Brophy Plc v Poole & 4 Ors [1996] UKEAT 133_95_0602

EAT
Brophy Plc v Poole & 4 Ors
[1996] UKEAT 133_95_0602 · 1996-02-06
When is an undertaking "in the nature of a commercial venture?".That was a question frequently asked under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (the 1981 Regulations) before they were amended with effect from 30 August 1993 (S.33(2) TURERA 1993) It was a critical question because of the exclusion by Regulation 2(1) of an undertaking which was "not in the nature of a commercial venture." If the exclusion applied, the 1981 Regulations did not apply. The practical effect was that employees in the excluded undertaking were not protected in their employment by the 1981 Regulations.The regulation was amended after the European Court of Justice held, in infringement proceedings, that the United Kingdom was in breach of the Acquired Rights Directive (No.77/187) in excluding such undertakings from the scope of the 1981 Regulations made under the European Communities Act 1972 for the purpose of implementing the Directive: Commission of the EC v UK 1994 ICR 664 .Although the question asked at the start of this judgment no longer has to be asked in connection with undertakings which are the subject of a relevant transfer after 30 August 1993, it still has to be answered in cases of alleged transfers occurring before that date. This is such a case.

In the experience of the Tribunal it is easier:-

(a) to ask the question than to answer it; and(b) to criticise another person's attempt to answer the question than to attempt an answer of one's own.Difficulty is increased by the absence of any stated or evident purpose in the exclusion of such undertakings from the 1981 Regulations. Why should employees of a commercial undertaking be protected, but not the employees of a non-commercial undertaking?We are indebted to all Counsel in this case - Mr McMullen QC for the Appellants Brophy Plc, Ms Mountfield for Dacorum Borough Council ("the Council") and to Mr Linden for the Respondents - for their valuable assistance in deciding whether the answer given by the Industrial Tribunal is legally correct. We shall attempt to provide further guidance to Industrial Tribunals faced with the question in cases yet to come. We believe that there are a substantial number of cases in the pipeline to the Industrial Tribunals and, from them, to the Appeal Tribunal.

THE APPEAL

This appeal is from the decision, on a preliminary issue, of the Industrial Tribunal held at Bedford in early 1994. In extended reasons notified to the parties on 3 January 1995 the Industrial Tribunal explained fully and carefully the reasons for their conclusion that the relevant undertaking in this case was "in the nature of a commercial venture."Brophy Plc, the alleged transferee and Respondent to the claims for unfair dismissal, appealed by Notice of Appeal served on 10 February 1995. Brophy's appeal is supported by the Council, as alleged transferor. It is opposed by the respondent employees who claim the protection of the 1981 Regulations against unfair dismissal.

THE BACKGROUND FACTS

In outline the relevant facts are as follows:-

(1) The Council is the local authority for an area covering Hemel Hempstead, Tring and Berkhamsted.(2) The Council had a Works Department. Mr Bainton was the Works Controller from November 1989 until October 1992. Mr Smedley was the Landscaping Manager in that department.(3) The "in house" activities of the Works Department included ground maintenance and landscaping. The area covered by these activities was divided into North, West and South Regions. Mr Poole and his fellow Applicants worked in the North Region.(4) Pursuant to the procedures for compulsory competitive tendering under the Local Government Act 1988, the South Region (Phase 1) and the West Region (Phase 2) were the subject of successful bids by the Council's Direct Services Organisation. The North Region was the third and last phase of compulsory competitive tendering for ground maintenance and landscaping. It operated from a separate depot with its own equipment under the separate day to day management of Mr Smedley. On 10 October 1991 a decision was made to award the contract to Brophy. The bid by the DSO was unsuccessful. This decision was made by the Ground Maintenance Committee of the Council.(5) By a contract dated 11 December 1991 the Council contracted out to Brophy for a period of 5 years and 357 days from 30 December 1991 ground maintenance and landscaping in the North Region.(6) Redundancy notices were issued to the staff affected, including Mr Poole and his fellow Applicants. A total of 27 staff were affected. Their dismissals were to take effect on 27 December 1991. Those who brought these proceedings had been unable to obtain a job with Brophy.The Applicants' case is that the effect of the contract with Brophy was to transfer an undertaking to Brophy within the meaning of the 1981 Regulations. The counter-argument of Brophy and the Council was that the subject matter of the contract was neither a commercial undertaking nor in the nature of a commercial venture. It was therefore excluded from the 1981 Regulations.In order to decide whether the Industrial Tribunal's conclusions contain a legal error, it will be necessary later in this judgment to refer to further facts found by them in the decision and relied upon by the parties in their arguments.

