Upper Tribunal Tax and Chancery Chamber

UT/2023/000049 - [2024] UKUT 00233 (TCC)

Fecha: 16-May-2024

Discussion

Discussion

46.

The Upper Tribunal has recently considered mutuality of obligation in the context of an overarching contract in Exchequer Solutions Ltd v HMRC [2024] UKUT 00025 (TCC) (“Exchequer”). We agree with the following principles summarised at [11] of that decision:

As to the nature of the obligations required to constitute the necessary mutuality, the FTT noted the following principles…which we do not understand to be in dispute:

(1)

The mutuality of obligation is not simply that required for a contract to exist but must be mutuality which is such as “to locate the contract in the employment field” (Elias J in James v Greenwich LBC [2007] ICR 577 at [16] and Carmichael v National Power Plc [1999] 1 WLR 2042 per Lord Irvine of Lairg LC [2047A-B].

(2)

The mutuality must exist throughout the whole of the period of the contract including the gaps between assignments (Elias LJ in Quashie vStringfellows Restaurant Limited [2013] IRLR 99 at [12]).

(3)

There is some scope for flexibility around the nature and extent of the obligation to work. An obligation to do the work if offered and an obligation to pay a retainer if no work was offered would be sufficient (Clark v Oxfordshire Health Authority [1998] IRLR 125 at [41]). The obligation on the employer could include “the provision of work, payment of work, retention upon the books, or the conferring of some other benefit which is non-pecuniary”. It is enough that “there is some obligation upon an individual to work, and some obligation upon the other party to provide or pay for it” (Langstaff J in Cotswold Developments (at [41] and [55]).

47.

Regardless of whether it “locates the contract in the employment field”, there must be a mutuality of obligation. In Cotswold Developments Construction Limited v Williams [2006] IRLR 181, Langstaff J said this, at [54]-[55] (emphasis added to original):

…Regard must be had to the nature of the obligations mutually entered into to determine whether a contract formed by the exchange of those obligations is one of employment, or should be categorised differently. A contract under which there is no obligation to work could not be a contract of employment. It may be a contract of a different type: it might, for instance, be a contract of licence (see Royal Hong Kong Golf Club v Cheng Yuen [1998] ICR 131(Privy Council) or even carriage, as was the contract in Ready Mixed. However, the phrase ‘mutuality of obligations’ is most often used when the question is whether there is such a contract as will qualify a party to it for employment rights or holiday pay. In this situation a succession of contracts of short duration under each of which the person providing services is either an employee or a worker will give rise to no rights (for instance to pay unfair dismissal or holiday pay) unless (i) the individual instances of work are treated as part of the operation of an overriding contract, or (ii) s.212 (continuity of employment) or, arguably, a continuing employment relationship sufficient to satisfy the principal of effectiveness applies (for holiday pay). Such an overriding contract cannot exist separately from individual assignments as a contract of employment if there is no minimum obligation under it to work at least some of those assignments.

We are concerned that tribunals generally, and this tribunal in particular, may, however, have misunderstood something further which characterises the application of ‘mutuality of obligation’ in the sense of the wage/work bargain. That is that it does not deprive an overriding contract of such mutual obligations that the employee has the right to refuse work. Nor does it do so where the employer may exercise a choice to withhold work. The focus must be upon whether or not there is some obligation upon an individual to work, and some obligation upon the other party to provide or pay for it. Stevenson LJ in Nethermere put it as ‘... an irreducible minimum of obligation ...’.

48.

We consider that the FTT properly directed itself as to the law relating to mutuality of obligation, both in relation to these and other applicable principles. The FTT also referred (at FTT[78], [79] and [81]) to the guidance regarding mutuality given recently by the Court of Appeal in HMRC v Atholl House Productions Limited [2022] EWCA Civ 501. (Footnote: ³) The FTT found that there was a sufficient obligation on Mainpay in the gaps between assignments, but not on the workers. In order to succeed under Ground 1, Mr Firth must establish that, although the FTT correctly directed itself as to the applicable law, it erred in law in reaching this conclusion by erroneously finding that there was no obligation on workers to accept work, and that there was no obligation on Mainpay to pay workers in respect of the minimum number of hours of work which Mainpay was obliged to offer them.

49.

