The Privy Council has recently passed its decision in Ali v Petroleum Company of Trinidad and Tobago on the issue of an implied term for an employee to repay a loan to his employer when he took voluntary redundancy.

Terms can be implied into a contract if, along with other factors, one of two tests applies. Either the term is necessary to give business efficacy to the contract or the term is so obvious that it goes without saying – Marks & Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Ltd.

Mr Ali had been employed by Petrotrin for a number of years when he was offered a scholarship to study for a degree. Mr Ali was also paid a monthly living allowance by way of loan from Petrotrin. The loan was subject to an express term that repayment would be waived if Mr Ali returned to work for Petrotrin for five years after the completion of his degree.

Mr Ali completed his degree and returned to work for Petrotrin. Eighteen months after his return, Mr Ali successfully applied for voluntary redundancy. He was accordingly dismissed.

Petrotrin deducted the value of the outstanding loan from Mr Ali’s redundancy payment, leaving him with a redundancy payment of zero.

Mr Ali brought a claim against Petrotrin arguing that he was not contractually obliged to repay the loan. It was Mr Ali’s position that there should be an implied term either precluding Petrotrin from dismissing him within the five year period, or that Petrotrin should waive repayment in this situation.

Mr Ali, having lost his claim at first instance and subsequently on appeal, appealed to the Privy Council.

The Privy Council dismissed the appeal by majority decision. It was held that there was no implied term preventing Petrotrin from dismissing Mr Ali within the five year period. However, there was an implied term preventing Petrotrin from doing something of its own initiative to prevent Mr Ali completing his five years’ service. The Privy Council stated that if this was the case, repayment of the loan must be waived. Without this implied term, the contract simply would not work.

However, on the facts, the Privy Council concluded that Mr Ali was not prevented by Petrotrin from completing his five years’ service. He in fact took a purely voluntary redundancy, and therefore the implied term was not triggered. Petrotrin were entitled to deduct the loan value from Mr Ali’s redundancy payment.

Although decisions of the Privy Council are not binding on UK Courts and Tribunals they hold great weight and persuasive value. It can be seen how this decision could apply to any number of loans or repayment arrangements provided to employees, such as enhanced maternity pay schemes.

Whilst the decision is ultimately in the employer’s favour, costly litigation could have been avoided if express repayment terms were included in the loan agreement initially. When providing employees with loans and repayment arrangements, employer’s should turn their minds to the specific circumstances upon which repayments must be made and draft the agreement terms appropriately to reflect this.

If you would like to discuss any issues raised in this article, we have specific employment law expertise in advising in this area. For further advice, please contact Joan Pettingill.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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