British Fuels Ltd v. Baxendale and Another and Wilson and Others v. St Helens Borough Council [1998] UKHL 37

House of Lords
Between
British Fuels LtdAppellantBaxendale and Another and Wilson and Others v. St Helens Borough CouncilRespondent
Before
Lord Browne-WilkinsonLord Slynn of HadleyLord SteynLord ClydeLord HuttonDate 29 October 1998
My Lords,I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Slynn of Hadley. For the reasons which he gives I would allow the appeal of British Fuels Ltd. in both Mr. Baxendale's and Mr. Meade's cases and dismiss the appeal of Mr. Wilson and others against St. Helens Borough Council.

LORD SLYNN OF HADLEY

My Lords,These two appeals raise important issues under the Transfer of Undertakings (Protection of Employment) Regulations 1981 S.I. 1981/1794 which were made to give effect to the Acquired Rights Directive (77/187/EEC) of the European Council of February 1977.

The Measures

The Regulations provide as follows:

"3 A relevant transfer

These Regulations apply to a transfer from one person to another of an undertaking [which includes any trade or business] situated immediately before the transfer in the United Kingdom.
"5 Effect of relevant transfer on contracts of employment, etc (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any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee.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, including, where the transfer is effected by a series of two or more transactions, a person so employed immediately before any of those transactions.

( a ) paragraph (1) above shall not apply to his dismissal; but

( b ) without prejudice to the application of section 57(3) of the 1978 Act or Article 23(10) of the 1976 Order (test of fair dismissal), the dismissal shall for the purposes of section 57(1)( b ) of that Act and Article 22(1)( b ) of that Order (substantial reason for dismissal) be regarded as having been for a substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held.

"12 Restriction on contracting out

Any provision of any agreement (whether a contract of employment or not) shall be void in so far as it purports to exclude or limit the operation of Regulation 5, 8 or 10 above or to preclude any person from presenting a complaint to an industrial tribunal under regulation 11 above."[2086]The words in square brackets were inserted by the Trade Union Reform and Employment Rights Act 1993 as from 30 August 1993.It is common ground that, both under English law and under Community law, the national court should construe a regulation adopted to give effect to a directive as intended to carry out the obligations of the directive and as not being inconsistent with it if it is reasonably capable of bearing such a meaning (see Garland v. British Rail Engineering Ltd. [1983] 2 AC 751 and Litster v. Forth Dry Dock & Engineering Co. Ltd. and Anor [1990] 1 AC 546 ). In Sabine Colson and Anor v. Land Nordrhein-Westfalen (case 14/83) [1984] ECR 1891 the European Court said that, pursuant to Member States' obligations under Article 5 of the EC Treaty, "National courts are required to interpret their national law in the light of the wording and the purpose of the directive in order achieve the result referred to in the third paragraph of Article 189." Accordingly where different options are available and effective to achieve the objects of the Directive it is for Member States to choose between them. It is also common ground that if a Regulation does not properly implement the Directive, the Directive can only be relied upon by the employees involved if they can show that the employer is an emanation of the state. It has not been suggested that BFL is such an emanation or that St. Helens Borough Council is not such an emanation.The Directive is "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." It begins by reciting that economic trends have brought about many changes in the structure of undertakings and that "it is necessary to provide for the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded;"Article 1 of the Directive provides that the 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."By Article 3:Member states have, however, a discretion to provide that the transferor shall continue to be liable in respect of obligations arising under the contract of employment in addition to the liability of the transferee.By Article 4:

The Facts

In outline the relevant facts are as follows:

