In Secretary of State for the Department for Environment, Food and Rural Affairs v Public and Commercial Services Union and two other cases [2024] UKSC 41, the Supreme Court overturned a Court of Appeal decision and held that a trade union was entitled, under the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act), to enforce a “check-off” arrangement (whereby the employers deduct trade union subscriptions from the employees’ salaries and pay them directly to the union) that had been removed from the employment contracts of employees.

Section 1 of the 1999 Act provides that if a term in a contract expressly confers a benefit on a third party, the third party can enforce that term, even where they are not a party to the contract. However, this exception will not apply if it appears, on a proper construction of the contract, that the parties did not intend the term to be enforceable by the third party. The Supreme Court had to consider whether the union in this case had the right to enforce the legal obligation under the 1999 Act or whether the presumption of the right of enforceability by the trade union had been rebutted by the normal rules of contractual construction.

The claimant employees were employed by either the Department of Environment, Food and Rural Affairs, the Home Department or His Majesty’s Revenue and Customs (the employers). They were members of the Public and Commercial Services Union (the PCSU), which was recognised by the employers for collective bargaining purposes. The employers entered into a collective agreement, negotiated in the 1960s, which included a provision for check-off arrangements to be paid directly to the PCSU. The check-off provision was incorporated into the claimant employees’ contracts of employment.

From 2014 the employers began unilaterally to withdraw the check-off arrangements. The employees and the PCSU brought claims for breach of contract. The High Court ruled in favour of the claimants, holding that the withdrawal amounted to a breach of contract and that the PCSU was entitled to bring a claim under the 1999 Act to enforce it. However, the Court of Appeal, by a majority, upheld the employers’ appeal against the finding that the PCSU could enforce the term. The court concluded that on a proper construction of the contract, the parties did not intend the term to be enforceable by the PCSU.

The PCSU successfully appealed to the Supreme Court. Analysing the 1999 Act, the Supreme Court disagreed with the majority in the Court of Appeal. The Supreme Court held that when a contractual term seeks to grant a benefit to a third party who is clearly identified in the contract, the 1999 Act establishes a strong presumption that the relevant term is enforceable by the third party. This presumption can only be overturned if it is evident that the parties shared a clear and mutual intention for the obligation not to be enforceable by the third party.

Since the Supreme Court found that there was no express term in the contract which indicated a joint intention of the parties that the PCSU should not be able to enforce the term, it was then necessary to consider whether there was an implied term to that effect. However, the Court emphasised that the test to imply a term where the contract is silent is a demanding on. Given that there was no basis for an implied term in the individual contracts, the Supreme Court concluded that the PCSU should be entitled to enforce the check-off term.

What this means for employers:

It is important to remember that while contractual obligations of the employer may be enforceable by a third party, promises by an employee and worker in a contract of employment cannot create an enforceable third party right under the 1999 Act as there is an express exclusion. This would mean that an obligation by an individual in a contract of employment (such as a post termination restriction) could not be enforced by a third party such as a company in the same group. However, such obligations in a termination agreement or share option scheme could be enforceable by a third party.

This case, however, does highlight that employer obligations, such as check-off arrangements can be incorporated into individual employment contracts and enforced by third parties, such as trade unions. The Supreme Court’s ruling under the 1999 Act establishes a clear presumption of enforceability, limiting employers’ ability to withdraw such arrangements and providing trade unions with an effective recourse if they do. This serves as a cautionary signal to employers when drafting employment contract terms that involve third parties. If those terms confer a benefit on a third party, and the parties do not intend for the terms to be enforceable by the third party, then it is usually in the interest of the employer to exclude the rights under the 1999 Act.