| Date | 10 March 2004 |
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| Judgment | Fairhurst Ward Abbotts Limited v Botes Building Limited, CA 13 February 2004 |
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| The Issue | The application of the TUPE Regulations to second generation re-tendering of local authority works contracts. |
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| Implication |
Whether the transfer of an undertaking applies, such that employees may benefit from the protection offered by the TUPE regulations, depends on the particular facts of the case. The fact that a contract for public works has been divided into two contracts will not have bearing upon the outcome. |
printThe Acquired Rights Directive of the European Community came into effect in 1977 in order to ensure, as far as possible, that the rights of employees would be safeguarded in the event of a change of employer as a consequence of a transfer of an undertaking, business or part of a business. The Directive was given effect in the UK by the Transfer of Undertakings (Protection of Employment) Regulations 1981, commonly referred to as the TUPE Regulations. Both the Directive and the Regulations continue to cause difficulties for the construction industry. An example is the case of Ayse Suzen v Zehnacker, which I reported in Contract Journal in April 1997. The decision concerned a fairly common set of circumstances. A local authority puts out to tender a package of works and services previously undertaken by the authority's directly employed workforce. An external bidder successfully wins the contract for a pre-determined period. This 'outsourcing' amounts to a transfer of an undertaking and thus the TUPE Regulations apply. Accordingly, the successful contractor will be required to take over employment responsibilities for the authority's workforce relative to these particular activities. Assume however that at the end of the pre-determined period the contract is put out to tender once more. The contractor in place fails to win the contract this time around and a competitor secures the contract. The question before the European court in the Ayse Suzen case was whether this so-called second generation contract would be covered by the Acquired Rights Directive. They held it would not. The court held that for the Directive to be applicable the transfer had to relate to a stable, economic entity, whose activity was not limited to performing one specific works contract. In order to determine whether the conditions for the transfer of an undertaking are met, the Court ruled that it would be necessary to consider all the facts characterising the transaction in question. This would include the type of undertaking or business, whether or not its tangible assets, such as buildings and moveable property, are transferred, the value of its tangible assets at the time of transfer, and the degree of similarity between the activities carried on before and after the transfer. What became evident from all of this was that contractors who had taken on local authority works or services where employee rights had been transferred to them, could not automatically assume that these rights would be off-loaded to an incoming contractor in the event that the contract was subsequently lost. Last week, the Court of Appeal was once again asked to look into the TUPE Regulations in the case of Fairhurst Ward Abbotts v Botes Building. The case also concerned a second generation local authority contract, in this case for the supply of building maintenance services for the London Borough of Southwark. Initially, the entire building maintenance works for the Borough had been won by Botes. In December 1998 Southwark invited new tenders for the maintenance work, this time partitioning the Borough into two geographic areas. Botes were unsuccessful in both areas and Fairhurst successfully won the second area contract. Fairhurst refused to take any Botes employees on, contending that there was no relevant transfer of an undertaking and that TUPE did not apply. Botes, on the other hand contended that TUPE did apply. They argued that they no longer employed any of the workforce that had previously been working in the geographic area now covered by Fairhurst. Caught up in the middle of this dispute, nine employees brought unfair dismissal claims against both Fairhurst and Botes on the basis that at least one of them should be responsible for their employment or redundancy pay. The argument put forward by Fairhust was relatively simple. Since the Borough had been split into two areas, the contract works before and after re-tendering were quite different. The subject matter of the re-tendered contract won by Fairhust had not existed as a discrete identifiable economic entity in the hands of Botes. If it was not an economic entity in the hands of Botes, it could not have been transferred as such to Fairhurst. The Court of Appeal agreed that, unless a stable economic entity could be identified as existing before the transfer took place, there could be no transfer of an undertaking. The question was whether partitioning the Borough into two separate areas made any difference. Lord Justice Mummery was satisfied that neither the legislation nor previous case law expressly required that the particular part transferred should itself, before the date of transfer, exist as a discrete and identifiable, stable economic entity. If Fairhurst were correct, it would be a simple matter to avoid the protection offered by TUPE to divide contracts into separate parts before making any subsequent transfer. This would not be consistent with the aim of TUPE and the European Directive. In conclusion, the Court of Appeal agreed with the Employment Tribunal. Having examined all of the relevant factors in the particular case, there had been a relevant transfer caught by TUPE. At the time of re-tendering of the contract, there had been a transfer of the employees contractual rights from Botes to Fairhurst and accordingly the employees were entitled to succeed against Fairhurst in their claims for unfair dismissal. The question of whether or not there has been a transfer of an undertaking continues to be complex and uncertain, the outcome dependant upon the particular facts of each case.
CJ-0410
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