Baxendale and Meade

Mr. Baxendale was employed from 1977 and Mr. Meade from 1978 by the British Coal Corporation ("B.C.C.") or its subsidiary National Fuels Distributors Ltd. ("N.F.D."). On 1 September 1992 the undertakings of N.F.D. and of British Fuels Ltd. ("B.F.L."), another subsidiary of B.C.C., were merged. By letters dated 20 August 1992 B.C.C. gave both men three months' notice of dismissal on the grounds of redundancy saying "your effective date of redundancy will . . . be 28 August 1992." They received wages in lieu of notice, statutory redundancy pay and further redundancy pay under B.F.L.'s own arrangements. By a letter also of 20 August 1992 B.F.L. offered the men employment with effect from 1 September 1992 on terms which it is common ground were less favourable than those which they enjoyed with N.F.D.Both men signed the offer letter accepting employment and they began to work on 1 September 1992. On 22 January 1993 B.F.L. notified them that for statutory purposes their service with N.F.D. would be counted as continuous employment with their service with B.F.L. They were given statutory statements incorporating this change into their existing terms which they accepted, Mr. Meade on 23 April and Mr. Baxendale on 14 May 1993.On 23 September 1994 Mr. Meade claimed before an Industrial Tribunal under section 11 of the Employment Protection (Consolidation) Act 1978 (now section 11 of the Employment Rights Act 1996 ) that he was employed by B.F.L. on the terms applicable to his employment with N.F.D., having already in the county court claimed a further £10,000 under B.C.C.'s Redundancy Payments Scheme. He is still employed by B.F.L.On 6 February 1995 Mr. Baxendale was dismissed by B.F.L. as being redundant. Before an Industrial Tribunal in addition to claiming further redundancy pay, and a declaration that he had been unfairly dismissed he sought a declaration under section 11 of the 1978 Act that until dismissed he was entitled to be employed by B.F.L. on the terms of his employment with N.F.D.Before separate Industrial Tribunals the two men's claims failed, though on different grounds. They also failed before the Employment Appeal Tribunal. The Court of Appeal decided in favour of the men but gave B.F.L. leave to appeal.In Mr. Meade's case the Industrial Tribunal held that Regulation 12 did not provide that a dismissal for a reason connected with the transfer was void but rather that it should not be a ground for dismissal. They concluded, therefore, that the dismissal by N.F.D. was an effective dismissal and the applicant could have brought proceedings for unfair dismissal under Regulation 8 within three months of the dismissal, if he could show that the dismissals was "triggered by the transfer or a reason connected with it." Conversely the employer might have a defence under Regulation 8(2) to a claim for unfair dismissal if he could show that the viability of his business was threatened (paragraph 13). Here Mr. Meade "freely negotiated terms and conditions with a new employer against a background of compensation for loss of his employment and its benefits with N.F.D." (paragraph 14). This he could do without contravening Regulation 12 or the Directive.In Mr. Baxendale's case the Industrial Tribunal found that he was not dismissed for redundancy, or at all, in 1992 but only in 1995. He accepted the new B.F.L. terms either initially after the transfer or when he signed the revised statutory statement of terms on 14 May 1993. He had not claimed constructive dismissal in September 1992 and in respect of any less advantageous terms he was "in effect compensated for this through receipt of the enhanced 'redundancy' package and pay in lieu of notice" (paragraph 27).The Employment Appeal Tribunal concluded that Mr. Meade had been validly if unfairly dismissed and that neither at Common Law nor by virtue of the Regulation or the Directive was the dismissal to be treated as a nullity. They accordingly rejected Mr. Meade's appeal. They said that if the dismissal was by virtue of Community Law a nullity they would have held that the variation of terms both in the statement signed on 25 August 1992 and in the statement signed on 23 April 1993 were rendered void by Regulation 12. The E.A.T. added, however, that:As to Mr. Baxendale they held that he was validly if unfairly dismissed and that the statement of terms "properly reflected the new contract that he then entered as subsequently varied." They did not, however, accept that a transferred contract (i.e. if the dismissal was a nullity) could be varied; Regulation 12 prohibited that.

Wilson

Eight men, including Mr. Wilson, and one woman were employed by Lancashire County Council ("L.C.C.") at the Red Bank Controlled Community Home run by L.C.C. They were employed in different capacities - e.g. as teacher, gardener-groundsman, team leader. In 1990 L.C.C. gave notice that because of the cost involved it would not continue to run the school after 30 September 1992. St. Helens Borough Council ("St. Helens") agreed to assume control of the school on 1 October 1992 on the basis that running the school would involve no charge on St. Helens' resources. This meant that there would have to be a reorganisation entailing a change in the workforce. Some staff stayed with L.C.C. in different jobs; others were made redundant. Some 76 were offered jobs by St. Helens. Each of the appellants was offered employment by St. Helens commencing on 1 October 1992 on terms which were different from those on which they had previously been employed. They each also received a letter from L.C.C. terminating their contracts of employment with L.C.C. with effect from 30 September 1992.In June 1994 the appellants claimed under the Wages Act 1986 (now the Employment Rights Act 1996 ) that they were being paid less than they were contractually entitled to when working for L.C.C., that the difference was an unlawful deduction from wages and that they should be paid the difference. St. Helens succeeded before the Industrial Tribunal, failed before the Employment Appeal Tribunal but succeeded in the Court of Appeal.The appellants claim that their terms of employment with L.C.C. immediately before transfer were more favourable than those which were applied when they began work with St. Helens immediately after transfer. They received no termination payment on dismissal. It is agreed that, though the Industrial Tribunal found that some were promoted with greater allowances, and others lost the responsibilities and allowances, findings remain to be made as to the terms and conditions which applied to the appellants' employment.As in the case of Mr. Baxendale and Mr. Meade, at the time of the dismissal and re-employment of all the people involved in Wilson's case, it was not realised that there had been a transfer of an undertaking within the meaning of the Regulations and the Directive. The claim that there had been such a transfer on which previous terms of employment continue to apply was raised for the first time in Wilson's case on 2 March 1993. The essence of St. Helens' reply was that the new terms had been agreed and subsequently confirmed by the appellants and that such agreement was lawful and binding.The Industrial Tribunal found that if L.C.C. or St. Helens had been faced with claims of unfair dismissal they could have successfully relied on Regulation 8(2) on the basis that there were economic, technical or organisational reasons entailing changes in the workforce:The Industrial Tribunal continued:But the Industrial Tribunal ruled that, even if as a matter of law the L.C.C. terms applied to the new appointment immediately on transfer, it was possible for the terms to be varied subsequently, either expressly or by conduct. They found that in Wilson's case in relation to all the employees:Some waited till March 1993, others until 10 June 1994, before indicating through their unions that they did not accept the new contracts. The Industrial Tribunal clearly had no doubt that the contractual variation had been affirmed by conduct.It appeared from a subsequent decision of the Chairman of the Industrial Tribunal following an application for a review that the defence of "economic, technical or organisational reasons" under Regulation 8(2) had not been specifically argued at the hearing though the facts relevant to such a defence had been fully gone into. A review of the earlier decision was refused partly on the ground that the tribunal had in the alternative held that the new terms had been affirmed and thereby the terms of the employees' contracts varied.The Employment Appeal Tribunal held that in considering whether there had been an unlawful deduction of wages, it was crucial to decide whether the reason for the alteration of the terms of the contract for employment was the transfer of the undertaking. If it was, the variation was ineffective; if it was not, then the parties were free to vary the terms. The Employment Appeal Tribunal held:In particular Regulation 8(2) (the "eto" defence) did not apply because the applicants were not dismissed--"nothing in Regulation 8(2) permits a variation in terms or limits the mandatory scope of Regulation 5(1) of the 1981 Regulations."Moreover:Accordingly the variation was ineffective and the terms of the original contract remained in force.