THE LAW

In order to decide whether the Industrial Tribunal made an error in the interpretation or application of the law to the facts, it is necessary to identify the relevant provisions in the regulations and to construe their meaning according to the rules of statutory interpretation and in the light of the authorities.Many cases reported in the Industrial Cases Reports and the Industrial Relations Law Reports were cited to the Industrial Tribunal. They are discussed in the extended reasons. Many of the same cases and some additional ones were cited to this Tribunal.The following cases were cited to this Tribunal:

Hadden v University of Dundee Students Association [1985] IRLR 449

Woodcock v Friends School [1987] IRLR 98

Stirling v Dietsmann [1991] IRLR 368

Expro Services v Smith [1991] ICR 577

Dr Sophie Redmond v Bartol [1992] IRLR 366

Wren v Eastbourne Borough Council [1993] ICR 955

Commission of the EC v UK [1994] ICR 664

Birch v Nuneaton Borough Council [1995] IRLR 518

UK Waste Control Ltd v Wren (No.2) [1995] ICR 974 (a valuable review of the current legal position on this point)It is unnecessary for the purpose of this judgment to discuss all (or any) of these cases in detail or to compare the facts of those cases with each other or with the facts of this case or to make extensive quotations and extracts from the judgment. It is not argued on behalf of any of the parties that any of those cases were wrongly decided. It is not argued that any one of them, on their facts and legal reasoning, is so close to the present case that this Tribunal is bound by an individual authority to reach a particular decision one way or the other.Debate rightly concentrated on the language, scheme and structure of the Regulations and points of legal principle established in the decision of the European Court of Justice, the Court of Appeal and the Employment Appeal Tribunal.

We highlight the following points:-

(1) The correct approach is to identify the relevant undertaking (or part of an undertaking) and to ask the question posed by the interpretation of "undertaking" in Regulation 2(1) ie

"Is the undertaking in the nature of a commercial venture?"

The undertaking in this case consisted of the Council's landscaping and ground maintenance in the North region.(2) An Industrial Tribunal will commit an error of law if it asks the wrong question ie a question not posed by the statutory definition eg is the undertaking a profit making venture? Is the undertaking legally charitable? (see Birch v Nuneaton Borough Council (supra)).(3) It is not correct simply to ask "is the undertaking commercial?". If that question is asked and the answer is "Yes", then clearly such an undertaking is not excluded from the 1981 Regulations. But if the answer to that question is "No", it is necessary to ask a further question: Is the undertaking in the nature of a commercial venture ? An undertaking may not be a commercial undertaking or venture, but it may nonetheless be in the nature of a commercial venture (see UK Waste Control Ltd v Wren (No.2) (Supra).(4) In the absence of a statutory definition of the expression "in the nature of a commercial venture" and in the absence of any mandatory guidelines or prescribed considerations in the Regulations, the duty of the Tribunal is to interpret that expression according to its meaning in ordinary English.(5) The expression has a wide meaning, certainly wider than the expression "commercial venture".(6) Whether an undertaking falls in or outside the exclusion is very much a matter of "first impression", a recognition by the Court of Appeal in Woodcock (Supra) that there are sensible limits on the extent to which a conclusion on such a question can be fully reasoned, totally predictable or wholly certain. Tribunals are urged to look at all the factors potentially relevant to the nature of the undertaking - its purpose, its organisation, its users, the policies governing its management. There may be factors pointing one way. There may be factors pointing the other way. The factors may be labelled "positive" or "negative". All that matters is that they are relevant and are taken into account. The cases contain decisions one way or the other. But they are only examples or illustrations, not statutory statements. For example:(a) It is relevant to inquire whether the venture is entered into with a view to making profit, but the absence of a profit motive, the absence of profit the non-distribution of profit or, indeed, the making of an actual loss do not necessarily lead to the conclusion that the undertaking is not in the nature of a commercial venture. Further, the fact that the European Commission and the Court in Commission v UK (Supra) regarded the exclusion as covering non-profit making undertakings does not determine the correct interpretation, approach or result in a case brought in reliance on the Regulations.(b) It is also relevant to inquire whether the undertaking is engaged in activities which are not necessarily or obviously commercial: eg education, "artistry", the provision of public services. But an affirmative answer to those enquiries does not necessarily mean that the undertaking fails to qualify as one in the nature of a commercial venture.(c) It is relevant to inquire whether an undertaking is commercial or in the nature of a commercial venture from the transferee's point of view. But an affirmative answer does not necessarily mean that what was transferred by the transferor to the transferee was an undertaking in the nature of a commercial venture. An undertaking which is commercial in private hands, may not be in the nature of a commercial venture in the hands of a public authority.(d) In the case of contracting out by a public authority, it is relevant to make a comparison between the undertaking in question, in the hands of the transferor public authority, with a similar undertaking carried on as a commercial venture by a private operator.

