EDWARDS V. SKYWAYS, LTD.
QUEEN'S BENCH DIVISION
[1964] 1 All ER 494, [1964] 1 WLR 349
HEARING-DATES: 15, 16, 17, 21 January 1964
21 January 1964
CATCHWORDS:
Contract -- Intention to create legal relationship -- Agreement to make "ex gratia" payment -- Oral negotiations on
redundancy of employees -- Employing company agreeing to make "ex gratia" payment to redundant employees -- Consideration given by employees -- Company subsequently rescinding agreement -- Whether agreement legally binding.
Contract -- Uncertainty of terms -- "Approximating to" -- Whether agreement for payment of sum approximating to
total of contributions to pension fund too vague.
HEADNOTE:
The plaintiff was employed by the defendant company as an aircraft pilot, and as such he was a member of the defendant company's contributory pension fund and entitled under its rules on leaving the defendant company's service in
advance of retirement age to a choice between two options, either to withdraw the sum of his own contributions to the
fund or to take the right to a paid-up pension payable at retirement age. In January, 1962, the defendant company wrote
the plaintiff, among others, informing him that it was necessary to declare a redundancy of approximately fifteen per
cent. of the defendant company's pilot strongth and giving him three months' notice terminating his employment. At a
meeting on Feb. 8, 1962, between authorised representatives of the defendant company and BALPA, the plaintiff's trade
association, it was agreed (as recorded in the notes of the meeting) that "pilots declared redundant and leaving [the defendant company] would be given an ex gratia payment equivalent to the defendant company's contributions to the pension fund". The representative of the defendant company actually said at the meeting that the defendant company
would make ex gratia payments "approximating to" the defendant company's contributions. Having been informed of
the recorded agreement, and having found other employment and left the defendant company's employment at the end
of March, 1962, the plaintiff elected on May 1, 1962, to withdraw his contributions to the pension fund and to receive
the ex gratia payment that the defendant company proposed to make. The defendant company paid to the plaintiff the
amount of his contributions, but did not make the ex gratia payment, and rescinded the decision to make ex gratia payments, having regard to the defendant company's financial difficulties and creditors. The plaintiff brought this action to
recover a sum equal to the total contributions made by the defendant company in respect of him to the pension fund.
The defendant company contended that the recorded agreement was not intended to create legal relations and was too
vague, and thus was not legally binding. It was admitted at the hearing that there was consideration moving from the
plaintiff and that at the time of the meeting of Feb. 8, 1962, the defendant company tended to carry out the recorded
agreement.
Held: where, as here, there was agreement and the subject of agreement related to business affairs, the onus of establishing that the agreement was not intended to create legal relations, which was on the perty setting up that defence,
was a heavy onus (see p. 500, letter A, post); and the defendant company had failed to discharge it for the following reasons -(i) the words "ex gratia" were used simply to indicate that the party agreeing did not admit any pre-existing liability
on the defendant company's part, and the more use of the phrase "ex gratia" as part of a promise to pay (even if prompted by the purpose of avoiding the incidence of income tax) did not show that the promise, when accepted, should have
no binding effect in law (see p. 500, letters D and F, and p. 501, letter D, post), and
(ii) the use of the words "approximating to" on behalf of the defendant company did not render the terms of the
agreement to vague to be enforceable, for at most the phrase would connote on the evidence a rounding off of a few
pounds downwards to a round figure (see p. 501, letter F, post).
Observations of SCRUTTON, L.J., and ATKIN, L.J., in Rose and Frank Co. v. J.R. Crompton & Bros., Ltd.
([1924] All E.R. Rep. at pp. 240, 252) considered.
NOTES:
As to the negativing of the intention of the parties to enter into legal relations, see 8 HALSBURY'S LAWS (3rd
Edn.) 54, para. 90, note (a) and p. 69, para. 118, note (h); as to uncertainty in the terms of an agreement, see ibid, pp. 83,
84, para. 144; and for cases on the subject, see 12 Digest/ (Repl.) 21-23, 3-12.
CASES-REF-TO:
Balfour v. Balfour, [1918-19] All E.R. Rep. 860; [1919] 2 K.B. 571; 88 L.J.K.B. 1054; 121 L.T. 346; 12 Digest (Repl.)
