is a matter of law, to which there is a single right answer, albeit that the judge may have to decide matters of fact relevant to the context. His submissions were in substance that the judge reached the right answer for the reasons that he gave.

I believe, with respect to him, that the judge’s construction of the agreement was wrong and that the 90 days are to be calculated by the calendar method. I am not sure that it is helpful, as he did, to consider first what the natural meaning of the disputed phrase was when taken in isolation, before considering whether that meaning is affected by the context. It is better to approach the exercise – to use a word which I try to avoid so far as possible – holistically; that is, to ask simply what it means in the context of the facts known to both parties. In this case, what seems to me to be overwhelmingly the most important such fact is that the union had made a claim under section 189 of the 1992 Act, from which the employees stood to benefit to the tune of a maximum of 90 days’ pay. That claim was one of the claims being compromised by the agreement, and it is explicitly identified in the recitals. Against that background an objective reader would in my view naturally understand the reference to ‘90 days of gross pay’ as referring to that claimed entitlement, in which case it would follow that the pay in question should be calculated in the same way as it would be calculated for the purpose of the statutory claim. I take the judge’s point that there is no explicit reference to the Act, and that the language of a ‘protected period’ or a ‘protective award’ is not used in clause 1.2(ii). However, that does not seem to me to undermine the obvious implication of the reference to ‘90 days’. After all, the agreement was not making a protective award as such but providing for the payment to the employees of what they would have received under such an award, so that the only thing that needed to be identified in Clause 1.2 was the 90 days’ pay.

With regard to the point made by the judge at paragraph 74 of his judgment, I do not think that it is relevant that there were other claims being settled and that the company was willing to pay, as it might be thought, over the odds to settle a damaging dispute. That no doubt explains the apparent generosity of the figure of 3½ week’s pay for each year of employment agreed under clause 1.2(i), which is three times the statutory entitlement for most employees, and the additional long service payment in clause 1.2(iii); however it is no warrant for departing from the natural interpretation, in context, of clause 1.2(ii).

As for the judge’s point at paragraph 78, he himself gives the answer to why clause 1.2(i) uses the language of a ‘week’s pay’ and clause 1.2(ii) does not. Clause 1.2(i) uses the model of the statutory redundancy payment scheme, which is formulated directly using the language of a ‘week’s pay’, whereas clause 1.2(ii) is referring to the right under Section 189, which is expressed in terms of days. However, it equally, as I have shown, goes back ultimately, via section 190, to the same concept of a week’s pay calculated on a calendar basis). Viewed that way, the comparison with clause 1.2(i) supports rather than undermines the construction which I believe to be correct.

Mr Gorton pointed out that in the negotiations the union had floated the possibility of a further head of claim, namely for breach of the information and consultation provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (on the basis that the work of the Bootle factory was to be transferred elsewhere). That way of putting the case, would, if established, have generated a claim by the union under regulation 15 for an order that ‘appropriate compensation’ not exceeding ‘13 weeks’ pay’ (see regulation 16.3) be paid to the affected employees, who in turn could bring a claim in their own right if that compensation was not paid. Mr Gorton said that the fact that such a claim had been mooted was part of the factual matrix and could be referred to without departure from the rule excluding evidence of pre-contractual negotiations. That may or may not be right. However, even if the evidence is admitted, it does not advance the argument, for the reasons I have given. The fact that there were other claims, actual or potential, does not affect the natural reading, in context, of the reference to 90 days in clause 1.2(ii).

If, as I would hold, true construction of clause 1.2(ii) is that contended for by the company there is no need to consider its alternative claim for rectification.

For those reasons I would allow the appeal and dismiss the claim.