The Court of Appeal

In the Court of Appeal Beldam L.J. drew a series of propositions from the consideration of speeches in your Lordships' House in Litster v. Forth Dry Dock & Engineering Co. Ltd. and Anor [1990] 1 AC 546 and of a number of cases in the European Court of Justice, namely: Wendelboe v. L.J. Music ApS (Case 19/83) [1985] E.C.R. 457, Foreningen af Arbejdsledere i Danmark v. A/S Danmols Inventar (Case 105/84) [1985] ECR 2639 , Foreningen af Arbejdsledere i Danmark v. Daddy's Dance Hall A/S (Case 324/86) [1988] ECR 739 and P. Bork International A/S v. Foreningen af Arbejdsledere i Danmark (Case 101/87) [1989] I.R.L.R. 41, viz:
"(4) Under Article 4 the transfer does not by itself justify dismissal by the transferor or transferee unless such dismissal is for economic, technical or organisational reasons entailing changes in the workforce. The employer who dismisses an employee for one of the reasons specified in Article 4(1) can thus justify the dismissal.
"(5) In order to determine whether the only reason for dismissal was the transfer itself, account must be taken of the objective circumstances in which the dismissal occurred, in particular whether it took place on a date close to the transfer and whether the workers concerned were re-engaged by the transferee.
"(6) A dismissal effected before the transfer and solely because of the transfer of the business is in effect prohibited and when considering the application of Article 3(1) is required to be treated as ineffective.
"(7) The crucial question is what is meant by a contract of employment being terminated 'by' a transfer. To answer this question it is necessary to decide what is the effective reason for the termination of the contracts of employment.
In short, neither the former employer nor the succeeding employer may dismiss the employees simply because of the transfer, but they are not prohibited from terminating their contracts of employment on the occasion of the transfer if they do so on economic, technical or organisational grounds."He said that in Wilson's case there was clearly evidence on which the Industrial Tribunal could, as it did, find as a fact that the reason for the changes in the employees' terms of employment was an economic or organisational reason--L.C.C. ceased running the Home and the employees were no longer needed by L.C.C. to work there so that they were redundant. It was not, therefore, correct to say that the transfer was the reason for the change in conditions of employment. This was so even if the actions of L.C.C. before the transfer are deemed to have been done by St. Helens. Beldam L.J. said:He concluded:The other members of the Court of Appeal agreed.As to Mr. Meade and Mr. Baxendale Beldam L.J. held that on the evidence before the Industrial Tribunal the transfer was the reason for the dismissals. "If it had then considered the consequences, it could only have concluded that the purported dismissals were ineffective and that the contracts of employment continued as if originally made with B.F.L." (paragraph 63).He did, however, agree that if the dismissal was a nullity the agreement of the terms offered by B.F.L. on 20 August was not effective by reason of Regulations 5 and 8 read with Regulation 12. The change in the terms introduced in B.F.L.'s letter of 22 January 1993 was:

The appeals before your Lordships' House

Two issues are broadly common to the two appeals. The first is whether, on the transfer the employees were entitled to retain the benefit of their previous terms and conditions. The first issue in effect raises the question as to whether the dismissals or purported dismissals by the previous employers took effect or whether they were nullities. Put another way, the question is whether the dismissed employee can compel the transferee to employ him or whether he is given the right to enforce as against the transferee such remedies under national law as he could have enforced against the transferor. The second is whether, if despite dismissal they were entitled to retain the benefit of their previous terms, the employees either by initially agreeing terms with their new employers, or by continuing to work for the new employers or (in the case of Mr. Meade and Mr. Baxendale by accepting the statement of terms and conditions subsequently) varied any entitlement to the previous terms and conditions.