SUBMISSIONS OF BROPHY AND THE COUNCIL

Mr McMullen Q.C. for Brophy and Ms Mountfield for the Council joined forces in their submissions that the Industrial Tribunal erred in law in concluding that this undertaking fell outside the exclusion. It is not necessary to separate the submissions made by each of them. They both submitted, with different emphasis on individual points, that there had been a breach of the rules of natural justice in the procedure adopted by the Tribunal and an error of law and perversity in their conclusions.

(A) NATURAL JUSTICE

It was argued that the Industrial Tribunal breached the rules of natural justice because, after the hearing had finished, the members of the Tribunal had two further meetings and, without further notice to the parties and their advisers, relied, in their extended reasons, on matters on which the parties had not had an opportunity to address them. The Industrial Tribunal's conclusions on those new points were legally wrong and had a significant effect on the outcome of the case. A central plank of the reasoning of the Tribunal concerned the position of local authorities, Councillors and District Auditors under the provisions of the local Government legislation, in particular Sections 19 and 20 of the Local Government Finance Act 1982. It was argued that the Industrial Tribunal made a faulty analysis of these provisions in relation to the power of district auditors and the responsibility of Councillors and their financial risks. If they had heard argument from the parties on this aspect of the case they would, or might, have decided the case differently. For this reason alone, the appeal should be allowed and the case remitted to the Industrial Tribunal for further consideration. On this point, argument concentrated on the passage in the extended reasons of the Industrial Tribunal on pages 16 and 17.
"So what is the position in relation to in-house provision of local Government services ie the position of Dacorum Borough Council in relation to the Northern Area Grounds Maintenance prior to Brophy Plc taking it over?"
The ultimate responsibility was with the Councillors who can claim expenses upon which they are taxed. Certain office holders get extra allowances. The role of a local councillor is an extremely demanding and responsible one. They are answerable both to the electorate and to the District Auditor. They can be, and many of them have been, stripped of their office and disqualified from office. These draconian penalties are generally not available against Company Directors, nor incidentally, Members of Parliament.These penalties are available in case of mismanagement as well as deliberate wrongdoing. The only comparable provisions in relation to the company directors relate to disqualification. This is widely regarded as one of the most toothless pieces of legislation on the Statute Book.Local Authorities are subject to stringent spending limits and, ultimately, rate/charge/tax capping.Those responsible for running local authorities face risks that those in the private sector would not welcome."The Tribunal considered the risks in employment by a local authority and went on to say:
"What is the risk in running a private limited company? The loss of a £100 paid up share capital is the answer in most cases. yet no one suggests that such an organisation is not covered by the regulations."
The points relied on by the Industrial Tribunal in those passages affected their decision. It was a breach of natural justice for them to rely on reasoning on which the losing parties were not given an opportunity to make submissions.

(B) MISDIRECTION OF LAW

The Industrial Tribunal erred in law in failing to make a comparison with an analogous private operator of the activities in the North Region. Had they made that comparison they would have appreciated that the Council could not be equiparated with Brophy as an operator. The Board of a Plc is engaged in a commercial venture, taking risks. The elected members of a local authority, discharging statutory duties, are not in the same position.

