THE CHANCELLOR, MASTER AND SCHOLARS OF THE UNIVERSITY OF OXFORD v PAUL HUMPHREYS THE ASSOCIATED EXAMINING BOARD [1999] EWCA Civ 3050

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEENS BENCH DIVISION
(HIS HONOUR JUDGE HARRIS QC)
[1999] EWCA Civ 3050Case No Case No: QBENF 99/0165/1Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Between
THE CHANCELLOR, MASTER AND SCHOLARS OF THE UNIVERSITY OF OXFORDAppellantPAUL HUMPHREYS THE ASSOCIATED EXAMINING BOARDRespondents
Before
Lord Justice RochLord Justice PotterMr Justice Moore-BickJames Goudie QC and Sean Jones Esq (instructed by Manches &Co, Oxford, for the appellant)Brian Langstaff QC and Ms Helen Mountfield (instructed by Messrs Marshall & Galpin, Oxford for the first respondent)Mark Humphries Esq (instructed by Linklaters, London, for the second respondent)Date 20 December 1999

LORD JUSTICE POTTER:

INTRODUCTION

[1]This appeal by the Chancellor, Masters and Scholars of the University of Oxford ("the University") raises an interesting issue upon the construction of Regulation 5 of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("the l981 Regulations"). The appeal is from a determination of His Honour Judge Charles Harris QC pursuant to RSC Order 14A when dismissing an application by the University for an order that the statement of claim of the claimant (a former employee of the University) be struck out pursuant to Order 18 rule 19, alternatively the inherent jurisdiction of the court, on the grounds that it disclosed no reasonable cause of action against the University in respect of the claimant's constructive dismissal by the University. The University contended, but the judge did not accept, that by reason of the operation of Regulation 5(1) and Regulation 5(2) of the Regulations, all liability for any alleged breach of the claimant's contract of employment, or otherwise for termination thereof, had been transferred to the Associated Examining Board ("AEB"). However, by his order dated 2 nd December 1998, the judge gave leave to the claimant to join AEB as a party to the proceedings. AEB appear as a second respondent to the appeal. FACTS[2]The facts which are not in dispute for the purposes of this appeal can be shortly stated. For ten years prior to 31st March 1995 the claimant was employed by the University to work for the University of Oxford Delegacy of Local Examinations ("the Delegacy") as a Deputy Administration Officer. It was a term of his employment that his employment would continue until retiring age subject to termination by himself on not less than three months' written notice, and by the University in accordance with provisions of Title VIII Section 1 of the University Statutes and Decrees, which provided only for his removal from post if the Visitorial Board found that he had been guilty of misconduct or wilful disobedience to the Statutes or other enactments of the University relating to his office. It was the claimant's principal task to set, mark and moderate GCSE and A Level examinations for the Delegacy. By various letters and written announcements in the six months prior to 1 st April 1995 the University indicated its fixed intention to transfer the claimant's contract of employment upon a transfer of the business of the Delegacy to the AEB. During that period, by various communications and finally by letter from his solicitors to the University, the claimant notified the University that he objected to becoming an employee of the AEB. His reasons for such objection are set out at length in a section of his amended Statement of Claim headed "Particulars of Change of Working Conditions & Detriment" and "Particulars of Significant Change of Identity of Employer & Detriment". Without making any admissions in respect of the matters individually pleaded, the University and AEB concede for the purposes of this appeal (as was conceded below) that the transfer of the claimant's employment to AEB would have involved a substantial change in his working conditions to his detriment as an employee of the University.[3]Because of its relevance to part of the detailed argument addressed to us I now set out in a little more detail some extracts from the inter partes correspondence prior to transfer. After prolonged exchanges the University's solicitors wrote on 9 th March 1995:
"Although our clients have already explained Mr Humphreys' legal position both in person and to yourselves, and although you have undoubtedly informed Mr Humphreys as to his rights in respect of the proposed transfer, we consider that it is worth restating the position. 1. Your client's contract of employment will transfer to AEB on 31 March unless he exercises his right to object to the transfer under Regulation 5 (4A) of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("
TUPE"). As no doubt you have already advised Mr Humphreys, the exercise of this right will mean that Mr Humphreys' employment terminates upon transfer without compensation … 5. We stress, as has been said before to your client, that our client has made no commitment express or implied, that on the transfer on 31 March your client will be re-deployed elsewhere within the University. We wish to reiterate that such re-deployment is completely out of the question and it follows that, unless your client objects or has objected to the transfer under Regulation 5 (4A) of TUPE, his contract of employment will be transferred to AEB in the normal way under TUPE"[4]By letter dated 27 th March 1995, the claimant's solicitors replied:
"Our client maintains his objection, and refuses to transfer to the Associated Examining Board. In these circumstances our client's employment will terminate on 31 st March 1995 when the transfer takes place. We have already made it very clear to your client why our client does not wish to transfer to the Associated Examining Board … We note that you claim that our client will not be entitled to compensation. We should refer you in particular to the Transfer of Undertakings Regulations, Regulation 5(5). Our client will rely on this Regulation, the effect of which is that he will be treated as dismissed and will be able to bring a claim for wrongful dismissal based on the unexpired period of his tenure. Regulation 5(5) provides for two circumstances: 1. Where there is a substantial change in the employee's conditions to the employee's detriment 2. Where there is a significant change in the identity of the employer to his detriment. … . If it was not for the proposed transfer our client would remain employed by the University until the age of sixty-seven. Our client has received a letter from the Associated Examining Board dated 23 rd March 1995 .. which confirms that our client can only be guaranteed 3 years employment at Oxford … . On any construction of the Regulations this must surely be seen as a detriment to our client. … we put you on notice that when our client's employment terminates on 31 st March 1995 we will bring an Action for wrongful dismissal."
[5]Finally, on 30 th March 1995, the University's solicitors wrote:
"… . We note that your client has now formally objected to the transfer of his contract of employment to the AEB, and as a consequence his employment will terminate when the transfer to the AEB take place under Regulation 5(4A) .."
