Appeal No.	EAT/1342/00

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 25 April 2002
Judgment delivered on 14 June 2002

Before
THE HONOURABLE MR JUSTICE BELL
MR K EDMONDSON JP
MR A E R MANNERS

MRS R NICHOLLS	APPELLANT

LONDON BOROUGH OF GREENWICH	RESPONDENT

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellant	MISS NAOMI CUNNINGHAM
(of Counsel)
Instructed By:
Free Representation Unit
4th Floor
8 – 14 Verulam Street
London WC1X 8LZ	
For the Respondent	MISS JANE McCAFFERTY
(of Counsel)
Instructed By:
Legal Services
Chief Executive’s Department
London Borough of Greenwich
29-37 Wellington Street
Woolwich
London SE18 6PW	

MR JUSTICE BELL:

1.	This is an appeal by Mrs R.Nicholls against the decision of the Employment Tribunal, sent to the parties on 29 September 2000 after a hearing on 20 September 2000.

2.	The Tribunal dismissed Mrs Nicholls’ claim for damages for breach of contract. She had worked for many years, first for the Inner London Education Authority (“ILEA”) and then for the London Borough of Greenwich (“the Council”). Her contracts of employment with both authorities promised her a retirement gratuity of two weeks pay for every year of service, but when she retired the council calculated her gratuity under regulations made pursuant to the Superannuation Act 1972. She received £1,171.94 instead of the £4,075.58 which her “two weeks for every year” contract would have produced. She claimed the shortfall of £2,903.64 as damages for breach of contract. Her claim was rejected because the Tribunal decided that the relevant contractual term had become unenforceable because it was not lawful for the council to agree or make a payment in excess of the limits prescribed by the regulations.

3.	The Tribunal had every sympathy for Mrs Nicholls. It was highly regrettable that the council did not promptly inform her of its change of view of the law, many years before she retired, so that she could adjust her expectations and act accordingly, but there was nothing it could do. Was the Tribunal right?

4.	Mrs Nicholls was born on 23 February 1935. She commenced employment with ILEA as a part time cleaner on 1 April 1982. As she worked less than thirty hours per week she was not eligible to join the ILEA Pension Scheme, but her contract of employment included terms set out in the Greater London Council Staff Code. One of those terms was that on retirement she would receive a gratuity equivalent to two weeks pay for each complete year of service, subject to reduction for retirement before the age of sixty-five.

5.	Section 7 of the Superannuation Act 1972 provides that:

“(1) The Secretary of State may by regulations make provisions with respect to the pensions, allowances or gratuities which, subject to the fulfilment of such requirements and conditions as may be prescribed by the regulations, are to be, or may be, paid to or in respect of such persons, or classes of persons, as may be so prescribed, being –
(a) persons, or classes of persons, employed in local government service ….”

6.	Section 24 of the Act provides that:

“(1) …. The Secretary of State may ….. by regulations provide for the payment by such persons as may be prescribed or determined under the regulations of pensions, allowances or gratuities by way of compensation to or in respect of the following persons, that is to say persons – (a) in relation to whom regulations may be made under section 7 …. of this Act …. ; and (b) who suffer loss of office or employment, or loss or diminution of emoluments, in such circumstances, or by reason of the happening of such an event, as may be prescribed by the regulations.”

7.	Regulations have been made under section 7 in harness with section 24. The first regulations to present a potential problem to Mrs Nicholls’ gratuity, as it later turned out, were the Local Government Superannuation (Miscellaneous) Provisions Regulations 1987 (SI 1987/293).

8.	Regulation 16 of the 1987 Regulations amended Part K of the Local Government Superannuation Regulations 1986 (SI 1986/24), relating to “GRATUITIES”.

9.	Paragraph K2 of the 1987 Regulations, “Persons to whom Part K applies”, provided:

“This Part applies to a person employed otherwise than as a teacher, by a scheduled body if he –
(a) has been employed by the body for not less than 5 years and ceases to be employed by them ….”

10.	Paragraph K3, “Power to grant gratuities”, provided:

“(1) The body who employed a person to whom this Part applies may grant to him …. a gratuity which may consist of a lump sum or an annuity or both ….”