21, 3.
Rose and Frank Co. v. Crompton (J.R.) & Bros., Ltd., [1924] All E.R. Rep. 245; [1923] 2 K.B. 261; 92 L.J.K.B. 959;
129 L.T. 610; revsd. H.L., [1924] All E.R. Rep. 245; [1925] A.C. 445; 94 L.J.K.B. 120; 132 L.T. 641; 12 Digest (Repl.)
22, 4.
CASES-CITED:
Thomas v. Brown, (1876), 1 Q.B.D. 714; Central London Property Trust, Ltd. v. High Trees House, Ltd., [1956] 1 All
E.R. 256.n; [1947] 1 K.B. 130; Robertson v. Minister of Pensions, [1948] 2 All E.R. 767; [1949] 1 K.B. 227; Combe v.
Combe, [1951] 1 All E.R. 767; [1951] 2 K.B. 215.
INTRODUCTION:
Action. In this action the plaintiff Peter John Edwards, an aircraft pilot, formerly employed by the defendant company, Skyways, Ltd., claimed payment of a sum equal to the total of the defendant company's contributions on his behalf to the aircrew superannuation fund of which he had been a member. The action was founded on an oral agreement
reached at a meeting on Feb. 8, 1962, which had been arranged to negotiate matters arising out of a "redundancy declaration" affecting fifteen per cent. of the defendant company's pilot strongth. At this meeting the defendant company through their representatives, acting on the authority of a resolution of the board of directors, promised the representatives
of the British Air Line Pilots Association, acting for the plaintiff and other redundant pilots concerned, that to each of
those pilots who left their service and opted to take a refund of his own contributions to the superannuation fund (rather
than take the right to a paid up pension payable on retirement age) they would make an ex grattia payment approximating to (or equivalent to) the contributions made to the fund by the defendant company in respect of that pilot. On May
2, 1962, the defendant company's board of directors by resolution rescinded their carlier decision to make ex grattia
payments to redundant aircrew. The facts appear in the judgment.
COUNSEL:
J.P. Connyn, Q.C., and J.D.F. Moylan for the plaintiff. A.W. Hamilton for the defendant company.
JUDGMENT-READ:
Jan. 21, 1964.
PANEL: Megaw, J.
JUDGMENTBY-1: MEGAW, J.
JUDGMENT-1:
MEGAW, J., read the following judgment: The plaintiff, Captain Peter John Edwards, was employed as an aircraft
pilot by the defendant company, Skyways, Ltd., for June, 1955, until Mar. 31, 1962, with the rank of first officer for the
first few months, and thereafter as captain. His terms of employment provided for three months' notice of termination.
On Jan. 26, 1962, the defendant company, being in financial difficulty and not having sufficient work to continue to employ all its staff, wrote a letter to the plaintiff, at the same time sending similar letters to other persons. The plaintiff
was told that it would be "necessary to declare a redundancy of approximately fifteen per cent of our pilot strength", and
he was given three months' notice. He was offered alternative employment either as a captain based at Lympne Airport
with a subsidiary company (which would have involved him in moving his home) or as a first officer on the defendant
company's four engined fleet (which would have involved reduction of pay and status).
The question of the threatened redundancy was taken up with the defendant company by the British Air Line Pilots
Association, to which the plaintiff belonged. The association took the view that certain procedure which had been
agreed in 1948 in the National Joint Council with regard to redundancies had not been observed by the defendant company. A meeting took place between representatives of the association and representatives of the defendant company on
Feb. 8, 1962. It is not in dispute that the representatives of the association were the duly authorised agents of the plaintiff, and that the representatives of the defendant company had full authority from that company in respect of all that
was done and agreed at that meeting affecting the plaintiff. Two days before the meeting, on Feb. 6, at a meeting of the
board of directors of the defendant company, a resolution had been passed in these terms:
"The board approved that the secretary be empowered in his discussions with the British Air Line Pilots Association to agree should circumstances require to the payment to redundant aircrew members of ex gratia amount approximating to the company's contributions for each member of the Pension and Superannuation Fund."