Mr Firth accepted that there was no explicit obligation on workers to accept work under the 2013 Contract. However, he argued, a sufficient obligation arose under the 2013 Contract by virtue of the requirement for workers to consider proposed assignments in good faith considered together with Mainpay’s obligation to pay for the stated minimum number of hours worked. Those features, he said, meant that the necessary mutuality existed on the part of workers, as shown in Gizbert.

50.

Gizbert is an unreported decision of the Employment Appeal Tribunal (the “EAT”) (UKEAT/0160/06/DM) concerning a war reporter who worked for the broadcaster ABC. One of the issues was whether during a particular period Mr Gizbert was continuously employed by ABC under an overarching contract of employment. The Employment Tribunal concluded that “there was no mutuality of obligation in respect of the assignments in that [Mr Gizbert] was not bound to accept assignments”. The EAT disagreed, describing the facts as differing materially from earlier decisions. It stated (at [21]) that under the relevant contracts the position was as follows:

…there was an obligation on the employer to provide 100 days worked, or if not, 100 days pay at the agreed rates. For his part the Claimant could decide whether or not to accept assignments offered to him but was to do so in good faith. Thus the Respondent did not have an unfettered right to offer no work or pay; the Claimant did not have an unfettered right to refuse assignments; he was obliged to act in good faith.

51.

The EAT concluded on this basis that “as a pure matter of construction of those written contracts the necessary mutuality was present”: [22].

52.

It is not clear from the transcript of the EAT’s decision whether or not Mr Gizbert’s obligation to act in good faith in deciding whether to accept an assignment was explicitly stated in the relevant contracts. At [6] the decision records that under one of the contracts he was “[not] bound to accept any assignment offered”, but the terms of [21] and the reference at [22] to the construction of the written contracts might suggest otherwise. The decision in Gizbert was considered by the Upper Tribunal in Reed Employment plc v HMRC [2014] UKUT 160 (TCC) (“Reed”). The Tribunal said this, at [319]-[320] (emphasis added to original):

…In Gizbert, the employer did not have an unfettered right to offer no work or pay and the claimant did not have an unfettered right to refuse assignments. There was a commitment for the employer to offer 100 days work per annum and a commitment on the employee to consider assignments in good faith and the EAT considered that this did amount to sufficient mutuality to found a contract of employment.

320.

In our judgment Reed fails the Nethermere test. There was no real obligation on Reed which was capable of founding mutuality. The Employed Temp who never accepts an assignment, or who only accepts the first one, would not stay on Reed’s books for long, but he or she would never have had any obligation to do any work. In the period when the individual is not working, he or she has not only not accepted an assignment but he or she is not even under an obligation to consider in good faith an offer to work. Such an obligation is only appropriate if coupled with a commitment to offer a certain amount of work, as in Gizbert, because if there is a commitment to offer 100 days’ worth of work, or to pay for it if it is not done, there has to be a corresponding obligation on the employee who otherwise would receive the pay for nothing.

53.

We fully agree with the analysis of Gizbert in Reed. Whether or not the obligation on Mr Gizbert to act in good faith which was found to exist by the EAT was an explicit contractual obligation or was implied, it was critical to the EAT’s conclusion on the facts in that appeal that ABC was found to have a contractual obligation to pay Mr Gizbert for 100 days work a year at $1,000 a day: [6] and [21] of Gizbert. As the Upper Tribunal put it in Reed, a contractual obligation to pay regardless of whether work is accepted or done implies an obligation on the employee to act in good faith in considering a proposed assignment as otherwise the employee “would receive the pay for nothing”.

54.

We have no hesitation in rejecting Mr Firth’s argument that Mainpay was in the same position as ABC in Gizbert simply because it would be potentially liable in damages if it failed to offer the specified minimum amount of work. There is a material difference between such a potential liability for breach (which would be measured in terms of damage by conventional principles including mitigation) and what is in commercial terms a quantified and guaranteed retainer. In Exchequer the Upper Tribunal correctly referred in this context to Clark v Oxfordshire HealthAuthority as an example of when “an obligation to do the work if offered and an obligation to pay a retainer if no work was offered would be sufficient [to create mutuality]”. There was no obligation amounting or equivalent to a retainer under the 2013 Contract, meaning that the factual position is materially different to that in Gizbert. Thus, in our view, the implied obligation on a worker in considering a proposed assignment under the 2013 Contract was materially less onerous.