THE RELEVANT LAW[6]The position at common law is well established. Upon transfer of a business, an employee cannot, against his will, be obliged to work for a new employer who equally cannot be obliged to take him. It is therefore a repudiatory breach of contract to purport to change the identity of an employer without the consent of an employee. It is "a fundamental principle of our common law … that a free citizen, in the exercise of his freedom, is entitled to choose the employer he promises to serve, so that the right to his services cannot be transferred from one employer to another without his assent" see Nokes –v- Doncaster Amalgamated Quarries Limited [1940] AC 1014 per Viscount Simon L.C. at p.1020, re-iterated by Balcombe LJ in Secretary of State for Employment –v- Spence [1986] ICR 651 at 660G-661D when considering the effect of the "statutory novation" provided for in Regulation 5(1) of the 1981 Regulations. Thus, as a matter of the application of general principles of contract law, in the absence of a consensual or statutory novation between employee and new employer following the transfer of a business undertaking in which that employee was employed, the employee is entitled to treat such transfer as a repudiation of his contract of employment by the transferring employer and to sue him for damages for wrongful dismissal. Equally, prior to transfer, the threatened breach by the employer of his continuing obligation to employ the employee for the period of his contract, if persisted in despite the objection of the employee, is an anticipatory repudiatory breach of an executory contract, open to acceptance by the employee at any time prior to its withdrawal; see Norwest Holst Group Administration Limited –v- Harrison [1985] ICR 668 at 676-678. Finally, as is not in issue, while legislation may alter the common law position, it should not be construed to do so save to the extent that there is some "clear, definite, or positive enactment overturning it": per Lord Atkin in Nokes at p.1033.[7]The 1981 Regulations were made under the European Communities Act 1972 in order to implement the Council Directive of 14 th February 1977 (77/187/EEC) on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses (generally known as the Acquired Rights Directive, but which I shall for convenience call "the Directive"). THE DIRECTIVE[8]The aims and purposes of the Directive appear, inter alia, from the passage in the preamble which reads:
"Whereas it is necessary to provide for protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded; .."
The European Court has consistently held that the Directive "is intended to safeguard the rights of workers in the event of a change of employer by making it possible for them to continue to work for the new employer on the same conditions as those agreed with the transferor." see Katsikas –v- Konstantinidis [1992] ECR 1-65577 or 6607 para 21. Under Section II "SAFEGUARD OF EMPLOYEES' RIGHTS", the Directive provides as follows:
" Article 1 1. This Directive shall apply to the transfer of an undertaking, business or part of a business to another employer as a result of a legal transfer or merger … . Article 3 1. The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer within the meaning of Article 1.1 shall, by reason of such transfer, be transferred to the transferee. Member States may provide that, after the date of transfer within the meaning of Article 1.1 and in addition to the transferee, the transferor shall continue to be liable in respect of obligations which arose from a contract of employment or an employment relationship."
Article 4 1. The transfer of an undertaking, business or part of a business shall not in itself constitute grounds for dismissal by the transferor or the transferee …. . 2. If the contract of employment or the employment relationship is terminated because the transfer within the meaning of Article 1.1 involves a substantial change in working conditions to the detriment of the employee, the employer shall be regarded as having been responsible for termination of the contract of employment or of the employment relationship" " Article 7 This Directive shall not affect the right of Member States to apply or introduce laws, regulations or administrative provisions which are more favourable to employees" "who must be free to choose his employer and cannot be obliged to work for an employer whom he has not freely chosen." The Court also held that Article 3 did not oblige a Member State in such circumstances to legislate for automatic termination or transfer of the employment relationship:
".. It is for the Member States to decide the fate of the contract of employment or of the employment relationship with the transferor." [Para 37] "35. It follows that, in the event of the employee deciding of his own accord not to continue with the contract of employment or employment relationship of the transferee, it is for the Member State to determine what the state of the contract of employment or employment relationship should be. The Member States may provide, in particular, that in such a case the contract of employment or employment relationship must be regarded as terminated either by the employee or by the employer. They may also provide that the contract for employment relationships should be maintained with the transferor: see Katsikas, at pp. 6609-6610, paras. 35 and 36" "37. In the light of that submission, it should be noted that Article 4.2 provides that, if the contract of employment or the employment relationship is terminated because the transfer within the meaning of Article 1.1 involves a substantial change in working conditions to the detriment of the employee, the employer is to be regarded as having been responsible for termination. 39. Consequently, the answer to the second part of the question as re-formulated must be that Article 3.1 of Directive (77/187 E.C.C.) does not preclude an employee employed by the transferor at the date of the transfer of an undertaking from objecting to the transfer to the transferee of the contract of employment or the employment relationship. In such a case, it is for the Member States to determine what the state of the contract of employment or employment relationship with the transferor should be. However, where the contract of employment or the employment relationship is terminated on account of a change in the level of remuneration awarded to the employee, Article 4.2 of the Directive requires the Member States to provide that the employer is to be regarded as having been responsible for the termination ."