11.	Paragraph K4, “Amount of gratuity”, provided:

“(1) The amount of a gratuity, which is to be taken as including the capital value of an annuity, granted under regulation K3(1) is not to exceed ….”

12.	The formula for calculating the gratuity was then set out in the remainder of paragraph K4(1). Application of the formula would “cap” Mrs Nicholls’ contractual gratuity at a level below its “two weeks for every year” value.

13.	On 1 August 1991, the undertaking in which Mrs Nicholls was employed was transferred from ILEA to the council, so that she became employed by the council in its Direct Services Organisation. The transfer was governed by the Transfer of Undertaking (Protection of Employment) Regulations 1981 (“TUPE”), but it is common ground that as the ILEA term relating to retirement gratuity was a term relating to benefits for retirement and old age, it was excluded from transfer by regulation 7 of TUPE.

14.	To avoid Mrs Nicholls losing the benefit of the term, however, the council agreed it afresh. It did so by a letter dated 9 July 1991, written by the council’s Director of Contract Services, informing her of what were described as variations to her terms and conditions of employment. The letter included the following:

“Gratuity - ex-ILEA staff who are not members of the pension scheme will continue to accrue gratuity under the terms of the ILEA scheme (2 weeks for every year of service). For other staff who qualify the Greenwich Scheme will apply”.

15.	The letter was accompanied by a letter of engagement by the council. Paragraph 9 of the letter of engagement stated:

“Staff who do not contribute to the Superannuation Scheme will be entitled to a gratuity payment upon retirement in accordance with the ILEA scheme”.

16.	The council accepts that it thus expressly adopted the ILEA term relating to gratuity payments. Miss Jane McCafferty who appeared for the council before the Tribunal and before us informed us that when the council adopted the term it was aware that it would involve a gratuity greater than that provided for in the 1987 Regulations. It had taken the advice of eminent, specialist counsel, and took the view that it was empowered to make gratuity payments in excess of those prescribed by the 1987 Regulations, pursuant to its powers under sections 111 and 112 of the Local Government Act 1972.

17.	All that was changed soon afterwards, however, in the view of the council, and as Miss McCafferty argued, by the Divisional Court and Court of Appeal decisions in Allsop v. North Tyneside Metropolitan Borough Council [1991] 90 L.G.R.462 (QBD) and [1992] ICR 639 (C.A.). The council understood that case to mean that it had no power to make any gratuity payments in excess of the limits set by the 1987 Regulations; it could not turn to section 111 or section 112 to do so. Thereafter it did not make any gratuity payments in excess of the 1987 Regulations. It did not, however, communicate its change in view or attitude to Mrs Nicholls.

18.	There were further regulations under the Superannuation Act 1972 in the form of the Local Government (Discretionary Payments) Regulations 1996. Regulation 41 provides, under the heading “Retirement Gratuities”:

“(1) Where a person –
(a) who has been employed by a LGPS employer for at least 5 years; or
(b) who has been so employed for at least one year and 
(i) has attained the age of 60 ….
ceases to be so employed …., the LGPS employer may make him a discretionary grant (“a retirement gratuity”).
(2) A retirement gratuity may consist of a lump sum or an annuity or both.
(3) The amount of a retirement ….. must not exceed …. [formula].”
LGPS stands for Local Government Pension Scheme.

19.	Again, Mrs Nicholls’ “two weeks for every year” gratuity came to more than the formula in the 1996 Regulations provided.

20.	Mrs Nicholls eventually retired on 15 February 2000. Prior to her retirement she requested a statement of the gratuity which she could expect. It was, as we have already indicated, significantly less than she expected. It was paid in May 2000. Mrs Nicholls, understandably dissatisfied, made her application to the Employment Tribunal.

21.	The issue on appeal was ultimately refined to whether the ILEA term as to gratuity adopted by the council in Mrs Nicholls’ 1991 contract of service was lawful despite the provisions of the 1987 Regulations, and whether the agreed gratuity could lawfully be paid despite the provisions of the 1987 and 1996 Regulations.

22.	It is common ground that the council, as a local authority, can lawfully do only that which statute gives it power to do. That applies to entering contracts to make payments, and to making the payments themselves.

