In three linked appeals (Secretary of State for the DEFRA (and others) v PCS), the Supreme Court has held that a trade union does have the right to claim damages as a third party for breach of a check-off term contained in the contracts between an employer and their employee members, even though the check-off term derived from an unenforceable collective agreement. In this insight, we look at the reasons for that decision and key takeaways.

Background

The Public and Commercial Services Union (PCS), is recognised for collective bargaining purposes by three government departments - the Home Office, DEFRA and HMRC. Employees of those departments who were members of PCS chose to have their union subscriptions deducted from their salary through their employer’s payroll system, which would then be paid to PCS by their employer (known as check-off arrangements). The check-off arrangements originated in a collective agreement negotiated in the 1960s, but the employers, in breach of contract, began unilaterally withdrawing it from 2014. This led to a substantial reduction in PCS’s subscription income.

Consequently, PCS brought claims in their own right against the employers, relying on Section 1 of the Contracts (Rights of Third Parties) Act 1999 (the Act) to enforce the "check-off" term in their members’ employment contracts, which states:

“(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if—

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.”

The effect of Section 1 is that where a term of the contract confers a benefit on a third party who is expressly identified in that contract, it will be presumed that the third party may in its own right enforce that term. This presumption will only be defeated if it appears from the contract that the parties did not intend the term to be enforceable by the third party.

The High Court found that the withdrawal of the check off arrangements was a breach of contract and that PCS was entitled to bring a claim under the Act to enforce it. The employers appealed. The Court of Appeal overturned that decision, finding instead that PCS could not rely on the Act as the term was not intended to be enforceable by PCS. PCS appealed to the Supreme Court.

 The Supreme Court’s decision

The Supreme Court allowed the appeal, finding that:

• The correct interpretation of section 1 of the Act is, where the criteria are satisfied, a strong statutory presumption arises that the relevant term in favour of the identified third party is enforceable by that party, which will be difficult to rebut. Where that presumption arises, that is the starting point for the analysis. In order for the presumption to come into play, it does not have to be shown that the parties positively intended that the relevant term should be enforceable by the third party. Instead, to defeat the presumption it has to be shown that, on the usual objective approach to the interpretation of contracts, the parties had a positive common intention that the term should not be enforceable by the third party.
• On the facts of this case, the individual contracts of employment did not include any indication that the joint intention of the parties was that the term should not be enforceable by PCS, and no such term could be implied. There was therefore a presumption that the check-off facility was enforceable.
• Further, there was no inconsistency between recognising that a collective agreement is unenforceable as between an employer and a trade union and allowing a trade union a right of enforceability against the employer under an employment contract by reason of the Act.

What to take away

The Supreme Court has provided much needed clarity on the correct interpretation of Section 1 of the Act. In order to ensure clarity and avoid unintended consequences, any contract that confers a benefit on a third party but which is not intended to be enforceable by the third party, will need to include an express clause to that effect. Otherwise, where contracts are silent on the question of enforceability, there is a real risk that they will be found to be enforceable by the third party.

This Judgment also makes clear that trade unions will be able to bring claims as third parties under the Act against employers who breach and/or unilaterally vary contracts of employment which contain terms that benefit the union, even if those terms originate from an unenforceable collective agreement.

Whilst it is still open to employers to rely on any collective bargaining to rebut the statutory presumption, there would need to be evidence of a positive intention by the employer and employee to prevent a union being able to enforce a check off arrangement. Accordingly if employers are considering changing their approach to check-off arrangements, legal advice should be sought before doing so.

How Capsticks can help

Capsticks has significant experience of supporting employers with industrial relations issues, before, during and after collective negotiations, drafting / reviewing employment contracts, providing training and defending any legal challenges / claims that may arise.

For further information on how we might assist your organisation, please contact Paul McFarlane, Nicola Green and Alistair Kernohan.