(emphasis added) THE REGULATIONS "Any agreement between an employee and his employer determining the terms and conditions of his employment" and "employee" is defined as meaning "any individual who works for another person whether under a contract of service or apprenticeship or otherwise but does not include anyone who provides services and references to a person's employer shall be construed accordingly." "(1) … a transfer from one person to another of an undertaking situated immediately before the transfer in the United Kingdom or part of one which is so situated. (2) … whether the transfer is effective by sale or by some other disposition or by operation of law." "(1) Except where objection is made under paragraph (4A) below, a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee. (2) Without prejudice to Paragraph (1) above, but subject to Paragraph (4A) below , on the completion of a relevant transfer - (a) all the transferor's rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this Regulation to the transferee; and (b) anything done before the transfer is completed by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee. (3) Any reference in Paragraph (1) or (2) above to a person employed in an undertaking or part of one transferred by a relevant transfer is a reference to a person so employed immediately before the transfer … (4A) Paragraphs (1) and (2) above shall not operate to transfer his contract of employment and the rights, powers, duties and liabilities under or in connection with it if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee. (4B) Where an employee so objects the transfer of the undertaking or part in which he is employed shall operate so as to terminate his contract of employment with the transferor but he shall not be treated, for any purpose, as having been dismissed by the transferor. (5) Paragraph s (1) and (4A) above are without prejudice to any right of an employee arising apart from these Regulations to terminate his contract of employment without notice if a substantial change is made in his working conditions to his detriment; but no such right shall arise by reason only that, under that paragraph, the identity of his employer changes unless the employee shows that, in all the circumstances, the change is a significant change to his detriment. "(1) Where either before or after the relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part V of the 1978 Act and Articles 20-41 of the 1976 Order (Unfair Dismissal) as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal." THE RIVAL SUBMISSIONS "Regulation 5(3) must be construed on the footing that it applies to a person employed immediately before the transfer or who would have been so employed if he had not been unfairly dismissed before the transfer for a reason connected with the transfer." (per Lord Templeman at p.353) See also Jules Dethier Equipement S.A. –v- Dassy (Case C319/94) 1998 ICR 541 at 562 "The noble Lord, Lord Wedderburn, is seeking to have the law provide that where an employee objects to having his contract of employment transferred to the new employer that contract remains in force with the original employer. The Government cannot agree to that. The transfer regulations protect individuals by giving them automatic rights in relation to the new employer. If an individual voluntarily relinquishes those rights it hardly seems reasonable to argue that he should instead be given rights in relation to the old employer. His job still exists with the new employer. Of course, if a substantive change is made in an individual's working conditions to his detriment he will retain the right contained in Regulation 5(5) to resign and claim constructive dismissal." DISCUSSION ".. in the event of the employee deciding of his own accord not to continue with the contract of employment or employment relationship with the transferee, the directive does not require the Member States to provide that the contract or relationship is to be maintained with the transferor. In such a case, it is for the Member States to determine what the fate of the contract of employment or relationship should be." (Katsikas, para 35). While, as Merckx later made plain, the decision in Katsikas was simply dealing with the limited situation where the objection of the employee to transfer was based on the identity of the transferee alone (and not where it related to a detrimental change in working conditions), the amendments to the Regulations contained in paragraph (4A) and (4B), dealing with the matter in the wake of Katsikas contained no such limitation. It is that omission which leads to the primary argument of the University and AEB that, if an objection is made on the grounds of detriment, paragraph (4A) operates to prevent a transfer and paragraph (4B) operates to deprive the aggrieved employee of the right to sue both transferor and transferee for constructive dismissal because paragraph (5) must be read as subject to it. "Paragraphs (1), (4A) and (4B) above are without prejudice…." thereby disposing of the apparent conflict. CONCLUSION MR JUSTICE MOORE-BICK: This appeal raises an interesting and difficult question of some general importance in relation to the construction of the Transfer of Undertakings (Protection of Employment) Regulations 1981, commonly known as the TUPE Regulations. The circumstances which have given rise to it have been fully set out in the judgment of Potter L.J. which I gratefully adopt. The TUPE Regulations have their origin in a directive of the Council of the European Communities promulgated on 14 th February 1977 (77/187/EEC). The purpose of this directive, usually known as the Acquired Rights Directive, was to protect the rights of employees in the context of a transfer of the whole or a part of an employer's undertaking. The basic principle to which the directive gives effect is that existing rights of employees should be safeguarded by the transfer of their contracts of employment and all existing rights and liabilities arising under them to the person to whom the undertaking is transferred. The TUPE Regulations themselves were made under section 2 of the European Communities Act 1972 in order to implement the Acquired Rights Directive. They came into effect in 1982 and have since been amended from time to time. The only amendments which are relevant to the present appeal are those introduced with effect from 30 th August 1993 by the Trade Union Reform and Employment Rights Act 1993. The Directive itself has been considered by the European Court on a number of occasions and it is common ground that it is the court's duty to construe the Regulations, so far as it is possible to do so, in a manner which is consistent with the purpose of the Directive as that appears from its language and the decisions of the European Court. In other words, the court must give a purposive construction to the Directive itself and to the Regulations issued for the purpose of complying with it: see Litster v Forth Dry Dock & Engineering Co. Ltd [1989] ICR 341 per Lord Templeman at page 353E and Lord Oliver at page 371B-E. As a result of the introduction of the TUPE Regulations the rules of the common law which govern the relationships between the parties when a business is transferred from one proprietor to another have lost much of their significance. In the present case, however, I think it is instructive to trace the development of the law in this area from the common law principles to the position as one now finds it under the TUPE Regulations and decisions of the European Court. The position at common law The relationship between employer and employee has always been regarded by the common law as essentially personal. One consequence is that no one may be required to work for another person against his will. In Nokes v Doncaster Amalgamated Collieries Ltd [1940] A.C. 1014 an order was made by the court under the Companies Act 1929 transferring the whole of the undertaking of the Hickleton Main Company Ltd to Doncaster Amalgamated Collieries Ltd under a scheme of amalgamation. A question arose as to the effect of that order on existing contracts of employment. The House of Lords held that such contracts did not automatically become contracts with the transferee. Viscount Simon L.C. said at page 1020 "It will readily be conceded that the result contended for by the respondents in this case would be at complete variance with a fundamental principle of our common law – the principle, namely, that a free citizen, in the exercise of his freedom, is entitled to choose the employer whom he promises to serve, so that the right to his services cannot be transferred from one employer to another without his assent." Similar observations may be found in the speech of Lord Atkin. Lord Romer, although dissenting, recognised that at common law "The transfer would unquestionably operate as a notice of dismissal of the employees and the liquidator before making it should in strictness take timely steps to determine the existing contracts of service and give the employees the opportunity of entering into fresh contracts with the new company" (page 1041). Mr. Goudie Q.C., basing himself on the statement of Balcombe L.J. in Secretary of State for Employment v Spence [1986] I.C.R. 651, 661C-D that "without some statutory novation of the contract the transfer of an undertaking from one employer to another automatically determines contracts of service", submitted that in such circumstances the contract was terminated without any liability on the part of the original employer. However, I am quite unable to accept that that is what Balcombe L.J. meant. A contract of employment, like any other contract, may be discharged by breach and will be so discharged where the employer terminates it otherwise than in accordance with its terms. In the passage to which I have referred Balcombe L.J. was in my view simply pointing out that a transfer of the employer's whole undertaking will inevitably bring the contract to an end. As I read his judgment he was saying nothing about the consequences for either party. The Acquired Rights Directive One consequence of the position at common law was that just as the employee could not be required to work for the transferee of the undertaking, so the transferee was not obliged to take him on, either on the same terms or at all. It was to safeguard the position of the employee that the Acquired Rights Directive was issued. The material parts of Articles 3 and 4 provide as follows:
"Article 3 1. The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of transfer within the meaning of Article 1(1) shall, by reason of such transfer, be transferred to the transferee. Article 4 1. The transfer of an undertaking, business or part of a business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organizational reasons entailing changes in the work force. 2. If the contract of employment or the employment relationship is terminated because the transfer within the meaning of Article 1(1) involves a substantial change in working conditions to the detriment of the employee, the employer shall be regarded as having been responsible for the termination of the contract of employment or of the employment relationship."
