Implied Obligation of Good Faith

In Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589, Lord Brown-Wilkinson stated in the UK High Court:

“Pension scheme trusts are of quite a different nature to traditional trusts. The traditional trust is one which the settler, by way of bounty, transfers property to trustees to be administered for the beneficiaries as objects of his bounty. Normally, there is no legal relationship between the parties apart from the trust. The beneficiaries have given no consideration for what they receive. The settler, as donor, can impose such limits on his bounty as he chooses, including imposing a requirement that the consent of himself or some other person shall be required to the exercise of the powers. As the Court of Appeal have pointed out in Mihlenstedt v Barklays Bank International Ltd [1989] IRLR 522 a pension scheme is quite different. Pension benefits are part of the consideration which an employee receives in return for the rendering of his services. In many cases, including the present, membership of a pension scheme is a requirement of employment. In contributory schemes, such as this, the employee is himself bound to pay for his or her contributions. Beneficiaries of the scheme, far from being volunteers have been given valuable consideration. The company employer is not conferring a bounty. In my judgement, the scheme is established against the background of such employment and falls to be interpreted against that background.

In every contract of employment there is an implied term:

That the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence between employer and employee”; Woods v WM Car Services (Peterborough) Ltd [1981] ICR 666,670, approved by the Court of Appeal in Lewis v Motorworld Garages Ltd [1986] ICR 157.

I will call this implied term “the implied obligation of good faith”. In my judgment, that obligation of an employer applies as much to the exercise of his rights and powers under a pension scheme as they do to the other rights and powers of an employer. Say, in purported exercise of its right to give or withhold consent, the company were to say, capriciously, that it would consent to an increase in the pension benefits of members of union A but not of the members of union B. In my judgment, the members of union B would have a good claim in contract for breach of the implied obligation of good faith; see Mihlenstedt v Barklays Bank International Ltd  [1989] IRLR 522,525,531, paras 12, 64 and 70.

In my judgement, it is not necessary to found such a claim in contract alone. Construed against the background of the contract of employment, in my judgment the pension trust deed and rules themselves are to be taken as being impliedly subject to the limitation that the rights and powers of the company can only be exercised in accordance with the implied obligation of good faith”.

The mutual duty of good faith owed by employer and employee governs the parties’ rights and obligations during employment. It has recently been authoritatively suggested that the duty extends at least into and, perhaps, beyond a disciplinary process resulting in a termination: Johnson v Unisys Ltd [2001] UKHL 13. The question of whether or not the duty extends to former employees is of obvious importance in the pension (Superannuation) scheme context when considering the duties owed by an employer to deferred pensioners (beneficiaries). Lord Steyn’s alternative formulation of the duty in Johnson was to call it a duty on the employer to deal fairly.


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