In MM Packaging v Potter and others the Court of Appeal considered the correct construction of a payment clause in a COT3 Agreement.

MM Packaging is a packaging manufacturer which suffered a downturn in work at its Bootle plant in 2011. A redundancy exercise was carried out which led to strike action. Ultimately, the factory was closed and 109 employees were made redundant. Some employees brought unfair dismissal claims and the union brought a claim for a protective award in view of the company's alleged failure to comply with its collective redundancy consultation obligations under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). A protective award under TULRCA is a maximum of 90 days' gross pay for each affected employee, calculated on a calendar basis (that is the gross pay the employee would receive in respect of 90 calendar days).

Settlement negotiations were entered into and led to a COT3 Agreement between the employees, the union and the company. The agreement made explicit reference in the recitals to the union's claim for a protective award and set out the agreed payments which included: "90 days of gross pay" and an enhanced redundancy payment for each employee.

When payments were made under the agreement, a dispute arose as to the correct calculation of "90 days of gross pay". The company made payment by reference to 90 calendar days' pay (a period which would include some non-working days). The employees and the union, on the other hand, argued that the sum should be determined by calculating one day's gross pay and simply multiplying this by 90. This calculation would result in pay equivalent to 90 working days, rather than 90 calendar days.

Some of the employees, with the support of the union, brought a breach of contract claim in the High Court. The High Court found in favour of the employees on the basis that the "natural reading" of the phrase "90 days of gross pay" was the pay of 90 working days. The judge found no reason to decide that the parties had intended the amount to be directly referable to the statutory maximum of a protective award (and so to be based on calendar days). He commented that it was open to the parties to make clear in the agreement if calendar days were intended (as was the case with the enhanced redundancy payment set out in the agreement) but that they had chosen not to do so.

The Court of Appeal allowed the company's appeal, holding that the High Court's construction of the agreement was not correct. Giving the leading judgment, Lord Justice Underhill stated that the meaning of the phrase "90 days of gross pay" should be determined simply by asking "what it means in the context of the facts known to both parties". Taking this approach, it was clear to him that an objective reader would understand that the parties intended the company to pay an amount equivalent to what the employees would have received as a protective award in settlement of the section 188 claim. He noted that the redundancy payment clause in the agreement referred to the statutory language of "a week's pay" and commented that this indicated to him that the intention was for the 90 days' pay to be calculated on the same basis as the statutory protective award.

This case highlights the need for careful drafting of settlement agreements and COT3 agreements in order to avoid disputes of this kind arising after settlement has been reached. Employers should be aware that settlement agreements cannot settle claims relating to a breach of the agreement itself and that unclear terms can lead to further litigation and dispute.

First published October 2017.

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