It will be seen that under the terms of the Directive the transfer of the undertaking operates automatically to transfer all existing contracts of employment and the rights and liabilities associated with them to the transferee. No express provision is made for those employees who, for one reason or another, might not want that to take place and the TUPE Regulations in their original form followed the Directive in that respect. Katsikas v Konstantinidis and Skreb and Schroll v Stauereibetrieb Paetz On the face of it the Directive and the TUPE Regulations which implemented it were at variance with the common law in precisely the manner described by Viscount Simon L.C. in Nokes v Doncaster . In Katsikas v Konstantinidis and Skreb and Schroll v Stauereibetrieb Paetz [1992] ECR I-6577 , however, the European Court was asked in two conjoined cases to consider whether an employee had the right to object to the transfer of his contract of employment, notwithstanding the absence from the Directive of any provision for such an objection. The Court held that he did, and that if he exercised that right the transfer of the undertaking did not result in his becoming employed by the transferee. The Court described the position as follows in paragraphs 30-36 of its judgment: 30. " . . . . . in paragraph 16 of its judgment in Case 105/84 ( Foreningen af Arbeidsledere i Danmark v Danmols Inventar [1985] ECR 2639 ), the Court held that the protection which the directive is intended to guarantee is redundant where the person concerned decides of his own accord not to continue the employment relationship with the new employer after the transfer. In that situation Article 3(1) of the directive does not apply. 31. Whilst the directive . . . . . . . . . allows the employee to remain in the employ of his new employer on the same conditions as were agreed with the transferor, it cannot be interpreted as obliging the employee to continue his employment relationship with the transferee. . . . . . . . . . . . . . . . . . . . . 34. However, as the Court has held (judgment in Berg v Besselsen ) the purpose of the directive is not to ensure that the contract of employment or employment relationship with the transferor is continued where the undertaking's employees do not wish to remain in the transferee's employ. 35. It follows that, in the event of the employee deciding of his own accord not to continue with the contract of employment or employment relationship with the transferee, the directive does not require the Member States to provide that the contract or relationship is to be maintained with the transferor. In such a case, it is for the Member States to determine what the fate of the contract of employment or employment relationship should be. 36. The Member States may, in particular, provide that in such a case the contract of employment or employment relationship must be regarded as terminated either by the employee or by the employer. They may also provide that the contract or relationship should be maintained with the transferor." The TUPE Regulations Not long after judgment was given in the Katsikas case the TUPE Regulations were amended in order to take account of that decision. In particular, two additional paragraphs, paragraphs (4A) and (4B), were inserted in Regulation 5 and some consequential amendments were made in other paragraphs. As a result Regulation 5 reached it current form. The material parts provide as follows:
" (1) Except where objection is made under paragraph (4A) below, a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee. (2) Without prejudice to paragraph (1) above, but subject to paragraph (4A) below, on the completion of a relevant transfer- (a) all the transferor's rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this Regulation to the transferee; and (b) anything done before the transfer is completed by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee. . . . . . . . . . . . . . . . . . . . . (4A) Paragraphs (1) and (2) above shall not operate to transfer his contract of employment and the rights, powers duties and liabilities under or in connection with it if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee. (4B) Where an employee so objects the transfer of the undertaking or part in which he is employed shall operate so as to terminate his contract of employment with the transferor but he shall not be treated, for any purpose, as having been dismissed by the transferor. (5) Paragraphs (1) and (4A) above are without prejudice to any right of an employee arising apart from these Regulations to terminate his contract of employment without notice if a substantial change is made in his working conditions to his detriment; but no such right shall arise by reason only that, under that paragraph, the identity of employer changes unless the employee shows that, in all the circumstances, the change is a significant change and is to his detriment."