It appears that the defendant company realised that the association would be seeking to secure some form of compensation for its members who were being declared redundant and that it was accordingly authorising the secretary, in
advance, to deal with the question when it arose. The secretary of the defendant company, Mr. David John Davies,
himself drafted the resolution. It was based on what had been done at the time of an earlier redundancy in the defendant
company in 1959, when, after discussions with the association, the defendant company had paid sums to redudant aircrew staff, the sums being at any rate closely related in amount to the total superannuation contributions made by the
company in respect of the particular redundant employee.
At the meeting on Feb. 8, 1962, the defendant company's representatives included, amonget others, Mr. Davies, the
secretary, and Mr. Lees, the personnel officer. The association's representatives included, amongst others, Mr. Follows,
who was then the secretary, and Captain Clink, the chairman of the association's local committee with the defendant
company, who was also an employee of the defendant company. The plaintiff himself was not present. As to what happened at the meeting, so far as is relevant to the issues in this action, there is no real dispute on any matter of substance.
Each of the witnesses who gave evidence before me was truthful and fair in giving his recollection. Such minor differences as there were in their accounts of the conversations are not on matters of any real significance. I need not recount much of what took place at the meeting. The substance of it is accurately summarised in a document headed "Notes", which was prepared the next morning by Mr Follows with the assistance of Captain Clink, on the basis of manuscript notes made during the meeting. There is no doubt that everyone present at the meeting thought that all major difficulties had been resolved and that various matters of principle had been agreed. I need mention only one of the matters discussed and agreed.
The plaintiff (and there were other pilots in a similar position) would have been entitled under his terms of service,
if he left his employment with the defendant company for any reason other than dismissal for misconduct, to take a
paid-up pension; that is, a pension which would, without further contribution to be made by anyone, become payable
when he reached the normal retiring age stated in the pension scheme. It would be calculated by reference to the total
contributions paid, up to date, by himself and by the defendant company on his account. Alternatively, the plaintiff
would be entitled to withdraw his own contributions in cash. Mr. Follows had in mind what had happened in the 1959
redundancy when the company had agreed to pay, and had paid, redundant pilots sums of money equivalent, at least
broadly, to the company's pension contributions in respect of them, in addition to the pilots' own contributions which
they were contractually entitled to withdraw. He, therefore, at the meeting, asked that similar financial compensation
should be paid by the defendant company, on this occasion. Mr. Davies, on behalf of the defendant company, having
already in anticipation received his board's authority, quickly and readily agreed.
This agreement is recorded as follows in notes to which I have referred:
"The following general principles were then accepted in relation to the redundancy and consequential matters";
and then, after certain other matters, this appears:
"Pilots declared redundant and leaving the company would be given an ex gratia payment equivalent to the compa-
ny's contribution to the Pension Fund. They would, of course, be entitled to a refund of their own contributions to the
fund."
The pilots affected were informed of the various decisions and agreements in a publication called "Newsletter", addressed by the association to its members on Feb. 9, 1962. The agreement as to the defendant company's contributions is
there recorded as follows:
"After considerable discussion, the following points were agreed between the company and the association: ... 4.
To those pilots who are finally declared redundant, the company will make an ex-gratia payment equivalent to their (the
company's) own contributions to the Provident or Pension Scheme."
There is reason to believe that Mr. Davies, the secretary, saw this "Newsletter", and did not challenge the accuracy
of what was there recorded. Mr. Davies' own account of what he said on the point at the meeting is as follows:
"Having the board's authority, I said we would make ex gratia payments approximating to the company's contributions for those pilots who chose to take their contributions rather than paid-up pension policies."
I think it is probable that Mr. Davies's recollection is right when he says that he himself used the words "approximating
to". It may well be that both that phrase and "equivalent to" were used during the discussion. No one attached any particular significance to the point, and I do not regard verbal niceties as being of importance. Mr. Davies in evidence
agreed that "equivalent to" is a reasonable interpretation of what he said. Mr. Lees agreed that everyone left the meeting with a clear impression that the defendant company would pay an amount equal to the defendant company's contribution. I am satisfied that that is the substance of what was understood and agreed when the meeting ended.