The Regulation

Paragraph 1 of Regulation 5 provides that transfer does not (i.e. by itself) operate to terminate the contract of employment but "any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made [with] the transferee." That replaces the position in English law where the sale of a business by one employer to another does not automatically transfer a contract of employment. There has to be a novation, a new contract by which the employee agrees to be employed by the new employer. The regulation makes such a new contract unnecessary; the "novation" takes place by operation of the regulation. Paragraph 5 of Regulation 5 does not, however, in terms provide that an actual dismissal, before, on or after the transfer, has no effect so that the transferee is obliged to employ the employee until such time as he has an independent justification for terminating the employment.Paragraph 2 of Regulation 5 takes the matter one step further. On such a transfer "all the transferor's rights, powers, duties and liabilities under or in connection with any such contract" are transferred to the transferee and anything done before the transfer by or in relation to the transferor in respect of the contract or a person employed in that undertaking shall be deemed to have been done by or in relation to the transferee. Those rights, powers, duties and liabilities must obviously depend on the law governing the contract.In English domestic law it is clear that the dismissal of an employee by an employer determines the working relationship between them. As Lord Oliver of Aylmerton said in Litster v. Forth Dry Dock & Engineering Co. Ltd. [1990] 1 AC 546 :-Thus, English courts will not as a general rule, though there are exceptions, specifically enforce contracts of employment since (see Treitel, Law of Contract 9th ed. p. 927):On the other hand if the determination is in breach of contract the employee can claim damages for wrongful dismissal. If it is unfair he may be able to obtain statutory compensation for unfair dismissal or an order for reinstatement or re-engagement. But the contract of employment is gone save for the purpose of enforcing rights under it other than a right to go on working.The transferor's liability is thus to pay damages or to comply with an order under the relevant employment legislation for compensation or reinstatement, but it is not to continue actually to employ the employee he has dismissed. It is that liability of the transferor under the contract which is transferred by virtue of the Regulation to the transferee. Paragraph 2( b ) makes it doubly sure that the transferee is to be liable because if the transferor dismisses the employee that act is deemed to have been done by the transferee.Paragraph 3 of Regulation 5 makes it clear that the reference to a person employed is a reference to a person employed immediately before a transfer. Paragraph 4A in force from 30 August 1993 (i.e. after the transfer in these cases) provides that no transfer of the contract, or of rights and liabilities under it, are to pass if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee. Paragraph 4A does not mean, in my view, that but for an objection by the employee the right to continue actual employment with the transferee would exist if the transferor dismisses the employee. What it means is that there is no automatic novation, which would impose obligations on the employee, so that any claims which the employee may have against the transferor must be enforced, if at all, against the transferor. The transferee is not liable for them.There is an important provision in respect of an employee's rights under domestic law on a transfer in paragraph 1 of Regulation 8. Dismissal before or after transfer by transferor or transferee is deemed to be unfair, for the purposes of legislation dealing with unfair dismissal, if the transfer, or a reason connected with it, is the reason or a principal reason for his dismissal. Equally there is an important provision for employers in that the dismissal is not to be deemed to be unfair where:These provisions both seem to me to point to the dismissal being effective and not a nullity. If there is no dismissal there cannot be compensation for unfair dismissal. It is because the dismissal is effective that provision is made for it to be treated as unfair for the purposes of awarding compensation under employment legislation.B.F.L. were right to point out, as the recitals to the Directive expressly recognised, that the Regulation affects many transfers which occur as an everyday matter--not just on the merger of giants but in the sale of a business or part of a business, or in the redistribution of a business or part of a business or in the redistribution of a business between subsidiary companies. Changes may be needed in order to harmonise terms and conditions of the combined workforces--either by agreement or by dismissal (which, if it is unreasonable, will attract compensation) followed by an offer of re-engagement. It does not follow, they submit, that an obligation to take on all the workforce on the existing terms is necessarily in the best interests of employees. It could deter transfers which overall would be in the interest of the employees. Moreover where adjustments have to be made to working conditions, detailed questions may fall to be litigated as to whether the various adjustments do mean that the employee's terms overall are less favourable or as to whether the employer has discharged the onus of showing that the "eto" reason relied on was one "entailing changes in the workforce" and whether it was the reason or a principal reason for dismissing the employee.It follows in my opinion that under the Regulation the dismissals are not rendered nullities; nor is there an automatic obligation on the part of the transferee to continue to employ--to find work for--the employees who have been dismissed.If this reading of the Regulation is right the next question is whether the Regulation complies with the Directive.