23.	Mrs Naomi Cunningham, for Mrs Nicholls, primarily contended that the council had the power to agree the relevant term in Mrs Nicholls’ 1991 contract of service, and to make a payment to her upon retirement in accordance with the term, pursuant to its powers under section 112 of the Local Government Act 1972. The powers in that section were somewhat wider than the powers in its predecessor provision, section 105 of the Local Government Act, 1933. Alternatively, it had power to so under section 111 of the Local Government Act 1972. Those sections of that Act took effect some months after section 7 of the Superannuation Act, 1972.

24.	Section 111 of the Local Government Act, 1972, provides:

“(1) Without prejudice to any powers exercisable apart from this section but subject to the provisions of this Act and any other enactment passed before or after this Act, a local authority shall have power to do anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate or is conducive or incidental to, the discharge of any of their functions.”

25.	Section 112 of the Act provides:

“(1)  ….. [a] local authority shall appoint such officers as they think necessary for the proper discharge of such of their or another authority’s functions as fall to be discharged by them ….
(2) An officer appointed under subsection (1) above shall hold office on such reasonable terms and conditions, including conditions as to remuneration, as the authority appointing him think fit.”

26.	We accept Mrs Cunningham’s submission that in the context of the power given by section 112, “officers” simply means “employees” and that Mrs Nicholls was an officer of the council for the purposes of section 112. This accords with the terms of section 255 of the Act, which treats the holder of any office or employment as an officer for the purpose of transfer between local authorities. See also Legg v. Vestry of Stoke Newington [1985] 59 JP 696 and Carpenter and others v. Corporation of Bristol [1907] 2KB 617. Miss McCafferty did not dispute this. She drew our attention to the statement of Parker L.J. in Allsop at [1992] ICR 644:

“ …. I should however make clear that although it was not argued that section 112 applies only to “officers” properly so called I have considerable doubts whether it can properly be construed to apply to all employees of a local authority.”

But Miss McCafferty felt unable to develop an argument that “officers” did not include employees of all grades.

27.	Mrs Cunningham’s argument then proceeded essentially as follows. It was a term of Mrs Nicholls’ contract of service from the time when she was engaged by the council in 1991 that she would continue to accrue gratuity at the rate of two weeks for every year of service. The right to a gratuity so calculated was one of the terms upon which she held office, and as such the council was entitled to confer it in exercise of its powers under section 112. It was in her contract of employment from the outset, and it was as much part of the council’s consideration for her work as her regular pay. Section 112 was not, like section 111, made subject to other enactments, and in any event section 7 of the Superannuation Act 1972 contained no express authorisation to limit a local authority’s broad power to engage employees on any reasonable terms. Section 112 of the Local Government Act 1972 reiterated and extended local authorities’ pre-existing powers in that respect, and it was passed after the Superannuation Act 1972. If the provisions of the Superannuation Act 1972 were to be interpreted to authorise a limitation on that power, it would follow that it authorised the Secretary of State (in his jurisdiction over “allowances”) to determine all the terms of employment of local authority employees in so far as they related to pay or other financial benefits. That could not have been intended. Even if the Superannuation Act 1972 authorised the Secretary of State to limit the contractual terms upon which local authorities might engage staff, the power had not been exercised in respect of the relevant term in Mrs Nicholls’ contract or the payment to be made under it. They were matters of contractual obligation, and were not governed by the Regulations. The Regulations dealt with the power to “grant … a gratuity” when an employee ceased to be employed by a local authority, and were not apt to cover a sum which had been promised to an employee at the start of her service, and which the authority had been contractually bound to pay, growing year by year, throughout her employment. The fact that the sum was described as a “gratuity” in the contract was irrelevant. It was a valid contractual entitlement. If section 112 did not provide the power to agree and make the payment which Mrs Nicholls claimed, section 111 did. It was subject to other enactments, but the Regulations, it was argued again, dealt with gratuities, and not the payment to which Mrs Nicholls was for long entitled as a term of her contract. Such a payment was not a “discretionary payment”: see the title and regulation 41(1) of the 1996 Regulations which were the Regulations in force when the payment came to be made.