The issue in this action is whether, as a result of what was agreed at the meeting, the plaintiff when he decided not
to accept any of the offered alternatives but to leave the company's service and withdraw his own pension contributions,
acquired a legal right, to be paid by the defendant company a sum equal to the contributions which they had paid to the
pension fund on his behalf. The plaintiff says that there was a legally binding contractual right. The defendant company say that, while there may have been a moral right, or an obligation binding in honour, there was not a legally enforceable right. Before considering the issue, I should complete my outline of the history of the matter.
The plaintiff, not desiring to accept the defendant company's offer of continuing employment with the various disadvantages involved, sought and obtained other employment to begin on Apr. 1, 1962, and the defendant company
agreed that the plaintiff should leave their service on Mar. 31 before the full three months' notice had run. On Apr. 15,
1962, the plaintiff wrote to Mr. Roberts, the assistant secretary of the defendant company, asking for information to enable him to make up his mind about the option between, on the one hand, his undoubted legal right to take the paid-up
pension, and, on the other hand, the right which it had been agreed (whether or not as an obligation binding in law) that
he should have, to withdraw his own contributions and receive what he described (no doubt following the wording of
the "Newsletter" which he had seen) as, "the amount of the ex gratia payment which the company proposes to make in
the event of my taking the cash refund". Mr. Roberts replied on Apr. 17, giving him approximate figures: a paid-up policy of about £ 180 per annum at the age of fifty; his own contributions of approximately £ 630, less tax of approximately £ 60; and "The ex gratia payment will be approximately half as much again as your own contributions, but as this is
purely ex gratia there is no question of tax." The following day the plaintiff wrote to Mr. Roberts telling him how he had
decided to exercise what he believed to be his option: "I have decided to take the cash refund of my contributions, with
the company's ex gratia payment". The plaintiff, with the complete frankness which was characteristic of his evidence,
said that he could not now be sure whether he would have exercised the option the same way, if he had not though that
the defendant company were going to pay him that which they had agreed to pay in respect of their own contributions.
He would certainly have thought much more deeply about it. He might still have decided to take the immediate cash
provided by the refund of his own contributions.
On May 1, 1962, the defendant company sent the plaintiff a cheque for £ 609 1s., in respect of his own contributions. On May 2, 1962, the very day after that payment had been made to, and accepted by, the plaintiff in the belief
that a further sum was to follow -- because the defendant company ahd so promised -- the board of directors of the defendant company met and passed another resolution. It was in these terms:
"It was resolved that the company's previous decision to make ex gratia payments to redundant aircrew be rescinded because of the large number of staff involved and in view of the position that the company's contributions to the
scheme which were returnable to the trustees could not, under the rules of the scheme, be utilised directly by the company. Mr. Ryland and Mr. Davies would draft a letter to the staff concerned explaining the position and Mr. Davies would
arrange with the insurance company for an extension of the option period to be made for all aircrew members who had
already opted for cash so that they could reconsider their decision."
I offer no comment, except to mention the explanation given on behalf of the defendant company. It is said that they
found themselves in financial difficulties, with various creditors, secured and unsecured, pressing them. Although at the
time when they made the promise they intended to honour it, later they thought that in the existing financial situation
they should decline to honour it because they believed that it was not legally binding, and because other creditors, with
legal obligations, might have been prejudiced. The defendant company ave not gone into liquidation. The plaintiff has
not been paid, because the obligation was merely, as I understood the defendant company's view, a moral one, which
they repudiated. It is not necessary for me to set out the subsequent history, since it does not affect the issue, namely:
was there a legal obligation on the part of the defendant company?
The defendant company admit, as I understand it, that at the meeting a promise was made on their behalf with their
authority, although the actual word "promise" was not used. In the defence it was pleaded that no consideration moved
from the plaintiff. That plea was expressly abandoned at the hearing. It was conceded that there was consideration.
The defendant company admit that it was their intention to carry out their promise when they made it, and that the plaintiff's representatives, and the plaintiff himself, believed, and acted in the belief, that the promise would be fulfilled.
Everyone, at the end of the meeting, believed that there was an agreement which would be carried out. But the defendant company say that the promise and the agreement have no legal effect, because there was no intention to enter into
relations in respect of the promised payment.