The Directive

The European Court of Justice has considered the meaning of Articles 3 and 4 of the Directive in a number of cases.In the first place the Court made it clear that only those employed on the date of transfer can claim the benefit of Article 3 of the Directive ( Wendelboe v. L.J. Music APS (case 19/83) [1985] E.C.R. 457). The Court ruled that whether a contract of employment or an employment relationship existed at such date:The Advocate General further expressed the opinion that: see p. 460.In Foreningen af Arbejdsledere i Danmark v. A/S Dansmols Inventar (" Mikkelsen's case") (case 105/84 [1985] ECR 2639 the Advocate General said:The Court concluded:"The protection which the directive is intended to guarantee is however redundant where the person concerned decides on his own accord not to continue the employment relationship with the new employer after the transfer. That is the case where the employee in question terminates the employment contract or employment relationship of his own free will with effect from the date of the transfer, or where that contract or relationship is terminated with effect from the date of the transfer by virtue of an agreement voluntarily concluded between the worker and the transferor or the transferee of the undertaking. In that situation Article 3(1) of the directive does not apply." (Paragraphs 15 and 16).In Katsikas v. Konstantinidis and Others (cases 132/91 138/91 139/91) [1993] E.C.R. 6577 the Court added to this last point:The Court added:See also Ny M/lle Kro (case 287/86) [1987] E.C.R. 5465.In D'Urso (supra) a company, E.M.G., was placed under receivership and the undertaking was transferred to a new company "Nuova E.M.G" 518 employees including Mr. D'Urso remained in the service of E.M.G. though later their employment relationship was "suspended." D'Urso claimed that their employment relationship continued with Nuova E.M.G. the transferee. Article 2112 of the Italian Civil Code provided that:The Italian court asked:The Court replied that by Article 3(1):The Court, however, repeated that whether the contract or relationship of employment existed at the date of the transfer must be assessed on the basis of national law, though it was not possible to derogate from the mandatory rules of the Directive in a matter unfavourable to employees:In P. Bork International v. Foreningen etc. (case 101/87) [1988] E.C.R. 3057 the question arose as to whether the close down of a factory with dismissal of staff on 22 December 1981 followed by a takeover of the factory with effect from 4 January 1982 constituted the transfer of an undertaking so that the transferee was required to safeguard the rights and obligations arising under the contract of employment in existence at the date of the transfer. The Court repeated that the purpose of the Directive was:It said:Much attention was paid in oral argument in the present case to Foreningen af Arbejdsledere i Danmark v. Daddy's Dance Hall A/S (Case 324/86) [1988] ECR 739 . Mr. Tellerup was employed by Irma Catering A/S, the lessee of a restaurant. Being obliged to give up its lease Irma on 28 January 1983 dismissed all its staff with effect from 30 April 1983. Daddy's Dance Hall became lessee of the premises and on 7 February 1983 employed Mr. Tellerup with effect from 25 February 1983 subject to a trial period of three months terminable on fourteen days' notice. On 26 April 1983 Mr. Tellerup was dismissed on fourteen days' notice. Having stressed that the purpose of the directive was to ensure that rights resulting from a contract of employment are safeguarded the Court held that an employee cannot waive the rights conferred on him by the mandatory provisions of the directive even if the disadvantages resulting from his waiver are offset by such benefits that, taking the matter as a whole, he is not placed in a worse position.The Court held:
"17. Consequently, in so far as national law allows the employment relationship to be altered in a manner unfavourable to employees in situations other than the transfer of an undertaking, in particular as regards their protection against dismissal, such an alternative is not precluded merely because the undertaking has been transferred in the meantime and the agreement has therefore been made with the new employer. Since by virtue of Article 3(1) of the directive the transferee is subrogated to the transferor's rights and obligations under the employment relationship, that relationship may be altered with regard to the transferee to the same extent as it could have been with regard to the transferor, provided that the transfer of the undertaking itself may never constitute the reason for that amendment."
Finally, in Rask (case C-209/91) [1992] ECR I-5755 the Court said:
"31. Consequently, the reply to the third question should be that Article 3 of the Directive is to be interpreted as meaning that, upon a transfer, the terms and conditions of the contract of employment or employment relationship relating to wages, in particular those relating to the date of payment and the composition of wages, cannot be altered even if the total amount of the wages remains the same. The Directive does not, however, preclude an alteration of the employment relationship with the new employer in so far as the applicable national law allows such an alteration to be made in situations other than the transfer of an undertaking. Furthermore, the transferee is also bound to continue to observe the terms and conditions of employment agreed in any collective agreement on the same terms applicable to the transferor under that agreement, until the date of termination or expiry of the collective agreement or the entry into force or application of another collective agreement."

