With employment agreements falling under the Unfair Contract Terms Act,
employers need to tighten contracts
For some years there has been a question mark over whether contracts of
employment are covered by the Unfair Contract Terms Act 1977. This Act
effectively restricts the ability of certain parties to rely on contractual
clauses which exclude their liability. Previously the issue has arisen where
employers have sought to exclude any liability in respect of stock options
which have not been exercised by the time an employee’s contract of employment
is terminated.
In Brigden v American Express, The High Court ruled that employment
contracts fall within the scope of section 3 of Ucta.
Provision issue
Brigden was employed by American Express for under 12 weeks before he was
summarily dismissed with three months’ pay in lieu of notice. The company did
not follow the contractual disciplinary procedure before dismissing him and he
claimed that because of this American Express was in breach of contract.
The company relied on a provision in Brigden’s contract which stated,
"An employee may be dismissed by notice and/or payment in lieu of notice
during the first two years of employment without implementation of the
disciplinary procedure."
Brigden argued that this provision was void as being unreasonable under S3
of Ucta. This states that when a party is in breach of contract, it cannot:
• Exclude or restrict any liability in respect of that breach.
• Claim to be able to perform the contract in a way which is
"substantially different from that reasonably expected of it".
• Fail to perform at all by reliance on a contractual term purporting to
allow them to do so unless the contractual term is "reasonable" under
Ucta.
Brigden argued that the provision that his employer need not apply the
disciplinary procedure to him was unreasonable and therefore could not be used
to by-pass the dismissal procedure.
First, the court had to decide whether S3 Ucta, which is primarily to govern
consumer contracts, can be applied to contracts of employment. It decided that
it can, as an employee entering into an employment contract is "dealing as
a consumer" under Ucta.
Ucta cover
The clause which Brigden complained was unenforceable under Ucta did not
come within S3(2) because it was not a term excluding or restricting the
employer’s liability for breach of contract. Nor did it entitle the company to
perform the contract in a different way from that reasonably expected of it.
Although the clause was expressed in negative terms, it set out the limitations
on Brigden’s rights.
This gives some indication of the clauses which will not fall foul of Ucta –
although employers should note that with the reduction in the qualifying period
for unfair dismissal claims from two years to one, any dismissal of an employee
with more than a year’s service is likely to invite claims. The clause which
helped American Express would not exclude liability for unfair dismissal.
So what type of clause is void under Ucta? S3 covers exclusion clauses. The
second part, 3(2), covers situations where an employer seeks to carry out the
contract in a manner "substantially different from that which was
reasonably expected of them". This could cover a number of scenarios,
particularly where an employer has an express power. For example, a mobility
clause exercised unreasonably.
Wider net
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While it is useful to have had the issue clarified on whether contracts of
employment are covered by Ucta, the wider scope of this decision is likely to
bring more areas of uncertainty to the employment relationship.
By Sarah Lamont, a partner at Bevan Ashford