It is clear from such cases as Rose and Frank Co. v. J. R. Crompton & Bros., Ltd. n(1) and Balfour v. Balfour n(2),
that there are cases in which English law recognises that an agreement, in other respects duly made, does not give rise to
legal rights, because the parties have not intended that their legal relations should be affected. Where the subject-matter
of the agreement is some domestic or social relationship or transaction, as in Balfour v. Balfour n(2), the law will often
deny legal consequences to the agreement, because of the very nature of the subject-matter. Where the subject-matter
of the agreement is not domestic or social, but is related to business affairs, the parties may, be using clear words, show
that their intention is to make the transaction binding in honour only, and not in law; and the courts will give effect to
the expressed intention. SCRUTTON, L.J., expressed it thus, in Rose and Frank Co. v. J. R. Crompton & Bros, Ltd.
n(3).
n(1) [1924] All E.R. Rep. 245; [1923] 2 K.B. 261.
n(2) [1918-19] All E.R. Rep. 860; [1919] 2 K.B. 571.
n(3) [1924] All E.R. Rep. at pp. 249, 250; [1923] 2 K.B. at p. 288.
"It is quite possible for parties to come to an agreement by accepting a proposal with the result tht the agreement
concluded does not give rise to legal relations. The reason of this is that the parties do not intend that their agreement
shall give rise to legal relations. This intention may be implied from the subject-matter of the agreement, but it may
also be expressed by the parties. In social and family relations such an intention is readily implied, while in business
matters the opposite result would ordinarily follow. But I can see no reason why, even in business matters, the parties
should not intend to rely on each other's good faith and honour, and to exclude all idea of settling disputes by any outside intervention with the accompanying necessity of expressing themselves so precisely that outsiders may have no difficulty in understanding wthat they mean. If they clearly express such an intention I can see no reason in public policy
why effect should not be given to their intention."
In the same case, ATKIN, L.J., said n(4):
n(4) [1924] All E.R. Rep. at p. 252; [1923] 2 K.B. at p. 293.
"To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly. Such an intention ordinarily wii be inferred when parties enter into an agreement
which in other respects conforms to the rule of law as to the formation of contracts. It may be negatived impliedly by
the nature of the agreed promise or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in the course of family life between members of a family as in Balfour v. Balfour n(2). If the intention may
be negatived impliedly it may be negatived expressly."
n(2) [1918-19] All E.R. Rep. 860; [1919] 2 K.B. 571.
In the present case, the subject-matter of the agreement is business relations, not social or domestic matters. There
was a meeting of minds -- an intention to agree. There was, admittedly, consideration for the defendant company's promise. I accept the propositions of counsel for the plaintiff that in a case of of this nature the onus is on the party who assets that no legal effect was intended, and the onus in a heavy one. Counsel for the plaintiff also submitted, with the
support of the well-known textbooks on the law of contract, (ANSON, and CHESHIRE AND FIFOOT), that the test of
intention to create or not to create legal relations is "objective". I am not sure that I know what that means in this context. I do, however, think that there are grave difficulties in trying to apply a test as to the actual intention or understanding or knowledge of the parties; especially where the alleged agreement is arrived at between a limited liability company and a trade association; and especially where it is arrived at at a meeting attended by five or six representatives on
each saide. Whose knowledge, understanding or intention is relevant? But if it be the "objective" test of the reasonable
man, what background knowledge is to be imputed to the reasonable man, when the background knowledge of the ten
or twelve persons who took part in arriving at the decision no doubt varied greatly between one another? However that
may be, the defendant company say, first, as I understand it, that the mere use of the phrase "ex gratia" by itself, as a
part of the promise to pay, shows that the parties contemplated that the promise, when accepted, should have no binding
force in law. They say, secondly, that even if their first proposition is not correct as a general proposition, nevertheless
here there was certain background knowledge, present in the minds of everyone, which gave unambiguous significance
to "ex gratia" as excluding legal relationship.
