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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Litster v Forth Dry Dock and Engineering Co Ltd [1988] UKHL 10 (16 March 1989)
URL: http://www.bailii.org/uk/cases/UKHL/1988/10.html
Cite as: [1988] UKHL 10, 1989 SC (HL) 96, [1989] 2 CMLR 194, [1990] 1 AC 546, [1989] 2 WLR 634, [1989] 1 All ER 1134, [1989] ICR 341, [1989] IRLR 161, 1989 SLT 540, [1990] AC 546

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JISCBAILII_CASE_CONSTITUTIONAL

    Parliamentary Archives,
    HL/PO/JU/18/249

    Litster and others (Appellants) v. Forth Dry Dock Engineering Company
    Limited (In Receivership) and another (Respondents) (Scotland)

    JUDGMENT

    Die Jovis 16° Martii 1989

    Upon Report from the Appellate Committee to whom was referred the
    Cause Litster and others against Forth Dry Dock Engineering Company
    Limited (In Receivership) and another. That the Committee had heard
    Counsel on Wednesday the 1st and Thursday the 2nd days of February
    last, upon the Petition and Appeal of William Forsyth Litster of 22
    Pilton Drive North, Edinburgh, Leslie Lipscombe of 46 West Granton
    Terrace, Edinburgh, James Montgomery of 16 Cableswind House, Leith,
    Edinburgh, David Hume of 9 Trafalgar Street, Edinburgh, Anthony
    Angelosant of 17/8 Viewcraig Street, Edinburgh, Allan Brent Middlemist
    of 156 High Street, Edinburgh, Albert Watson Merrylees of 7/14 Saunder
    Street, Edinburgh, John Walker of 7 The Bowling Green, Leith,
    Edinburgh, Graham Shanley of 7 Macdonald Road, Edinburgh, Neil Nisbett
    of 216 Crewe Road North, Edinburgh, Charles King Dick of 1 Pennywell
    Place, Edinburgh and James Whitecross of 11 Royston Mains Road,
    Edinburgh praying that the matter of the Interlocutor set forth in the
    Schedule thereto, namely an Interlocutor of the Second Division of Her
    Majesty's Court of Session of the 18th day of March 1988, might be
    reviewed before Her Majesty the Queen in Her Court of Parliament and
    that the said Interlocutor might be reversed, varied or altered or
    that the Petitioners might have such other relief in the premises as
    to Her Majesty the Queen in Her Court of Parliament might seem meet;
    as upon the case of Forth Dry Dock Engineering Company Limited (In
    Receivership) and Forth Estuary Engineering Limited lodged in answer
    to the said Appeal; and due consideration had this day of what was
    offered on either side in this Cause:

    It is Ordered and Adjudged, by the Lords Spiritual and Temporal
    in the Court of Parliament of Her Majesty the Queen assembled, That
    the said Interlocutor of the 18th day of March 1988 complained of in
    the said Appeal be, and the same is hereby, Recalled and that the
    Order of the Employment Appeal Tribunal of the 5th day of December
    1985 be, and the same is hereby, Restored: And it is further Ordered,
    That the said Cause be, and the same is hereby, remitted back to the
    Court of Session in Scotland to proceed as accords: And it is further
    Ordered, That the Respondents do pay or cause to be paid to the said
    Appellants the Expenses incurred by them in respect of the Action in
    the Court of Session and also the Costs incurred by them in respect of
    the said Appeal to this House, the amount of such last-mentioned Costs
    to be certified by the Clerk of the Parliaments if not agreed between
    the parties: And it is also further Ordered, That unless the Costs
    certified as aforesaid shall be paid to the Appellants entitled to the
    same within one calendar month from the date of the Certificate
    thereof the Cause shall be, and the same is hereby, remitted back to
    the Court of Session in Scotland or to the Judge acting as Vacation
    Judge to issue such Summary Process or Diligence for the recovery of
    such Costs as shall be lawful and necessary.


    Cler: Parliamentor:


    Judgment: 16.3.89

    HOUSE OF LORDS

    LITSTER AND OTHERS
    (APPELLANTS)

    v.

    FORTH DRY DOCK & ENGINEERING COMPANY LIMITED

    (IN RECEIVERSHIP) AND ANOTHER

    (RESPONDENTS)

    (SCOTLAND)

    Lord Keith of Kinkel
    Lord Brandon of Oakbrook
    Lord Templeman
    Lord Oliver of Aylmerton
    Lord Jauncey of Tullichettle


    LORD KEITH OF KINKEL

    My Lords,

    I agree with the speeches of my noble and learned friends
    Lord Oliver of Aylmerton and Lord Templeman, which I have had
    the opportunity of reading in draft, and will add only a few
    observations of my own.

    In Pickstone v. Freemans Plc. [1989] AC 66 there had been
    laid before Parliament under paragraph 2(2) of Schedule 2 to the
    European Communities Act 1972 the draft of certain Regulations
    designed, and presented by the responsible ministers as designed, to
    fill a lacuna in the equal pay legislation of the United Kingdom
    which had been identified by a decision of the European Court of
    Justice. On a literal reading the regulation particularly relevant
    did not succeed in completely filling the lacuna. Your Lordships'
    House, however, held that in order that the manifest purpose of
    the Regulations might be achieved and effect given to the clear
    but inadequately expressed intention of Parliament certain words
    must be read in by necessary implication.