28.	The essence of Miss McCafferty’s answer was that Allsop was binding authority that the power to make the payment to Mrs Nicholls could not be found in section 112 because that provision was concerned with what happened during employment. The statutory provisions concerned with what happened upon termination of a contract of employment, and thereafter, were contained in the Superannuation Act 1972 and the Regulations made under that Act. The terms upon which Mrs Nicholls relied was not a term upon which she held office; it was a term upon which she left office. Payments by local authorities upon termination of employment were under the control of the Secretary of State, by laying regulations before Parliament. Mrs Nicholls could not rely upon section 111 because that was subject to the provisions of other enactments, namely the Regulations. The power to pay a gratuity to Mrs Nicholls was to be found in the Superannuation Act and the Regulations alone. It followed that the term of contract relied upon by Mrs Nicholls was unlawful from the start since it would provide an unlawful payment in excess of that allowed by the 1987 Regulations, and any payment at the end of her service, in accordance with her contract would be an unlawful payment in excess of the 1996 Regulations.

29.	The Applicant in the case of Allsop was the auditor of the accounts of a local authority which had a policy of not making its employees compulsorily redundant. But it could not balance its books without redundancies, so it introduced an “enhanced voluntary redundancy scheme” which involved payments substantially higher than those which it was either liable for under section 81 of the Employment Protection (Consolidation) Act 1978, or specifically empowered to make under three sets of regulations made pursuant to sections 7 and 24 of the Superannuation Act 1972, including the Local Government Superannuation Regulations 1986. Mr Allsop made an application for a declaration that the items of account attributable to the making of payments under the enhanced voluntary severance scheme were unlawful. A trial was ordered of a preliminary issue of whether the authority would have had power by virtue of sections 111 and 112 of the Local Government Act 1972 to make payments in excess of those provided by the 1978 Act or the various regulations.

30.	The Divisional Court answered the question in the negative. It decided that the powers in sections 111 and 112 were subject to the limitations imposed by the three sets of regulations. Parliament had laid down under sections 7 and 24 of the Superannuation Act 1972 the particular method for bringing into existence the power to make provisions outside section 81 of the 1978 Act, and no other method could be adopted. The payments made under the scheme could not accurately be described as contractual payments, but even if they were contractual payments that would make no difference. Payments under the scheme would be unlawful no matter under what guise, contract or otherwise, they were made: see Watkins L.J. giving the judgment of the court at 90 L.G.R. page 480.

31.	The local authority appealed. The Court Of Appeal came to the same conclusion as the Divisional Court and dismissed the appeal, holding that the Regulations provided that the Secretary of State should have sole responsibility for determining what was to be or might be paid on redundancy in excess of the payments provided for by section 81 of the 1978 Act.

32.	Parker L.J. gave the leading judgment with which McCowan L.J. and Sir John Megaw agreed. At [1992] I.C.R. 644C to F, Parker L.J. dealt with the council’s preliminary contention, that power to institute the scheme was to be found in section 112, as follows:

“ It is accordingly submitted that if the power to make the disputed payments can be found in section 112 there can be no question of it being excluded or affected by any other Act or enactment.
Is the power to be found on section 112?
There is clearly no express power here to make payments of any sort to persons made redundant. There is an express duty to appoint and clearly, in subsection (2), power to fix the terms and conditions upon which an appointee shall hold office. But no more. It is submitted however that there must also be inherent power to dismiss and to fix terms for dismissal including terms for payment in the event that dismissal is on the grounds of redundancy.
I am unable to accept this submission. In my judgment the power to do anything which is not expressly provided for by section 112 must be found, if it is to be found at all, in section 111. The power to make or provide for the making of redundancy payments may well be calculated to facilitate or be conductive or incidental to the discharge by a local authority of any of its functions but that is another matter to which I shall shortly turn.”

33.	Parker L.J. then made the reference to “officers” to which we have previously referred, before dealing with the council’s secondary contention that the power to institute the scheme was to be found in section 111 coupled with its functions in Part IX of the Local Government Act. 1972. At page 645C-G, he said:

“ There can I think be no doubt whatever that, by virtue of section 111, a local authority has power to engage staff upon agreed terms and to dismiss them. It could not otherwise discharge any functions. If for example a local authority were seeking to employ someone for the purpose of discharging one of its sewerage functions and could only find a suitable employee if the contract of employment provided that in the event of redundancy the local authority would pay the statutory amount provided for by the Employment Protection (Consolidation) Act 1978 plus 10 per cent, I can see no basis upon which it could be said that it had no power under section 111 to agree to do so.
This being so, the real question for determination is simply whether any such power is excluded or restricted by the Act itself or any other enactment passed before or after the Act.”