As to the first proposition, the words "ex gratia" do not, in my judgment, carry a necessary, or even a probable, implication that the agreement is to be without legal effect. It is, I think, common experience amongst practitioners of the
law that litigation or threatened litigation is frequently compromised on the terms that one party shall make to the other
a payment described in express terms as "ex gratia" or without admission of liability". The two phrases are, I think, synonymous. No one would imagine that a settlement, so made, is unenforceable at law. The words "ex gratia" or "without admission of liability" are used simply to indicate -- it may be as a matter of amour propre, or it may be to avoid a
precedent in subsequent cases -- that the party agreeing to pay does not admit any pre-existing liability on his part; but
he is certainly not seeking to preclude the legal enforceability of the settlement itself by describing the contemplated
payment as "ex gratia". So here, there are obvious reasons why the phrase might have been used by the defendant company in just such a way. They might have desired to avoid conceding that any such payment was due under the employers' contract of service. They might have wished -- perhaps ironically in the event -- to show, by using the phrase,
their generosity in making a payment beyond what was required by the contract of service. I see nothing in the mere
use of the words "ex gratia", unless in the circumstances some very special meaning has to be given to them, to warrant
the conclusion that this promise, duly made and accepted, for valid consideration, was not intended by the parties to be
enforceable in law.
The defendant company's second proposition seeks to show that in the circumstances here the words "ex gratia" had
a special meaning. What is said is this: When a payment such as this is made by an employer to a dismissed employee
the question whether it is subject to income tax in the hands of the recipient is important; it was understood by the defendant company and by the association, and by all their respective representatives at the meeting, that if the company's
payment were made as the result of a legally binding obligation, it would be taxable in the hands of the recipient; whereas, if it were to be made without legal obligation on the part of the company, it would not be taxable. (It was not argued before me whether this assertion is right or wrong in law. It was said by the defendant company that that was quite immaterial; what was material was that the parties so believed.) Thus, it is said, the phrase "ex gratia" was used, and
was understood by all present to be used, deliberately and advisedly as a formula to achieve that there would be no binding legal obligation on the company to pay, and hence to save the recipient from a tax liability. It is said that the offer
was accepted by the association with full knowledge and understanding of these matters. Hence, it is said, the agreement by tacit consent, a consent evidenced by the use of the words "ex gratia" against this background of common understanding, was an agreement from which legal sanction and consequences were excluded. In my judgment, that submission also fails because the evidence falls far short of showing that this supposed background of avoidance of tax liability was present as an important element in the minds of all, or indeed any, of the persons who attended the metting of
Feb. 8, 1962, or, if this be something different, in the minds of the defendant company or of the association; or that they
all, or any of them, directed their minds to the significance of the words "ex gratia" which is now suggested on behalf of
the defendant company. The question of tax liability, and the possible influence thereon of the use of the words "ex gratia", may indeed have been present in some degree, and as one element, in the minds of some of the persons present at
the meeting. That, however, is far from sufficient to establish that the parties -- both of them -- affirmatively intended
not to enter into legal relations in respect of the defendant company's promise to pay.
Lastly, the defendant company say that, even if the agreement were otherwise in all respects a binding agreement, it
is not enforceable because its terms are too vague. This is founded on the submission that the precise words used by
Mr. Davies at the meeting were "approximating to"; that these precise words are a part of the agreement; that they leave
a discretion to the defendant company; that therefore there is no enforceable agreement, and they can refuse to pay anything. I have already indicated my conclusion on the evidence as to what was indeed agreed at the end of the meeting.
If this be right, there is nothing in this point. Even if it were wrong, I do not think that English law provides that in such
circumstances the plaintiff would be entitled to nothing. At most "approximating to", if that were the contractual terms,
would on the evidence connote a rounding off of a few pounds downwards to a round figuare. If a contract for the sale
of goods is valied and binding when it provides for "about 1,000 tons in seller's option", or "1,000 tons, up to ten per
cent. more or less in buyer's option", it would seem hard to justify treating such a contract as this as a nullity, and I do
not think that the law so requires.
I do not have to consider a further issue of alleged failure to mitigate damages, as this was expressly abandoned by
the defendant company at the hearing. I shall hear submissions as to the precise form which the order of the court
should take.
DISPOSITION:
Judgment for the plaintiff.
SOLICITORS:
Evan Davies & Co. (for the plaintiff); McKenna & Co. (for the defendant company).