    In the present case the Transfer of Undertakings (Protection
    of Employment) Regulations 1981 (S.I. 1981 No. 1794) were
    similarly laid before Parliament in draft and approved by
    resolutions of both Houses. They were so laid as designed to give
    effect to Council Directive (77/187/E.E.C.) dated 14 February
    1977. It is plain that if the words in regulation 5(3) of the
    Regulations of 1981 "a person so employed immediately before the
    transfer" are read literally, as contended for by the second
    respondents, Forth Estuary Engineering Ltd., the provisions of
    regulation 5(1) will be capable of ready evasion through the
    transferee arranging with the transferor for the latter to dismiss
    its employees a short time before the transfer becomes operative.
    In the event that the transferor is insolvent, a situation commonly
    forming the occasion for the transfer of an undertaking, the

    - 1 -

    employees would be left with worthless claims for unfair dismissal
    against the transferor. In any event, whether or not the
    transferor is insolvent, the employees would be deprived of the
    remedy of reinstatement or re-engagement. The transferee would
    be under no liability towards the employees and a coach and four
    would have been driven through the provisions of regulation 5(1).

    A number of decisions of the European Court, in particular
    P. Bork International A/S v. Foreningen af Arbejdslederre i
    Danmark
    (Case 101/87) [1989] I.R.L.R. 41 have had the result that
    where employees have been dismissed by the transferor for a
    reason connected with the transfer, at a time before the transfer
    takes effect, then for purposes of article 3(1) of Council Directive
    (77/187/E.E.C.) (which corresponds to regulation 5(1)) the employees
    are to be treated as still employed by the undertaking at the time
    of the transfer.

    In these circumstances it is the duty of the court to give to
    regulation 5 a construction which accords with the decisions of the
    European Court upon the corresponding provisions of the Directive
    to which the regulation was intended by Parliament to give effect.
    The precedent established by Pickstone v. Freemans Plc, indicates
    that this is to be done by implying the words necessary to achieve
    that result. So there must be implied in regulation 5(3) words
    indicating that where a person has been unfairly dismissed in the
    circumstances described in regulation 8(1) he is to be deemed to
    have been employed in the undertaking immediately before the
    transfer or any of a series of transactions whereby it was
    effected.

    My Lords, I would allow the appeal.

    LORD BRANDON OF OAKBROOK

    My Lords,

    For the reasons given in the speeches of my noble and
    learned friends, Lord Keith of Kinkel, Lord Templeman and Lord
    Oliver of Aylmerton, I would allow the appeal.

    LORD TEMPLEMAN

    My Lords,

    By article 3 of the Directive (77/187/E.E.C.) dated 14
    February 1977 the Council of Ministers of the European

    Community directed that upon the transfer of a business from one
    employer to another, the benefit and burden of a contract of
    employment between the transferor ("the old owner") and a worker
    in the business should devolve on the transferee ("the new owner").
    The Directive thus imposed on the new owner liability for the
    workers in the business although the member states were
    authorised by article 3 to continue the liability of the old owner

    - 2 -

    to the workers in the business "in addition to the transferee." The
    object of the Directive was expressed to be:

    "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 4(1) of the Directive provided that:

    "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 organisational reasons entailing
    changes in the workforce."

    The result of article 4(1) is that the new owner intending to
    dismiss the workers cannot achieve his purpose by asking the old
    owner to dismiss the workers immediately prior to the transfer
    taking place. The new owner cannot dismiss the workers himself
    after the transfer has taken place. Any such dismissal, whether
    by the old owner or the new owner, would be inconsistent with the
    object of protecting the rights of the workers and is prohibited by
    article

    The Transfer of Undertakings, (Protection of Employment)
    Regulations 1981 (S.I. 1981 No. 1794), were approved by a
    resolution of each House of Parliament in pursuance of paragraph
    2(2) of Schedule 2 to the European Communities Act 1972, for the
    express purpose of implementing Council Directive (77/187/E.E.C.).
    Regulation 5(1) provides, in conformity with article 3 of the
    Directive, that:

    "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."

    Thus upon the transfer of a business from one employer to
    another, the benefit and burden of a contract of employment
    between the old owner and a worker in the business devolves on
    the new owner.

    Regulation 8 provides, in conformity with article 4, that:

    "(1) Where either before or after the relevant transfer, any
    employee of the transferor or transferee is dismissed, that
    employee shall be treated ... as unfairly dismissed if the
    transfer or a reason connected with it is the reason or
    principal reason for his dismissal."

    The result of regulation 8(1) is the same as article 4(1),
    namely, that if the new owner wishes to dismiss the workers he
    cannot achieve his purpose either by procuring the old owner to
    dismiss the workers, prior to the transfer taking place, or by
    himself dismissing the workers after the date of the transfer.