(C) PERVERSITY

This was at the heart of the submissions by both Brophy and the Council. They submitted that no reasonable Tribunal could have arrived at the conclusion that the undertaking of ground maintenance and landscaping in the hands of the Council was in the nature of a commercial undertaking. The facts set out in the decision were examined in detail. Mr McMullen carried out an exercise of listing the various factors which pointed one way and the other. There were factors present prior to the transfer by the Council to Brophy which favoured the view that those activities were not in the nature of a commercial venture. The Council is a local authority providing a public local service for the benefit of the residents of and visitors to the area. The staff are interchangeable and mobile, subject to national conditions. There is no client/provider relationship between the Council and those who benefit from the services. There are no competitors. There is no assessment by reference to financial returns, no separate accounts. It is not a revenue generating or profit making activity. It just involves cost to the tax payer. The management of the relevant region was not by a DSO, but by a Landscape Manager. Mr McMullen contrasted that with numerous factors present in the undertaking after the transfer (to a DSO or to Brophy) which were the hallmarks of an undertaking in the nature of a commercial venture. He accepted that a DSO would be in the nature of a commercial venture. In the case of the North Region before contracting out the activities were under the control of a Council official with reduced responsibilities. There had been none of the structural changes brought about on becoming a DSO. In a DSO responsibility for staff is with a DSO Staff Committee. A DSO is in competition with outside bodies. The ethos of a DSO is different than that of the undertaking in the Northern Region. It became cost orientated. Emphasis was placed on the performance of staff with financial rewards for staff by reference to performance as a change from the emphasis on the provision of a public service to a commercial undertaking. There is greater emphasis on recruiting staff with a stronger business background. The structure of the workforce is changed. Equipment is purchased with higher performance potential. There is an emphasis on obtaining return (5%). Conditions of service change. It is no longer a matter of national bargaining. Accounts have to be submitted to the Department of the Environment. A DSO may be shut down if the DSO makes a loss or there is a failure to achieve certain returns. Different rates exist in different areas. There is no control over contracting out by the Council. In making these comparisons Mr McMullen's principal point was that the Council had organised two of the three areas (the West and South Regions) as DSOs which were accepted as being in the nature of a commercial venture. In contrast, the Council had decided not to organise the North Region in this way. The service provided by the North Region was a local authority service provided by the Council for tax payers, pursuant to a statutory duty and without the obligations to make a return on capital imposed on DSOs. The evidence of the differences in directly run services and by DSOs was disregarded by the Tribunal.Ms Mountfield elaborated on this challenge to the correctness of the Industrial Tribunal decision. She submitted that:(1) The unchallenged evidence of the Council was that, before the moment of transfer on 31 December 1991, the activities in question were carried out through political and statutory, not commercial, mechanisms:-(a) in-house;(b) as a service to the public, free at the point of use to all residents, ratepayers, charge payers and Council tax payers;(c) with no competition;(d) with no assessment of financial returns;(e) with no generation of revenue;(f) with no cost-orientated ethos;(g) with no seeking of a return on capital.In those circumstances, no reasonable Tribunal could have reached the conclusion that the undertaking was in the nature of a commercial venture. She added that political risk, responsibility for mismanagement and the poor performance by a local authority could not be reasonably equated with commercial risks and responsibilities in the way attempted by the Tribunal. The object of the undertaking, the organisation and accountability pre-transfer all pointed to an undertaking of a nature excluded from the 1981 Regulations.As the Appeal Tribunal has all the necessary material before it, in the form of the uncontradicted evidence of the Council, this Tribunal need not remit the case to the Industrial Tribunal. A Tribunal properly directing itself on this material could only give one answer, namely that the undertaking was not in the nature of a commercial venture.It was made clear during the discussions at the hearing that, even if this appeal is dismissed, Council will remain parties to the proceedings, because the Applicants intend to pursue against them a claim for ordinary unfair dismissal, quite apart from the claim for unfair dismissal against Brophy under the 1981 Regulations.

CONCLUSIONS

The forceful (and forthright) submissions of Mr McMullen QC and Ms Mountfield have not convinced us that the Industrial Tribunal breached the rules of natural justice or were perverse or made an error of law.