34.	At page 646C-E:

“Regulations under both section 7 and section 24 are to made by statutory instrument and are subject to annulment by resolution of either House of Parliament.
Section 7 does not on its face refer to redundancy payments at all. It covers pensions allowances or gratuities which are to be or may be paid and plainly confers on the Secretary of State complete control of matters falling within its ambit. He may make regulations both as to what must be paid but also as to payments which it is permissible to make.
Section 24 , although not using the word “redundancy” appears to me to be wide enough to embrace redundancy payments. What else are payments by way of compensation for loss of office? The section, however, does not, as does section 7, expressly provide both for payments which must be paid and those which it is permissible to pay. The working is nevertheless wide enough to cover both matters and again the Secretary of State, albeit subject to circumstances not here relevant to the consent of the Minister, appears to be given complete control.”

35.	At pages 647G to 648A:

“In my judgment the provisions of the Superannuation Act 1972 coupled with irreconcilable conflicts which would arise if the council’s argument is right and of which I have instanced but two, are such that, in the absence of some compelling argument to the contrary I would, like the Divisional Court, answer the question posed in the issue in the negative. To give it an affirmative answer appears to me to involve ignoring the restriction or limitation by the opening words of section 111 of the Local Government Act 1972 and the plain intention of Parliament that the Secretary of State, subject to Parliamentary power to annul regulations in accordance with the Act, should be in complete charge of what is to be or may be paid on redundancy in addition to the payments provided for by the Act of 1978.”

36.	At Page 648C to E:

“The word “enactment” (in section 111 of the Local Government Act 1972) is apt to cover Regulations made by Statutory Instrument and the word “passed” sensibly means no more than “effectively made”. Furthermore the power is in any event subject to the Superannuation Act 1972 and thus also, in my view, to the Regulations which it provides ….. The phrase (“pensions, allowances or gratuities” in the Superannuation Act 1972) covers payments of all kinds, contractual or otherwise, lump sum or periodical made in respect of redundancy."

37.	Turning back to the case before us, we have no doubt that the payment to be made to Mrs Nicholls in accordance with the “two weeks for every year” term of her contract was a “gratuity” for the purposes of section 7 of the Superannuation Act 1972 and the 1987 Regulations. “Gratuity” is not defined in the Act or those Regulations, but we see no reason why it should not bear its normal meaning of “money given in recognition of services”. It is, in the context of the Act and regulations, apt to cover all payments by lump sum or annuity, or both, paid when the person concerned ceases to be employed by the local authority. The authority of Allsop both in the Divisional Court and the Court of Appeal, that there is no distinction in this respect between payments, simply by reason of the fact of a contract, is clear.

38.	The position in relation to the 1996 Regulations is more complex because those regulations refer to “a discretionary grant (“a retirement gratuity”)”, but we do not consider that the reference to “a discretionary grant” is sufficient to exclude Mrs Nicholls’ contractual “gratuity” from the effect of the 1996 Regulations. Again, the authority of Allsop that there is no distinction between payments to a contract and other payments is clear.

39.	It follows, in our view, again in accordance with Allsop that neither the power in 1991 to agree to make a payment to Mrs Nicholls in accordance with the “two weeks for every year” term, but in excess of that permitted by the 1987 Regulations, nor the power in 2000 to make a payment in accordance with that term, but in excess of that permitted by the 1996 Regulations, can be found in section 111.

40.	We see no distinction in this respect between the facts of Mrs Nicholls’ case with its longstanding term of contract, ands the facts of Allsop with the late introduction of a voluntary redundancy scheme. In both cases the exercise of any section 111 power was expressly subject to other enactments, even if passed after section 111, and “the two weeks for every year” term would have resulted, at the time the term was agreed, in a payment in excess of that permitted by Part K of the 1987 Regulations. It would have resulted, in May 2000, in the payment of a sum in excess of that permitted by Regulation 41 of the 1996 Regulations.