The language in which paragraphs (4A) and (4B) are cast indicates that when introducing these amendments Parliament intended to take advantage of the freedom allowed to Member States by the European Court in the Katsikas case to regard the contract of any employee who objected to its being transferred to the transferee as having been terminated by the employee himself. The consequence of that in the ordinary way would be that he would be regarded as having resigned from his employment rather than as having been dismissed by his employer. In those circumstances the inclusion of paragraph (4B) makes perfectly good sense. Merckx v Ford Motors Co. (Belgium) S.A. As far as one can tell from the report, in Katsikas v Konstantinidis and Skreb and Schroll v Stauereibetrieb Paetz the objection of the employees to working for the transferee of the business was essentially a personal one. At any rate, there is nothing to suggest that they were based on an expectation that the transfer of their contracts of employment would produce any substantial detrimental change to their working conditions or any other significant disadvantage to them. Factors such as these cannot therefore be said to have played any part in the Court's decision. In Merckx v Ford Motors Co. (Belgium) S.A. [1997] I.C.R. 352, however, this additional factor was present. The plaintiffs were salesmen employed in connection with a dealership for Ford motor vehicles in Belgium. Their employer decided to cease trading and announced its intention to transfer the dealership, together with a number of its employees including the plaintiffs, to a new proprietor, Novarobel. The plaintiffs refused to accept the transfer which they regarded as a unilateral breach of their contracts of employment, in part because Novarobel refused to guarantee that their previous level of earnings, which depended on the number of vehicles sold, would be maintained. They considered that to involve a material change to their detriment in their conditions of employment and brought proceedings claiming damages for wrongful dismissal. The question referred to the European Court was whether in the particular circumstances of that case there had been a transfer of an undertaking within the meaning of Article 1(1) of the Directive, but the court reformulated the question in a way which once again squarely raised the question whether an employee can object to the transfer of his contract of employment. The Court confirmed its earlier decision in Katsikas v Konstantinidis that on the transfer of an undertaking an employee has the right to object to a transfer of his contract of employment and that it is for the member states to determine the fate of the contract of employment with the transferor. It then continued as follows:
"36. The plaintiffs claimed, moreover, that in the case in point Novarobel refused to guarantee to maintain their level of remuneration, which was calculated by reference, in particular, to the turnover achieved. 37. In the light of that submission, it should be noted that article 4(2) provides that, if the contract of employment or employment relationship is terminated because the transfer within the meaning of article 1(1) involves a substantial change in working conditions to the detriment of the employee, the employer is to be regarded as having been responsible for the termination. 38. A change in the level of remuneration awarded to an employee is a substantial change in working conditions within the meaning of that provision, even where the remuneration depends in particular on the turnover achieved. Where the contract of employment or the employment relationship is terminated because the transfer involves such a change, the employer must be regarded as having been responsible for the termination. 39. Consequently, the answer to the second part of the question as reformulated must be that article 3(1) of Directive (77/187/E.E.C.) does not preclude an employee employed by the transferor at the date of the transfer of an undertaking from objecting to the transfer to the transferee of the contract of employment or the relationship of employment. In such a case, it is for the member states to determine what the fate of the contract of employment or employment relationship with the transferor should be. However, where the contract of employment or employment relationship is terminated on account of a change in the level of remuneration awarded to the employee, article 4(2) of the Directive requires the member states to provide that the employer is to be regarded as having been responsible for the termination."
Mr. Langstaff Q.C. submitted that since the plaintiffs in that case had objected to the transfer of their contracts of employment, no such transfer could have taken place and that therefore paragraph 39 of the judgment must be understood as referring to the existing relationship between the plaintiffs and their original employer, i.e. the transferor. This decision is, therefore, he submitted, binding authority that article 4(2) of the Directive entitles an employee who objects to the transfer of his contract of employment on the grounds that his working conditions would thereby be substantially altered to his detriment to treat himself as having been dismissed by the transferor. Although it appears from other passages in the report that it was left to the national court to decide whether the plaintiffs had in fact exercised their right to object to the transfer of their contracts of employment to Novarobel, the Court was clearly approaching the question before it on the assumption that they might be found to have done so. What, then, is one to make of paragraph 39 of the judgment and the last sentence in particular? I do not think that it can be read as merely a gratuitous reference to article 4(2) because it has been composed with the particular facts of the case in mind and it is clear from paragraph 15 that the Court was seeking to formulate and answer questions which would be of assistance to the Belgian court. I also think it is clear that the paragraph must be read as a whole and that the last sentence is intended to be read as a qualification on what immediately precedes it. In other words, the Court is confirming that an employee has a right to object to the transfer of his contract of employment and that member states can decide for themselves what the consequences for the existing contract shall be if he does so. However, it is also saying that if the contract is terminated in such circumstances because of some adverse change in conditions falling within the scope of article 4(2) – in that case a change in the level of remuneration – the employer must be regarded as having been responsible for the termination of the contract. I think the reference to "the employer" in that passage must mean the transferor because if an effective objection is made the employee never becomes employed by the transferee. Moreover, it seems to me that both the language of the Directive and the judgment of the Court contemplate that a remedy will be available to the employee under domestic law in such a case. The construction of TUPE Regulations It is against this background that the TUPE Regulations in their present form, and Regulation 5 in particular, fall to be construed. Mr. Goudie submitted that the effect of paragraphs (4A) and (4B) is perfectly clear: if an employee objects to the transfer of his contract of employment the transfer of the undertaking will not operate to transfer his contract to the transferee but will operate to terminate the contract altogether. In those circumstances it is not open to the employee to maintain a claim for damages for wrongful dismissal because by virtue of paragraph (4B) he is not to be treated for any purpose as having been dismissed by the transferor. On the face of it that is a powerful argument. The only answer suggested by Mr. Langstaff is that in circumstances such as those which existed in the Merckx case, and must be assumed for present purposes to exist in this case, the employee is entitled to invoke paragraph (5) in order to pursue his claim notwithstanding the wide terms of paragraph (4B). That is because the reference to paragraph (4A) must, so it is said, be read as involving a reference to paragraph (4B) which is simply consequential upon paragraph (4A). I begin with the language of the Regulations themselves. If one simply has regard to the language of paragraphs (4A), (4B) and (5), Mr. Langstaff's submission is not without its difficulties. The approach adopted by the draftsman of paragraph (5) was to identify certain provisions of the Regulations which were not to affect the rights referred to in that paragraph. One would expect, therefore, that he would have identified by a specific cross-reference all such paragraphs as he had in mind and the fact that he did not mention paragraph (4B) is some indication that he did not intend the operation of that paragraph to be excluded. Moreover, I think that conclusion is reinforced by