In our judgment, the legal position is as follows:-

(A) NATURAL JUSTICE

We agree with the Appellants that it would have been preferable for the Industrial Tribunal to call Counsel back for further argument on points in the extended reasons about the responsibilities and risks of local authority Councillors. Counsel would then have had the opportunity to persuade the Industrial Tribunal that these points were of no relevance to the determination of the critical question, namely whether the undertaking was in the nature of a commercial venture.In our view, however, there was no material breach of the rules of natural justice. All the facts, which were not in dispute, were put by Brophy and the Council before the Industrial Tribunal, along with all the arguments which Brophy and the Council wish to make to them. The points on the position of Councillors and Auditors under the Local Government legislation are points of law only. If they were determined correctly, there is nothing to complain about. If they were determined incorrectly, that can be rectified on appeal without the necessity for a re-hearing of the case on remission to an Industrial Tribunal. In our view, the legal points made by the Industrial Tribunal on these matters (see pages 16 and 17 of the decision) are not relevant to the determination of the question whether the undertaking of ground maintenance and landscaping was in the nature of a commercial venture. The decision is unaffected if, on all other matters, the Tribunal came to a correct conclusion. The fact that they took into account an irrelevant legal point would not necessarily affect the overall correctness of the decision.

(B) MISDIRECTION OF LAW AND PERVERSITY

The starting point is that the issue whether an undertaking is "in the nature of a commercial venture" is a question of fact reached by taking into account all the relevant circumstances and weighing one against another. The Tribunal is entitled to make a judgment on this point as a matter of "first impression" of all the relevant features. It is not bound to attempt a definition of what Parliament has not attempted to define. It is not bound to set out every step of its reasoning to the conclusion.There is no appeal against the determination of fact, unless it is shown that there was a failure to interpret or apply the law correctly (eg by asking the wrong question or by taking the wrong approach) or if it is shown that the conclusion is one which no reasonable Tribunal, properly directing itself, could have reached.This Tribunal asked itself the correct question (see page 14):
"... whether the activities of Dacorum Borough Council in relation to its Northern Area Grounds Maintenance Division were or were not in the nature of a commercial venture."
On page 17 they answered that correct question as follows:
"Looking at the matter as a whole we are satisfied and we find as a fact, that the operation of the Northern Area Grounds Maintenance Service by Dacorum Borough Council in 1991, immediately prior to the transfer to Brophy Plc, was part of an undertaking which was in the nature of a commercial venture and was thus covered by the Regulations."
In our judgment, that is a conclusion which a reasonable Tribunal could properly reach. The following points are regarded as significant on that question:-(a) Brophy and the Council concede (rightly, in our view), that the same ground maintenance and landscaping activities when carried out by DSOs are "in the nature of a commercial venture."The differences between the DSO regime and the non-DSO regime are not so significant that their activities are of a different nature. The notional internal market, with separate accounting and an obligation to make a notional profit in DSO, does not change the nature of the undertaking. Indeed, the fact that North Region put in a tender for the contract and that the contract was entered into for commercial reasons indicates the existence of an undertaking in the nature of a commercial venture prior to the transfer which changed into a commercial undertaking after the transfer.The operation of ground maintenance and landscaping was sufficiently commercial in nature for the North Region (as did the South and West regions) to be able to submit a bid and compete with the private sector as part of the tendering process. In the previous rounds of tendering the in-house bids defeated the private sector commercial competitors on grounds that could reasonably be regarded as of a commercial nature.(b) The undertaking of Brophy was undoubtedly in the nature of a commercial venture. This fact does not determine the nature of the same undertaking in the hands of the Council prior to transfer. But it is legitimate to take account of the fact that the undertaking of the North Area is accepted to be commercial one minute after midnight when the transfer takes place. It may be asked why is it not in the nature of a commercial venture one minute before midnight prior to the transfer? In our view, nothing changed which was essential to the nature of the venture; certainly not from the employee's point of view.For all those reasons we have reached the decision that this appeal should be dismissed.

MR JUSTICE MUMMERY : 22 February 1996

BROPHY PLC - V - (1) MR ALAN POOLE & 4 OTHERS

(2) DACORUM BOROUGH COUNCIL

As I am unfamiliar with your handwriting, in particular page 13, would it be possible for you to look over the above judgment. I have amended and reprinted a second draft.

Many thanks

Iris Pain

MR JUSTICE MUMMERY 5 March 1996

EAT/133/95

BROPHY PLC - V - (1) MR ALAN POOLE & 4 OTHERS

(2) DACORUM BOROUGH COUNCIL

As requested, please find enclosed white copy of the above judgment. This has been amended and re-printed from 2nd yellow draft.

Iris Pain