The first issue

On the basis of these authorities Mr. Bean Q.C. for Mr. Baxendale and Mr. Meade contends that the notices of dismissal stated to have effect on 28 August were nullities because the reason for them was the transfer which took place at midnight on 31 August 1992. It follows that the contract of employment (and the employment) continued unchanged save that B.F.L. stood in the shoes of N.F.D. The employees were employed on the same terms. They could be employed on better terms; there could, however, be no "downward variation by consent of the terms by reason of the transfer." This it is said is supported by statements in the judgments of the European Court that the existence of a contract of employment is subject to the observance of the mandatory provisions of the Directive and in particular to Article 4(1) ( Wendelboe, Ny M/lle Kro, Bork (supra)). The Directive aims:He says that Article 3 and Regulation 5 are not to be limited to giving against the transferee claims for damages or compensation which could have been claimed against the transferor, not least since such claims are not always available, e.g. if an employee has not completed a qualifying period.Mr. Elias Q.C. for Wilson also contends that the purported dismissal is a nullity on broadly the same grounds and in reliance on the same decisions as Mr. Bean Q.C. The employee on the transfer automatically becomes for all purposes employed by the transferee and if the latter refuses to employ him that constitutes an effective dismissal only if the transferee can establish an eto reason falling within Regulation 8(2). The employees cannot waive their rights to continue employment. Neither the transferor nor the transferee, nor the two acting together, can defeat the object of the Directive and the Regulations by serving notices of dismissal which fall outside Regulation 8(2). There is no justification for limiting the transferee's obligations to the "secondary obligations" of paying compensation or damages.Though appreciating the force and skill of their arguments I do not accept them.In my opinion, the overriding emphasis in the European Court's judgments is that the existing rights of employees are to be safeguarded if there is a transfer. That means no more and no less than that the employee can look to the transferee to perform those obligations which the employee could have enforced against the transferor. The employer, be he transferor or transferee, cannot use the transfer as a justification for dismissal, but if he does dismiss it is a question for national law as to what those rights are. As I have already said, in English law there would as a general rule be no order for specific performance. The claim would be for damages for wrongful dismissal or for statutory rights including, it is true, reinstatement or re-engagement where applicable. It may be in other countries that an order for specific performance could be obtained under the appropriate domestic law and that on this approach different results would be achieved in different Member States. That I do not find surprising or shocking. The Directive is to "approximate" the laws of the Member States. Its purpose is to "safeguard" rights on a transfer. The "rights" of an employee must depend on national rules of the law of contract or of legislation. There is no Community law of contract common to Member States, nor is there a common system or remedies. The object and purpose of the Directive is to ensure in all member states that on a transfer an employee has against the transferee the rights and remedies which he would have had against the original employer. To that extent it reduces the differences which may exist in the event of a change of employers as to the enforcement by employees of existing rights. They must all provide for enforcement against the transferee of rights existing against the transferor at the time of transfer. It seems to me that the Court has clearly recognised that the precise rights to be transferred depend on national law. But neither the Regulations nor the Directive nor the jurisprudence of the Court create a community law right to continue in employment which does not exist under national law.It is said that this is not an adequate remedy because some employees do not have statutory rights--e.g. those in the United Kingdom who have not been employed for a qualifying period--but that is inherent in the differences which exist in the laws of the Member States and seems to me to derive from the wording and limited purpose of the directive.Thus, where there is a transfer of an undertaking and the transferee actually takes on the employee the contract of employment is automatically transferred so that, in the absence of a permissible variation, the terms of the initial contract go with the employee, who though he may refuse to go, cannot as a matter of public policy waive the rights which the Directive and the Regulations confer on him. Where the transferee does not take on the employees who are dismissed on transfer the dismissal is not a nullity though the contractual rights formerly available against the transferor remain intact against the transferee. For the latter purpose, an employee dismissed prior to the transfer contrary to Article 4(1), i.e. on the basis of the transfer, is to be treated as still in the employment of the transferor at the date of transfer so as to satisfy the rule in Wendelboe as consistently followed, e.g. in Ny M/lle Kro .The Court has said that the employees' rights are safeguarded by "enabling them to remain in employment with the new employer on the terms and conditions agreed with the transferor" ( Bork ) or by "making it possible for them to continue to work for the new employer on the same conditions as those agreed with the transferor" ( Katsikas ), or, so far as possible, safeguarding employees' rights by "allowing them to remain in employment with the new employer on the terms and conditions agreed with the transferor" ( Daddy's Dance Hall para. 9). The emphasis is on the same terms and conditions applying if the employment is continued. I do not read, however, any of these expressions as meaning that the transferee is bound actually to take on an employee who has been dismissed, whether because of the transfer or for independent reasons, and to give him the same work as he had before. They mean that if he does take the employee he takes him on the terms of the employment with the transferor, i.e. there is a deemed novation by the two willing parties. If the transferee does not take the employee because the latter has already been dismissed by the transferor, or because he himself dismisses the employee on the transfer, then he must meet all of the transferor's contractual and statutory obligations unless(a) the employee objects to being employed by the transferee or(b) the or the principal reason for dismissal is an economic, technical or organisational reason entailing changes in the workforce when the employee is not to be treated as unfairly dismissed and when for the purposes of the 1978 Act and the 1976 Order the employee is to be regarded as having been dismissed for a substantial reason justifying the dismissal as fair.This approach seems to me to be borne out by a recent decision of the Court (Sixth Chamber) in Jules Dethier Equipement S.A. v. Dassy and Sovram (case 319/94) [1998] I.R.L.R. 266. As to the question referred, the Court said:On the basis that(a) employees dismissed before the undertaking was transferred contrary to Article 4(1) must be regarded as still employed by the undertaking by the date of transfer and(b) the rules of the Directive, in particular those concerning the protection of workers against dismissal, cannot be derogated from in a manner unfavourable to employees, the Court said:
