Incorporation of Contractual Terms by Reference

Last week, an interesting issue of contractual interpretation fell for the consideration of the United Kingdom Court of Appeals in Malone v. British Airways, [2010] EWCA Civ 1225. The Court was called on to decide circumstances in which terms may be incorporated into a contract from other related agreements or documents, leading it to some interesting conclusions.
In the wake of the economic recession in 2008-09, British Airways [“BA”] sought to reduce the size of its crew complements. There was no term preventing this in the individual employment contracts which BA had entered into with members of its crew. However, many aspects of the management of the business were governed by agreements entered into by BA with a trade union, of which 96% of its employees were members. Two of these agreements had provisions for the size of the crew complement, and this number could be reduced only by agreement. (It is worth noting in passing that the level provided by these agreements was well above the legally required minimum). However, none of these collective agreements were enforceable by themselves. The employees argued that this provision of the collective agreement was incorporated into their individual contracts, by virtue of a clause in their individual contracts, which provided,
Your employment …will be governed by…the Agreements between (BA) and the Employees’ side of the NJCA (National Joint Council) so far as the same are applicable to your particular appointment. The NJC Agreements from time to time in force are deemed incorporated into this contract and you are referred to these Agreements for details of your hours of work, periods of notice, paid holiday entitlements, sickness benefits and general matters. [emphasis supplied]
Thus, the issue before the Court boiled down to whether the above provision resulted in the terms of the collective agreement relating to the size of the crew complement being incorporated into the individual contracts of the employees. The significance of the incorporation is that unless they were held to have been incorporated, the employees would not have an independent claim, and would have to approach the trade union for a remedy. Further, apart from being a tedious process, this was also not a feasible option due to factions having been formed within the union.
The employees proffered two arguments in favour of the incorporation- first, although there was no term in their individual contracts dealing with the size of the crew complement, a reduction of its size resulted in increased workload for the remaining members of the crew. Thus, albeit indirectly, the reduction had an effect on the terms of the individual contract. Secondly, and more significantly, there was a system by which BA paid members of a smaller crew compensation for the reduced size of the crew. This was relied on by the employees to argue that it was assumed and intended by the parties that the size of the crew complement was a term of the contract.
Lady Justice Smith, speaking for the Court of Appeals, rejected both these contentions. For starters, she held that the mere fact that the collective agreements were not enforceable does not mean that they could not have a binding effect if incorporated into the individual contracts. However, whether or not they were, and which parts of them were, incorporated would depend on a construction of the individual contracts, and an examination of the intention of the parties. She held that undoubtedly some provisions of the collective agreement were so incorporated, but the size of the crew complement was not one of them. She also accepted that a modification of the crew complement would affect the workload of the remaining crew members.
Her rejection of the argument was based solely on the implications of holding that the size of the crew complement was a term of the contract. If the size was a contractual term, then any member asked to board a flight with a reduced crew size would have the right to refuse, and this would lead to “disastrous consequences” (¶ 62). The clause as to the minimum size of the crew complement was held to be a specific undertaking and not only aspirational. However, this did not mean that it could be enforced by an individual employee. The rights it gave rise to were purely collective, since there was no way BA could have intended to grant an individual employee the right. In her words (¶¶ 61-62),
61. I am satisfied that crew complements do impact to some extent upon the working conditions of individual employees and that that is a pointer towards section 7.1 being intended as an individually enforceable term. I also accept that the fact that crew complements have, in the past, been negotiated as part of a productivity deal is another pointer towards enforceability. I accept also that an undertaking as to the size of the team of workers who will undertake a task may, in some circumstances, be enforceable by individuals.
62. Set against that are the disastrous consequences for BA which could ensue if this term were to be individually enforceable. It seems to me that they are so serious as to be unthinkable. By that I mean that if the parties had thought about the issue at the time of negotiation, they would have immediately have said it was not intended that section 7.1 could have the effect of enabling an individual or a small group of cabin crew members to bring a flight to a halt by refusing to work under complement … I accept that there are pointers towards individual enforceability but these are not conclusive. In the end, I think that the true construction of this term is that it was intended as an undertaking by the employer towards its cabin crew employees collectively and was intended partly to protect jobs and partly to protect the crews, collectively, against excessive demands in terms of work and effort. I think that it was intended to be binding only in honour, although it created a danger that, if breached, industrial action would follow.
Thus, in sum, the Court of Appeal laid down three propositions for the incorporation of contractual terms-
First, the nature of the agreement from which terms are being incorporated is irrelevant to whether they are binding between the parties to the contract into which they are being incorporated. While this seems to be the tenor of the decision, it does not explain why the Court thought it necessary to clarify that the provisions in the collective agreement were undertakings and not merely aspirational
Secondly, the test for determining whether a term is incorporated is whether on a true construction of the contract into which they are being incorporated, the parties could have intended it to be incorporated.
Finally, and most importantly, the practical effects of such incorporation are crucial indicators to the parties’ intent. If the consequences of incorporation are such that the parties could not have possibly intended them, then the terms cannot be incorporated.
As a result, what can be taken away from the decision is that if a term is sought to incorporated, it should be referred to specifically, instead of the document in which it is contained being referred to generally.

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