the language of paragraph (4B) itself which is cast in wide and emphatic terms ("shall not be treated for any purpose (my emphasis) as having been dismissed by the transferor"). These words are not wide enough to preclude an employee from enforcing accrued claims of any kind against the transferor - for example, they would not prevent him from recovering arrears of wages - but they are wide enough to prevent him from claiming damages for wrongful dismissal where the termination of his contract occurs by reason of the transfer operating in conjunction with his objection. On this view of the matter all that paragraph (5) does is to provide that whether there is a transfer of the contract of employment by virtue of paragraph (1) or no transfer by virtue of paragraph (4A), any right of the kind described in paragraph (5) is to be unaffected; the consequences of exercising that right are governed by paragraph (4B). Paragraph (5) refers to the right of an employee to terminate his contract of employment if a substantial and detrimental change is made to his working conditions. In its original form, which referred only to paragraph (1), it only contemplated that such a change might come about as a result of the transfer of his contract to a new employer. The insertion of the reference to paragraph (4A) has introduced other difficulties, not least as to the meaning of the words "under that paragraph" in the second part of the paragraph. Where the contract of employment is not transferred because of an objection there can, of course, be no change in the identity of the employer. Moreover, the language used in this paragraph primarily contemplates a right which arises when a change in working conditions has actually been brought about. That can clearly happen on the transfer of the contract to a new employer; it is less easy to see any scope for this provision in the case of the employee who lodges an objection to a proposed transfer because in his case the transfer itself operates to terminate his contract, although I suppose it would make it clear that he continues to have the right to treat himself as constructively dismissed if his working conditions are substantially changed between the announcement of the transfer of the undertaking and its implementation. In the present case the University did not make any change in Mr. Humphreys' working conditions. All it did was to announce its intention to transfer its undertaking to another body which, we are bound to assume, would subsequently do so. In my judgment the intention of Parliament, insofar as it is to be collected simply from the language of the Regulations themselves, was to preclude an employee who objected to the transfer of his contract of employment from pursuing a claim for wrongful dismissal arising out of the termination of his contract, at any rate in circumstances such as those of the Katsikas case where the objection is not based on the grounds that the transfer would inevitably bring about a change in working conditions to his detriment. That is to some extent reinforced by the statements made by ministers in both Houses during debates on the Trade Union Reform and Employment Rights Bill which we allowed the Board to place before us under the principles laid down in Pepper v Hart [1993] AC 593 . I think it is fair to say, however, that when making those statements ministers do not seem to have had in mind a situation of the kind which subsequently arose in the Merckx case and arises in the present case. It is not possible to confine oneself simply to the language of the Regulations, however, since, as I have already observed, the task of this court when faced with legislation passed to give effect to Council Directives is to adopt a purposive approach and so far as possible to construe it in a such way as will give effect to the Directive as it has been construed by the European Court. The decision of the House of Lords in Litster shows how far the court may properly go to achieve that end. It is clear from the decisions in Katsikas and Merckx that member states are entitled to provide, as Regulation 5(4A) does, that where an employee objects to the transfer of his contract of employment the transfer of the undertaking automatically terminates his contract. However I am also satisfied in the light of the decision in Merckx that Article 4(2) of the Acquired Rights Directive is to be understood as meaning that if the transfer of an employee's contract of employment would result in a substantial change in working conditions to his detriment and he objects to the transfer on those grounds, the contract is to be regarded as having been terminated because the transfer involves a substantial change in working conditions to the detriment of the employee. The fact that Article 4(2) refers to "the employer" rather than "the transferee" means that it is capable of referring both to the transferee and the transferor as may be appropriate and is therefore consistent with that approach, and there are other indications to the same effect. Article 1(1) of the Directive identifies the type of transaction to which the subsequent Articles relate; it is Article 3(1) which contains the operative provisions. Accordingly, the expression "because the transfer within the meaning of Article 1(1) involves a substantial change in working conditions" in Article 4(2) must be interpreted as referring to a case where the contract is terminated at the instigation of the employee because the transfer of his contract would lead to a detrimental change in his working conditions. Article 4(2) of the Directive is carried into effect by Regulation 5(5). The first question, therefore, is whether paragraph (5) is capable of being construed as covering the case where the employee exercises the right to treat himself as constructively dismissed because the proposed transfer to the new employer would necessarily result in a substantial change in working conditions to his detriment. As I have already said, I think that the language of paragraph (5) is more apt to refer to the situation in which a change in working conditions has actually been brought about than one in which such a change is simply foreseen. However, if the purpose of the Directive is to be fulfilled, paragraph (5) must be given a generous interpretation and I do not think that it is too difficult to construe it as applying to a case of that kind. At common law any transfer of the undertaking would entitle the employee to treat himself as discharged immediately: see Litster per Lord Oliver at page 362H-363B and Wilson v St. Helens Borough Council [1999] 2 A.C.52 per Lord Slynn of Hadley at page 76G; a fortiori if it is one which would adversely affect his working conditions. On the assumption, which we are bound to make for the purposes of this appeal, that the transfer of the undertaking from the University to the Board would necessarily have that effect, Mr. Humphreys was entitled to treat it as discharging his contract with the University. That brings me back to the effect of paragraph (4B). Mr. Humphreys' right to treat his contract as discharged under these circumstances would ordinarily give rise to a claim for damages for wrongful dismissal, and indeed that is the claim which he makes in this action. Moreover, since the termination of his contract is a consequence, in part, of his objection to the transfer of his contract of employment, how can he escape the provisions of paragraph (4B)? Mr. Langstaff's answer was that in order to give effect to Article 4(2) of the Directive paragraph (4B) should be understood as applying only to the case where the employee objects to the transfer of his contract on the grounds that he does not wish to work for the transferee, in other words, when he simply objects to the change in the identity of his employer as appears to have been the case in Katsikas . Accordingly, the reference to paragraph (4A) in the opening words of Regulation 5(5) must be read as if it carried with it a reference to paragraph (4B). I do not think that paragraph (4A) itself can be read as applying only to objections made for purely personal reasons. It is unqualified in its terms and the principle that an objection by an employee prevents any transfer of the contract of employment or the rights and obligations associated with it to the transferee is one which must logically apply with equal force when an objection is made on substantial grounds. Certainly I can find nothing in the judgments in Katsikas and Merckx to suggest that an objection may have different effects in this respect depending on the grounds on which it is made. As I have said, simply as a matter of language I think there are difficulties in construing paragraph (5) as containing an implied reference to paragraph (4B), but it is necessary to have regard to the purpose of the Directive as interpreted by the European Court and construe the Regulations in a manner which will give effect to it, if it is possible to do so. In these circumstances I think one can