"42. For those reasons, the answer to the second part of the second question referred for a preliminary ruling must be that employees unlawfully dismissed by the transferor shortly before the undertaking is transferred and not taken on by the transferee may claim as against the transferee, that their dismissal was unlawful."
It is to be noticed in that case that Mr. Dassy who had been employed by Sovram had been dismissed by the liquidator of Sovram whose assets subsequently were transferred to Dethier . Mr. Dassy claimed moneys due by way of pay in lieu of notice, holiday pay and bonuses. The paragraphs of the judgments which I have set out seem to me clearly to proceed on the basis that the dismissal had taken effect. Mr. Dassy was thus not taken on by Dethier and there is nothing in the Court's judgment to say that he must still be permitted actually to work for Dethier . His dismissal by Sovram was however unlawful so that he could claim against Dethier the moneys which would have been due from Sovram . Thus, when the Court says the contract of employment "must be regarded as still extant as against the transferee" it means for the purpose of enforcing national rights against the transferee and not for the purpose of treating dismissal as ineffective, the employee having a right to continue employment with Dethier . Nor, it should be added, was there in the case of Mr. Tellerup or Mrs. Rask any suggestion that having been dismissed they continued to be entitled to work on the terms agreed with the transferee because the dismissal was ineffective.Your Lordships' attention was drawn to the decision of the Employment Appeal Tribunal in Cornwall County Care Ltd. v. Brightman [1998] I.R.L.R. 228 which rejected as unreal and as giving rise to serious practical difficulties the notion of a dismissal being a nullity unless falling within Regulation 8(2) on the basis of economic, technical or organisational reasons entailing changes in the workforce. There is much force in their criticism of that approach.In Litster v. Forth Dry Dock & Engineering Co. Ltd. (supra) the receiver of Forth Dry Dock (F.D.D.) agreed to sell the assets of the business to Forth Estuary Engineering Ltd. (F.E.E.) and did so at 4.30 p.m. on 6 February 1994. F.D.D. dismissed the appellant employees at 3.30 p.m. on that day. The Industrial Tribunal and the Employment Appeal Tribunal held that the employees were employed immediately before the transfer, that they had been unfairly dismissed and that they were entitled to compensation against the transferee, F.E.E. The Court of Session held that they had not been employed immediately before the transfer so that they were not entitled to the benefit of the Regulations. Your Lordships House held that, reading the Regulation as one adopted to give effect to the Directive, it was right to read into Regulation 5(3), as the Court of Justice had read into Article 3 in its judgement in Bork , after the words "immediately before the transfer" the words "or would have been so employed if he had not been unfairly dismissed in the circumstances described in Regulation 8(1)."It is to be noticed that in that case the appellants were seeking compensation for unfair dismissal by the transferor. They did not, so far as I can see in the report, contend that their actual employment continued because the dismissal was a nullity. It has been suggested on behalf of the employees in the present cases that in a number of passages it was indicated that the employment continued. Thus, e.g., at p. 577G Lord Oliver of Aylmerton refers to the employment as being "statutorily continued with the transferee" and at p. 575H Lord Oliver said that a dismissal effected before and solely because of transfer is "in effect, prohibited and is, for the purpose of considering the application of article 3(1), required to be treated as ineffective." Lord Templeman at p. 555E-F said that the transferee could not ask the transferor to dismiss prior to the transfer taking place nor "dismiss the workers himself after the transfer has taken place."The speeches of Lord Keith of Kinkel, Lord Oliver and Lord Templeman (with whom Lord Brandon of Oakbrook and Lord Jauncey of Tullichettle agreed) do not, however, read as a whole give support to the contention that a dismissal prior to, or after, a transfer is a nullity so that the actual employment continues. Thus Lord Keith at p. 554F-H says that if there is a dismissal before transfer then, for the purposes of Article 3(1) and Article 5(3) and Regulations 5(1) and 8(1), the employees are to be "treated" or are "deemed" to have been employed by the undertaking at and immediately before the time of transfer. Lord Oliver at p. 562G-H says that the scope and purpose of the Directive and the Regulations is to ensure that on any transfer "the employment of the existing workers in the undertaking is preserved or, if their employment terminates solely by reason of transfer, that their rights arising out of that determination are effectively safeguarded." Lord Oliver analyses the effect of a dismissal at p. 568. The transfer operates as a unilateral repudiation by the employer of his obligations under the contract and thereby as a dismissal.Lord Oliver said, in addition to the passage which I have already quoted:It is in my view clear, as Mr. Underhill Q.C. submitted, that Lord Oliver was regarding the dismissal, if unfair, as being effective to terminate the working relationship so that there was nothing of that to pass to the transferee. The contract of employment in his view was deemed to be kept alive only for the purpose of enforcing rights for breach of it or for enforcing statutory rights dependent on the contract of employment and not for the purpose of creating an obligation which did not exist under domestic law to continue with the working relationship to the transferee. This approach it seems to me is wholly consistent with the opinion I have expressed and with what I take to be the continuous approach of the European Court of Justice.It is to be noticed that in the cases of both Mr. Meade and Mr. Baxendale, the men received substantial payments on the basis that the dismissal had been effective, i.e. that their employment was terminated. That seems to me to be not only realistic but legally the result.It follows that the Regulations give effect to and are consistent with the Directive.It remains to be considered whether your Lordships are bound to refer the first issue to the European Court of Justice pursuant to Article 177, third paragraph. In my opinion, having considered all the cases to which I have referred, the Court of Justice has already indicated with sufficient clarity the answer to the first point of law which is raised in the present case. On that basis, although I have given the matter anxious consideration in the light of the wording of Article 177 and of the Court's judgment in CILFIT v. Ministro Della Santa [1982] ECR 3415 , it does not seems to me to be necessary or obligatory for your Lordships to refer a question in order to give judgment in the present case.Accordingly it is not strictly necessary to deal with the second issue which has been raised as to whether variation of the terms of employment could lawfully be agreed between the parties. Since the matter has been fully argued, particularly in the case of Wilson , I express my opinion on the point.

