How Far Can the Duty of Good Faith Go?


Could an employer be legally bound by a broad statement that they would make no further changes to their pension scheme, even though this was not written into a contract?

Yes, where this leads to a reasonable expectation on the part of the employees.


IBM wanted to change the terms of its ‘final salary’ pension scheme. The changes they wanted to make included closing the scheme to future benefits, and closing an option to retire early on beneficial terms.

IBM had previously carried out 2 exercises to change its pension schemes and, importantly, had previously said that there would be no further changes over the long-term horizon.

The High Court has found in the statement by IBM that there would be no further changes which gave rise to a reasonable expectation on the part of the employees. Breaching this reasonable expectation involved IBM breaching its “imperial duty” of good faith and not to breach trust and confidence.

The Court emphasised the severity of the trust and confidence test (the employer’s conduct must be such as to destroy or seriously damage the employment relationship) but said that the employer must behave in a way that is genuine and rational as opposed to empty or irrational. IBM had not done so in this case, and so would be liable for damages for breach of contract for changing the rules.

Implications for businesses

This case will be appealed, and a decision about the damages that will be payable to employees is still pending. However, this could cost IBM dearly, and is a reminder to all businesses of the importance of the employer’s obligation of trust and confidence, and the unlikely circumstances in which it can crop up.

Employers should beware the way in which they make any statements about what they will do in future, particuarly where a high cost might be involved.


How Far Can the Duty of Good Faith Go? 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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