The Privy Council has held that an employee who took voluntary redundancy was still required to repay a company loan when he fell short of the length of service requirement for repayment to be waived.

There was no implied term that repayment wasn't required in these circumstances. The principles in this case may be relevant to other conditional loan arrangements, such as enhanced maternity pay schemes or study loans. (Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2).

Background

Terms can be implied into employment contracts by statute or through case law.

When the express terms of the contract between the parties fail to deal with an issue, the court will consider whether a term is implied "in fact". In Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015], the Supreme Court confirmed that, depending on the circumstances of the case (and in addition to other factors), a term will be implied "in fact" if one of the following tests is satisfied that the term is:

  • necessary to give business efficacy to the contract; or
  • so obvious that it goes without saying (where, if an "officious bystander" suggested to the parties that the term be included in the contract, they would have said: "Oh, of course").

The Courts have held that they will not imply a term into a contract simply because they think it would have been reasonable for the parties to have done so, nor because to do so would make it fair.

Facts

Mr Ali (the Claimant) had worked for Petroleum Company of Trinidad and Tobago (Petrotrin) for over ten years when he was awarded a company scholarship to study for a degree abroad. Petrotrin agreed to pay the Claimant a monthly living allowance in the form of a repayable loan to assist with living costs. The loan was subject to a condition that repayment would be waived if the Claimant worked for Petrotrin for at least five years after finishing his degree.

Eighteen months after the Claimant had returned to work, Petrotrin wrote to all employees in the Claimant's section of the business, inviting applications for voluntary redundancy. The accompanying information booklet stipulated that invitations to participate in the voluntary redundancy scheme would only be sent to employees who had a minimum of five years' service and whose jobs had been identified as redundant (as determined by Petrotrin).

The Claimant chose to apply for voluntary redundancy and was successful in his application. However, when calculating the Claimant's redundancy payment, Petrotrin deducted the full amount of the Claimant's loan for his monthly living allowance. After deduction of some other debts as well, the Claimant's redundancy payment of approximately £28,000 was, ultimately, reduced to zero.

The Claimant sought to assert that he was not contractually obliged to repay the monthly living allowance loan, on the basis that Petrotrin had terminated his employment before he could attain the five years' service required for repayment to be waived. He argued that a term should be implied in the loan contract precluding his dismissal for five years. Alternatively, he said that Petrotrin should be required to waive the repayment if his employment was terminated at the initiative of the company other than for reasons of dishonesty.

However, the claim was dismissed by a judge at first instance and on appeal. The Claimant appealed to the Privy Council.

Privy Council decision

By a majority, the Privy Council (Council) dismissed the Claimant's appeal and held that:

1. There was no implied term that Petrotrin could not dismiss the Claimant within the five year period.

The Council recognised that there might be many reasons why it might not be necessary, or even reasonable, to require the company to keep on an employee, for example if there was no longer any sensible place for him in the business. Also, it was not necessary to imply an obligation to keep the Claimant's job open to him if that objective could be achieved by lesser means, such as requiring a waiver of the loan either on completion of five years, or if Petrotrin prevented him from serving out the five years.

2. There was an implied term that Petrotrin would do nothing of its own initiative to prevent the Claimant from providing 5 years' service (and that, if it did, the obligation to repay the loan would be waived).

The Council found that the Claimant's second ground of appeal was too narrowly expressed in only excepting dismissal for dishonesty, as it could not be said that preventing Petrotrin from terminating someone in the Claimant's position for any other repudiatory breach of contract, justifying dismissal, was necessary to make the contract work.

However, the Council concluded that the implied term would be triggered if Petrotrin prevented an employee completing five yeears of service (other than for repudiatory breach or where it operated under compulsion, such as where there are changed in regulatory law, or the intervention of a controlling company or liquidator).

On the facts, the majority concluded that Petrotrin had not prevented the Claimant from completing five years' service, as he had freely volunteered to be dismissed. Therefore, as there had been no obligation for the Claimant to volunteer, it was right that he should repay the loan. However, the Council accepted that their decision might have been different if the Claimant's redundancy had not been truly voluntary.

Whilst Privy Council decisions are not legally binding in the UK, they are persuasive. This case suggests that, in the absence of any express terms, employees in voluntary redundancy situations will be required to repay any loans or other debts to their employer, but that employees who are made compulsorily redundant may not.

To avoid disputes ending up in court, it is always best to include express wording in the terms of any conditional loan agreements to address what should happen regarding repayment in the event that any of the conditions are not met, such as employment terminating before an agreed term.

As the terms of the repayment loan in this case are similar to many other conditional loan arrangements (such as enhanced maternity pay schemes or study loans), employers should check whether express terms have been included in those agreements to deal with situations like early termination of employment and how that might affect repayment. For example, many employers choose to include a clause to pro-rate the amount of an outstanding loan that would be payable on termination, depending on how far the conditions for waiver have been met at the termination date.