construe it in the manner suggested by Mr. Langstaff given the fact that paragraph (4B) does no more than spell out the consequences of the objection provided for in paragraph (4A). Such an approach preserves such of the employee's common law rights as fall within paragraph (5) and gives effect to Article 4(2) as interpreted in the Merckx case. On the assumptions which we are bound to make for the purposes of this appeal, therefore, I am satisfied that Mr. Humphreys is entitled to pursue a claim for wrongful dismissal. Which defendant is liable to Mr. Humphreys? There remains only the question whether the University or the Board is liable to Mr. Humphreys in respect of the termination of his contract. Paragraph (4A) of Regulation 5 is quite explicit in its terms and indeed the whole concept of the employee's right to object to the transfer of his contract of employment points to the conclusion that the University is the party liable to him. Paragraphs (1) and (2) of Regulation 5 which provide for the transfer of contracts of employment and the rights and liabilities under and in connection with them are expressly subject to paragraph (4A) which provides in terms that they shall not operate to transfer the contract of employment or the rights, powers, duties or liabilities under or in connection with it in the case of an employee who objects to such a transfer. In the face of that paragraph it is difficult to see what could possibly be transferred to the transferee. Mr. Goudie sought to pray in aid Article 3(1) of the Directive itself which, he submitted, provides in mandatory terms for all rights and obligations to pass to the transferee. It is quite true that Article 3(1) is framed in absolute terms, but this argument overlooks the fact that the Directive fails to make any express provision for employees to object to the transfer of their contracts of employment. It proceeds on the footing that all employees will consent to the transfer and as such sets out the terms on which that is to occur. What one does not find, however, is any indication that existing rights and liabilities are to pass to the transferee when existing contracts of employment do not. A separation of existing rights and liabilities from continuing contracts would in my view be inconsistent with the scheme of the Directive and the Regulations. Mr. Goudie also developed another line of argument in an attempt to show that on any view the University cannot be under any liability to Mr. Humphreys. He submitted that if an employee has already chosen to treat himself as dismissed by the time of the transfer, there can be no further possibility of his becoming employed by the transferee and therefore there can be no effective objection of the kind contemplated by paragraph (4A). In those circumstances there is nothing to prevent the transfer of rights and liabilities under the contract taking place in accordance with paragraph (2). If, on the other hand, the employee waits and allows the transfer itself to terminate the contract under paragraph (4A), he will not have exercised his right to treat the contract as discharged at common law, and will not therefore be able to bring himself within paragraph (5) at all since that only preserves rights arising apart from the Regulations. The employee, he submitted, only has the right to object to the transfer of an existing employment relationship; he does not have the right to object to the transfer of rights and liabilities arising under a contract which has already been terminated. This is an ingenious argument, but it fails in my view to give adequate recognition either to the purpose of the Directive or to the effect of the transfer of an undertaking at common law. The purpose of the Directive, as the Court emphasised in Katsikas and Merckx , is to safeguard the rights of employees by making it possible for them to continue to work for the new employer on the same conditions as those agreed with the transferor, but employees are not obliged to take advantage of that protection if they do not wish to. If the employee does not object to the transfer of the employment relationship, Article 3(1) of the Directive automatically results in the transfer to the new employer of all rights and liabilities arising under the contract, whether the employee likes it or not: see Katsikas at paragraphs 22-24. That is consistent with the overall scheme of the Directive. If the employee does object, however, I can see nothing in the Directive itself or in the judgments of the Court in Katsikas or Merckx to suggest that the rights and liabilities under his contract are transferred to the new employer even though his employment relationship is not. As I have already indicated, I think that would be contrary to the scheme of the Directive. It would also be inconsistent with the principles which underlie the decisions in Katsikas and Merckx inasmuch as it would deprive the employee who objected to the transfer of his contract of the right to sue his original employer in respect of accrued claims. In my judgment the position under the both the Directive and the Regulations is quite clear: if an employee objects to the transfer of his contract of employment the transfer of the undertaking will not transfer to the transferee either the contract of employment or any of the rights or liabilities associated with it all of which remain with the transferor. I think Mr Goudie's argument also fails to recognise that the transfer of an undertaking operates to discharge the contract of employment both under the Regulations and at common law, as the authorities to which I have already referred demonstrate. That being so, the employee who waits for the transfer to take effect can rely on his common law rights which arise quite apart from the Regulations. That being so, if Mr. Humphreys has a right to recover in respect of the termination of his contract, he is entitled to do so against the University, not the Board. For these reasons I would dismiss this appeal. LORD JUSTICE ROCH: I agree. I too would gratefully adopt the account of the circumstances which have given rise to this appeal set out in the judgment of Potter LJ. Because this court has heard carefully constructed and cogently argued submissions in this appeal I shall state my reasons for reaching the conclusions I have shortly. There are two questions. First, where a transfer of an undertaking will involve a substantial and detrimental change in an employee's terms and conditions of employment can that employee treat his contract of employment as terminated by the employer and seek compensation? Second, if the answer to the first question is "Yes", against whom is the employee to obtain his remedy; is it the transferor of the undertaking or the transferee? The starting point for seeking answers to these questions is the Acquired Rights Directive of the Council of the European Communities. The purpose of that directive is to protect the employee when his employer transfers the employer's business to another. The protection has to be that if the terms of engagement with the transferee will be significantly different from those which obtained with the transferor and the differences will be detrimental to the employee then the employee is to have the option of treating his employment as terminated and obtaining compensation. That, it seems to me, is the interpretation the European Court has given to Article 4 (2) of the Directive in its decision in Merckx -v- Ford Motors Co. (Belgium SA) [1997] ICR 352. Article 4.2 of the directive provides "If the contract of employment or the employment relationship is terminated because the transfer within the meaning of Article 1(1) involves a substantial change in working conditions to the detriment of the employee, the employer shall be regarded as having been responsible for the termination of the contract of employment or of the employment relationship." In their judgment in Merckx's Case at paragraph 39, the European Court said:
"Consequently the answer to the second part of the question as reformulated (namely "whether Article 3(1) of the Directive precludes an employee of the transferor at the date of transfer of the undertaking from objecting to the transfer of his contract of employment or employment relationship to the transferee?") must be that Article 3(1) of the Directive does not preclude an employee employed by the transferor at the date of the transfer of an undertaking from objecting to the transfer to the transferee of the contract of employment or the employment relationship. In such a case, it is for member states to determine what the fate of the contract of employment or employment relationship with the transferor should be. However, where the contract of employment or the employment relationship is terminated on account of a change in a level of remuneration awarded to the employee, Article 4(2) of the Directive requires the member states to provide that the employer is to be regarded as having been responsible for the termination."
