Repayment of loans to employees

Added On: 6th March 2017

Repayment of loans to employees

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

In this particular case, Mr Ali had been employed by Petrotrin for a number of years when he was offered a scholarship to study for a degree. He was also paid a monthly living allowance by way of loan from the company. 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, he successfully applied for voluntary redundancy and, as a result, was dismissed.

Petrotrin deducted the value of the outstanding loan from Mr Ali’s redundancy payment.

Mr Ali brought a claim against the company on the basis that he was not contractually obliged to repay the loan. His argument was 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. They held that there was no implied term preventing Petrotrin from dismissing Mr Ali within the five year period, but there was an implied term preventing the company from doing something of its own initiative in order to prevent Mr Ali completing his five years' service. The Privy Council stated that if this had been 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; it was entirely his decision to take voluntary redundancy, and therefore the implied term was not triggered. Petrotrin were entitled to deduct the loan value from Mr Ali’s redundancy payment.

Privy Council rulings are not binding on UK Courts and Tribunals but they are considered very carefully by these courts when considering their decisions.

It is easy to see how this decision could apply to any number of loans or repayment arrangements provided to employees, such as enhanced maternity pay schemes.

Whilst this decision is ultimately in the employer’s favour, costly litigation could have been avoided if express repayment terms had been included in the loan agreement initially. Clearly the learning from this is that, when entering into any loan agreement, employers should think carefully about the specific circumstances upon which repayments must be made and draft the agreement terms appropriately to reflect this.