41.	Paragraph K3 of the 1993 Regulations clearly deals with “gratuities which …. may be paid” for the purposes of section 7 of the Superannuation Act 1972, and paragraph K4(1) expressly says that “the amount of a gratuity …. is not to exceed” the amount assessed in accordance with the formula set out in the paragraph. Regulation 41 of the 1996 Regulations also clearly deals with “gratuities which may be paid” for the purposes of section 7, and in paragraph(3) uses the words “the amount of retirement  …. must not exceed” a prescribed formula.

42.	In our view, there is no limitation on the time when the “grant” is to be made in order to come within paragraph K3 and therefore paragraph K4, or within Regulation 41. It is true that Part K (by paragraph K2) and Regulation 41 only apply to a person if he or she ceases to be employed, but that cannot, in good sense mean that a gratuity agreed well before the cessation of employment falls outside Part K or Regulation 41. The “grant” of a gratuity for the purposes of Part K or Regulation 41 must refer to the final decision to pay the gratuity, or the payment itself, even if the decision and payment are made pursuant to a contractual term agreed years earlier. This is consistent with the terms of sections 7 and 24 of the Superannuation Act 1972 which empower the Secretary of State to make regulations relating to sums to be “paid” and “payment”.

43.	However, the power given to the council by section 112 of the Local Government Act 1972, is not, like the power under section 111, expressly subject to the provisions of other enactments, and section 112(2) expressly gives a power to fix the terms and conditions upon which an appointee such as Mrs Nicholls should hold office. This did not help North Tyneside Council in Allsop because the terms upon which those benefitting from its voluntary redundancy scheme were paid in the event of dismissal on the grounds of redundancy were not “terms … upon which an appointee shall hold office”. However, the facts of Mrs Nicholls’ case are, it seems to us, significantly different in this respect to the facts of Allsop. The “two weeks for every year” term of Mrs Nicholls’ contract was a term upon which she held office, from the very beginning of her employment by the council, with her entitlement to a gratuity growing all the while. So the reason why the power to make enhanced redundancy payments could not be found in section 112, given by Parker L.J. at page 644C to F of his judgment in Allsop, does not in our view apply to Mrs Nicholls’ case.

44.	Nevertheless, we have been driven to the conclusion that this distinction from Allsop is not sufficient to win this appeal. Although, in our view, section 112 of the Local Government Act 1972 gave the council a general power to agree a term under which an employee became entitled to a gratuity which would accrue from year to year, the 1987 Regulations had been validly made before the council purported to exercise that power in Mrs Nicholls’ case and the effect of Allsop is that those regulations and later the 1996 Regulations are to be interpreted as forbidding the council to make years later, payment in the amount it had agreed. It would have made no difference if the agreement had been made, as it was with ILEA, before the 1987 Regulations came into effect. Despite the distinguishable facts upon which it was based, Allsop is in our view binding authority on this Appeal Tribunal that section 7 of the Superannuation Act 1972 conferred on the Secretary of State, subject to the control of Parliament, complete control of matters falling within its ambit, including gratuities such as that granted to Mrs Nicholls. See Allsop at page 646C-E. The Secretary of State chose to provide that no grant of a gratuity should exceed that formulated in Part K of the 1987 Regulations and, later, the 1996 Regulations. Mrs Nicholls’ agreed gratuity did exceed those formulations. Therefore, the council could not lawfully agree to grant it to her; it could not lawfully decide to pay, or actually pay it, when she ceased to be employed.

45.	For all these reasons Mrs Nicholls’ appeal must be dismissed. We endorse the Employment Tribunal’s regret that the council did not tell Mrs Nicholls or other employees in her position of its change of view in 1992 as to what could be paid by way of gratuity. No doubt all employees in Mrs Nicholls’ position have now been told, as the Tribunal urged they should be. Our decision may not be the end of the matter, however. We consider that the submissions put forward by Mrs Cunningham in the circumstances of this case, which relate to a gratuity agreed at the beginning of a contract of service, justify further argument before the level of court which finally decided Allsop, which strictly related to enhanced redundancy payments granted at the end of contracts of service. There are other employees or ex-employees who are in the same position as Mrs Nicholls. Accordingly we grant permission for Mrs Nicholls to appeal to the Court of Appeal, should she be advised and choose to do so.