To read Article 4.2 of the Directive as meaning no more than that in the circumstances set out in that Article the employer should be considered responsible for the termination of a contract of employment or the contract relationship without any resulting liability, would not, in my judgment, achieve the purpose of the Directive namely to protect the employee. It is of some assistance that the directive in the French language provides that in the circumstances contemplated in Article 4.2 the ending of the contract of employment or the relationship of employment is to be considered as having been brought about by the act of the employer. The word "responsibility" does not appear. The answer to the first question is in dispute because it is arguable that Regulation 5(5) of the Transfer of Undertakings (Protection of Employment) Regulations, 1981, (to which I shall refer as the Regulations) is subordinate to Regulation 5(4B) of the Regulations. That argument is based on the fact that Regulation 5(5) does not refer expressly to paragraph (4B) of the Regulation. Regulation 5(5) reads:
"Paragraphs (1) and (4A) above are without prejudice to any right of an employee arising apart from these Regulations to terminate his contract of employment without notice if a substantial change is made in his working conditions to his detriment; but no such right shall arise by reason only that, under that paragraph, the identity of the employer changes unless the employee shows that, in all the circumstances, the change is a significant change and is to his detriment."
It is convenient also to set out the terms of Regulation 5(4A) and (4B) "(4A) Paragraphs (1) and (2) above shall not operate to transfer his contract of employment and the rights, powers, duties and liabilities under or in connection with it if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee. (4B) Where an employee so objects the transfer of the undertaking or part in which he is employed shall operate so as to terminate his contract of employment with the transferor but he shall not be treated, for any purpose, as having been dismissed by the transferor." The question is whether paragraph (5) has to be read as being subject to paragraph (4B) or whether paragraph (4B) is without prejudice to any right of an employee arising apart from these Regulations. In my opinion the answer is that paragraph (4B) has no existence independent of paragraph (4A) as its opening words clearly demonstrate. There is only one "objection by the employee situation" namely that contemplated in paragraph (4A). If that situation arises, it prevents the statutory novation provided for in Regulation 5(1) occurring. That is why in Regulation 5(1) "paragraph (4A) below" is referred to and paragraph (4B) is not. Paragraph (4B) states the consequences of a paragraph (4A) objection; but it does no more than that. Consequently where paragraph (5) provides that paragraphs (1) and (4A) above are without prejudice to any right of an employee, that was all that it needed to say to convey to the reader that paragraph (5) was to override paragraph (4B). That that is the correct reading and provides the answer to the first question is concluded, in my judgment, by the requirement that the Regulations must be read in a way which gives effect to the Directive as interpreted by the European Court. Turning to the second question, "against whom is the employee to obtain his remedy?" The European Court has decided that where a transfer of an undertaking takes place an employee is entitled to decide not to continue the contract of employment or employment relationship with the transferee. The Directive cannot be interpreted as obliging the employee to continue his employment relationship with the transferee. Where the employee decides not to continue with the transferee, the court has left it to member states to provide whether in such cases the contract of employment or employment relationship must be regarded as terminated either by the employee or the employer. Members states may also provide that the contract of employment or employment relationship should be maintained with the transferor. It must follow from these decisions that European Law leaves it to the national law to decide the answer to the second question. In my opinion Parliament has provided that answer in the opening words of Regulation 5(5) of the Regulations. Parliament has preserved "any right of an employee arising apart from these Regulations to terminate his contract of employment without notice where there is or will be a substantial change in his working conditions to his detriment brought about by the transfer". As that right arises apart from the Regulations, it cannot be a right against the transferee. Without the Regulations the employee has no rights against the transferee. His right to terminate his contract is a right which must exist against the other party to the contract who must be the transferor, in the absence of any statutory novation. The right to terminate the contract will lead on to the right to compensation for the transferring employer's conduct in bringing an end to the contract of employment by transferring his business on such terms as will bring about a substantial and detrimental alteration in the employee's working conditions. In my judgment, this appeal must be dismissed.

Order

Appeal dismissed with costs to include additional costs caused by joinder of second respondent; Applicant to pay second respondent's costs; Legal aid taxation; Leave to appeal to the House of Lords refused. Order does not form part of approved judgment.

Cited in 1 later judgment