The Second Issue

B.F.L. contends that if the dismissals were nullities and the contracts of employment were transferred to B.F.L. then those contracts were varied when Mr. Meade and Mr. Baxendale agreed B.F.L.'s letter of 20 August 1992 or at any rate by their continuing to work on B.F.L.'s terms for two years and by signing the revised statements of terms several months into their employment with B.F.L. The Directive, it is said, cannot have intended to rule out genuine agreements as to variations taking place in the context of the transfer; in any event the Court's statement in Daddy's Dance Hall paragraph 17 that "the transfer of the undertaking itself may never constitute the reason for that amendment" can only relate to the situation where the amendment is agreed as part of the process of transfer itself. The prolonged acceptance of the new terms in both cases (as the Industrial Tribunal in Mr. Baxendale's case accepted) can only mean that the new terms were contractually agreed. The employees reply that the letters of 22 and 25 January 1993 were on an erroneous basis and that the statement of terms did not constitute a new contract. They rely on the finding of Beldam L.J.:Contrary to what Beldam L.J. appears to have thought it seems to me that the Industrial Tribunal was satisfied that Mr. Baxendale had effectively accepted the new conditions. In Mr. Meade's case it was not necessary for the Industrial Tribunal to consider the question of variation since they held that the dismissals were effective.The question as to whether and in what situations, where there has been a transfer and employees have accepted the dismissal, claimed compensation based on it and worked for a long period after the transfer, there can be a valid variation by conduct is not an easy one. I do not accept the argument that the variation is only invalid if it is agreed on or as a part of the transfer itself. The variation may still be due to the transfer and for no other reason even if it comes later. However, it seems that there must, or at least may, come a time when the link with the transfer is broken or can be treated as no longer effective. If the appeal turned on this question I would find it necessary to refer a question to the European Court under Article 177 of the Treaty both in the case of Mr. Meade and in the case of Mr. Baxendale. Since in my view the dismissal was effective so that no question of variation falls to be considered it is not necessary for your Lordships to decide the matter or to refer a question to the European Court.In Mr. Wilson's case the parties take the same stance as in Baxendale and Meade as to whether the dismissals were valid. If there was no valid dismissal the position on the facts, in Wilson's case, however, is very different, though Mr. Elias Q.C. contends that there was not and could not be a valid variation. He says in the first place that if there was no valid dismissal there could not have been a justification under Regulation 8(2) and, in any event, there could not have been an effective variation since the employee's rights were adversely affected by the new terms. The matter was not raised before the Industrial Tribunal. The dismissals arose directly out of the transfer and the Industrial Tribunal did not find that they were due to a Regulation 8(2) "eto" reason. Nor did they find that there had been any change in the workforce which was essential to such a finding of an "eto" reason. Moreover, it is submitted that the Industrial Tribunal could not have done so since the dismissals were for redundancy and it is not a justification for the dismissals that they could have been effected on that other basis. Nor if the dismissals are nullities can there be a justification of a variation by analogy with an "eto" defence under Regulation 8(2) which only applies if there has been a dismissal.The employers contend that there can be an alteration of the terms and conditions of employment on or after a relevant transfer so that if the reasons are connected with the transfer the employee will be able to claim for unfair dismissal if he treats the imposition of the terms as a constructive dismissal. If he accepts the terms then that is the end of the matter. Here the employees had an option to stay with L.C.C. or to go to St. Helens on new terms. They chose the latter alternative and only a year or so later sought to insist on the old terms. If the transferee cannot safely agree terms to bring his new employees into line with existing employees' standard terms and conditions, that will discourage employers from taking over new businesses or lead to the transferee dismissing transferred employees.It seems to me clear, as Miss Booth Q.C. contended, that the Industrial Tribunal in Wilson's case found on the evidence before it, and the Court of Appeal accepted, that the Home could not continue unless there were radical organisational changes which would reduce the cost of running the school. L.C.C. could not or would not continue to carry the existing costs. St. Helens could not take over the running of the school with those costs and without organisational changes and reduced costs. Those changes were for an economic or organisational reason and entailed a change in the workforce since the number of employees at the school was considerably reduced, whether or not the "eto" defence can strictly be relied on in the present circumstances. The staff had the option of staying with LCC or going to St. Helens on the new terms to give effect to these economic and organisational reasons. In the circumstances the Industrial Tribunal and the Court of Appeal were entitled to find that the transfer of the undertaking did not constitute the reason for the variation. It was a variation of the terms of employment "to the same extent as it could have been with regard to the transferor" ( Daddy's Dance Hall para. 17). That seems to me to be sufficient on the facts to determine the appeal in Wilson's case. But I add that, although on a transfer, the employees' rights previously existing against the transferor are enforceable against the transferee and cannot be amended by the transfer itself, it does not follow there cannot be a variation of the terms of the contract for reasons which are not due to the transfer either on or after the transfer of the undertaking. It may be difficult to decide whether the variation is due to the transfer or attributable to some separate cause. If, however, the variation is not due to the transfer it can, in my opinion, on the basis of the authorities to which I have referred, validly be made.

Conclusion

In the result, however, I would allow the appeal of British Fuels Ltd. in both Mr. Baxendale's and Mr. Meade's cases and I would dismiss the appeal of Mr. Wilson and others against St. Helens Borough Council.

LORD STEYN

My Lords,I have had the advantage of reading a draft of the speech of my noble and learned friend Lord Slynn of Hadley. For the reasons he has given I too would allow the appeal of British Fuels Ltd. in both Mr. Baxendale's and Mr. Meade's cases and dismiss the appeal of Mr. Wilson and others against St. Helens Borough Council.

LORD CLYDE

My Lords,I have had the advantage of reading a draft of the speech of my noble and learned friend Lord Slynn of Hadley. For the reasons he has given I too would allow the appeal of British Fuels Ltd. in both Mr. Baxendale's and Mr. Meade's cases and dismiss the appeal of Mr. Wilson and others against St. Helens Borough Council.

LORD HUTTON

My Lords,I have had the advantage of reading in draft the speech of my noble and learned friend Lord Slynn of Hadley. I agree with it and for the reasons which he has given I too would allow the appeal of British Fuels Ltd. in the cases of Mr. Baxendale and Mr. Meade and dismiss the appeal of Mr. Wilson and others against St. Helens Borough Council.

Cited in 8 later judgments