55.

As we have explained, it is not clear whether the good faith obligation in Gizbert was express, or implied in light of the guaranteed payment obligation. In this appeal, we know with certainty that there was no express good faith obligation. In relation to Mr Firth’s argument that such a term must in any event always be implied into any contractual power, we consider that proposition is much too broad, and in any event has not been shown to apply in relation to the 2013 Contract.

56.

We note that the argument was not put by Mr Firth to the FTT in the same terms. The FTT stated at FTT[130]:

On the face of it, there is no obligation on the worker to accept any assignment. There is not even an express obligation to give good faith consideration to a suitable assignment as there was in Gizbert. Although Mr Firth tentatively suggested that such an obligation should be implied, he did not pursue this with any force. In our view, there is no justification for implying such a term. It is not necessary to give the contract business efficacy.

57.

The reference to business efficacy shows that the argument before the FTT was considered on the basis of conventional principles as to implied terms in a contract, as summarised in Lord Neuberger’s judgment in Marks & Spencer plc v BNP Paribas SecuritiesServices Trust Co (Jersey) Ltd [2015] UKSC 72, at [18] to [21].

58.

Since, however, it raises a pure point of law, and Ms Choudhury confirmed that she took no procedural objection on this basis, we have considered the argument.

59.

Mr Firth relied in particular on Brogden and Braganza. We gratefully adopt the following summary of the Braganza principle provided recently by Falk LJ in HMRC vHFFX LLP [2024] EWCA Civ 813, at [35]-[39]:

The Braganza principle

35…The essence of what is now commonly referred to as the Braganza principle is that a contractual discretion may be subject to an implied term that the discretion is exercised rationally.

36.

The context in Braganza was a decision by an employer that an employee had committed suicide and was thereby excluded from death in service benefits, and the relevant issue was the approach that needed to be taken in reaching that decision. Baroness Hale, with whom Lord Kerr agreed, said this at [18]:

“Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened where there is a significant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.”

37.

Baroness Hale then drew an analogy with the court’s approach in reviewing decisions of a public authority. As Lord Hodge picked up at [52] and [53], what was required was a rationality review, applying Wednesbury principles. Like Baroness Hale, Lord Hodge noted the significance of the employment context as well as the nature of the particular decision (at [54] onwards). He said at [57] that in the context of bonuses where there were no specific criteria, the courts had decided that the employee is entitled to a “bona fide and rational exercise by the employer of its discretion”, with “little scope for intensive scrutiny of the decision-making process”. In contrast, a fact-finding determination such as the one in issue in Braganza justified greater scrutiny. Lord Neuberger (and Lord Wilson) agreed with the other members of the court on this point at [103].

60.

In Brogden, another case concerning a discretion regarding employee bonuses, which preceded the Supreme Court’s decision in Braganza, Leggatt J referred (at [91]) to “the now well established principle that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably (in the sense of irrationally)…”. Leggatt J described the rationale for that principle in relation to a discretion given to an employer.

61.

We do not accept Mr Firth’s argument that, in effect, the Braganza principle applies to any contractual discretion unless excluded by specific wording. That is clear from Falk LJ’s summary set out above. Whether or not a contractual power must be exercised in good faith or rationally is fact-specific: as Baroness Hale said in Braganza any implied restriction on the exercise of a contractual power “may vary according to the terms of the contract and the context in which the decision-making power is given.” A good faith obligation is more likely to apply in relation to a discretion exercisable by an employer (because of what was described in Braganza as the “imbalance of power” between the parties).

62.

In this case, particularly given the absence of any contractual obligation on Mainpay to pay a worker a minimum fee, we are clear that the obligation in Clause 3.1 of the 2013 Contract for a worker to “consider any suitable Assignments obtained by the Company” does not create the necessary mutuality of obligation on the part of a worker.

63.

The FTT was therefore fully entitled to reach the decision which it did on this issue.

64.

In light of our conclusion, we do not need to consider the relevance of control during the gaps in assignments, and it would be appropriate for that to be considered in a case where it makes a difference to the outcome.

65.

Nor do we need to consider HMRC’s additional argument challenging the FTT’s decision that there was the necessary obligation on Mainpay in relation to mutuality of obligation.

66.

The appeal under Ground 1 is dismissed.