    - 3 -

    In the present case, the old owners agreed with the new
    owners to dismiss the workers. The old owners were the Forth
    Dry Dock Engineering Co. Ltd. ("the Forth Dry Dock"). The Forth
    Dry Dock was the subsidiary and a member of a group of
    companies headed by a parent company which defaulted in
    payments under a debenture issued to Lloyds Bank Plc. On 28
    September 1983, Lloyds Bank Plc. appointed receivers to all the
    companies in the group. The business of the Forth Dry Dock,
    namely, the business of ship-repairers was carried on under a lease
    of the Edinburgh dock at Leith, and this business was continued
    after the appointment of receivers by 25 workers including 12 who
    are the present appellants. A consultant to the parent company in
    the group, on financial and personnel matters, a Mr. Brooshooft,
    was minded to purchase the business of the Forth Dry Dock from
    the receivers. He acted in conjunction with a Mr. Hughes, the
    manager of the Forth Dry Dock and a Mr. Paterson who had
    formerly been a manager of another ship-repairing company, Robb
    Caledon. The workforce of Robb Caledon had been made
    redundant and were sufficiently chastened by unemployment to be
    offered lower wages than the wages of the workers of Forth Dry
    Dock. Mr. Brooshooft formed a new company which became Forth
    Estuary Engineering Ltd. (Forth Estuary). Forth Estuary declined
    to purchase the lease of the Edinburgh Dock vested in the Forth
    Dry Dock but took a new lease from the landlords. Forth Estuary
    declined to purchase the goodwill of the Forth Dry Dock and were
    only prepared to purchase the tangible assets of Forth Dry Dock
    but of course possession of these assets, plus possession of a lease
    replacing the lease to the Forth Dry Dock, conferred on Forth
    Estuary the goodwill of the Forth Dry Dock. The object of taking
    a new lease and of declining to take the goodwill expressly, was
    to make it appear that the Directive and the Regulations did not
    apply because the whole of the business of the Dry Dock Company
    had not been transferred or because a third party, the landlords,
    were involved. These arguments have rightly been rejected at ail
    stages of this litigation. The workers of Forth Dry Dock were
    given the impression that their employment would be continued by
    a new owner. On 6 February 1984, the receivers appointed by
    Lloyds Bank agreed in writing to sell to Forth Estuary "the
    business assets" defined as the plant, machinery, equipment,
    furniture and office equipment detailed in the schedule, "as the
    same shall exist at the close of business" on 6 February 1984 in
    consideration of £33,500 paid by Forth Estuary to the receivers
    when the agreement was executed in the morning or early
    afternoon of that day. At 3.30 p.m., the receivers appointed by
    Lloyds Bank informed the workforce of the Forth Dry Dock in
    writing that "no further funds can be made available to pay your
    wages with effect from the close of business today" and that no
    payments would be made for accrued holiday pay or damages for
    failure to give the statutory period of notice. Thereafter, Forth
    Estuary continued the business of the Forth Dry Dock, employed
    the former dockmaster and two other employees of Forth Dry
    Dock, but replaced the remainder of the workforce with former
    employees of Robb Caledon at lower wages. Thus Lloyds Bank,
    acting for the receiver transferred the business at 4.30 p.m. on 6
    February 1984, that being the time of close of business and one
    hour after the Forth Dry Dock workers had been dismissed. The
    assets of Forth Dry Dock were taken by Lloyds Bank as debenture
    holders so that nothing was available to pay the workers of Forth
    Dry Dock either their holiday entitlement or damages for dismissal

    - 4 -

    without notice, or damages for unfair dismissal. It is argued that
    Forth Estuary, which is solvent, is not liable to the workers
    because they were dismissed one hour before the transfer of the
    business. Article 3 of the Directive and regulation 5(1) of the
    Regulations of 1981 were plainly intended to prevent an insolvent
    old owner from dismissing a workforce at the behest of a solvent
    new owner so as to deprive the workforce effectively of their
    rights.

    Forth Estuary appear to deny that they are liable to the
    appellants for compensation for unfair dismissal pursuant to
    regulation 8. The Court of Session found in favour of Forth
    Estuary.

    The appellants were dismissed at 3.30 p.m. on 6 February by
    Forth Dry Dock and the business was transferred to Forth Estuary
    at 4.30 p.m. on the same day. It is argued, on behalf of Forth
    Estuary, that despite the Directive and the Regulations, they are
    not liable to the appellants in respect of their unfair dismissal
    because regulation 5(3) provides that:

    "Any reference in paragraph (1) . . . 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."

    Thus, it is said, since the workforce of Forth Dry Dock
    were dismissed at 3.30 p.m., they were not employed "immediately
    before the transfer" at 4.30 p.m. and therefore regulation 5(1) did
    not transfer any liability for the workforce from Forth Dry Dock
    to Forth Estuary. The argument is inconsistent with the Directive.
    In P. Bork International A/S v. Foreningen af Arbejdslederre i
    Danmark
    (Case 101/87) [1989] I.R.L.R. 41, 44 the European Court
    of Justice ruled that:

    "the only workers who may invoke Directive [(77/187/E.E.C.)]
    are those who have current employment relations or a
    contract of employment at the date of the transfer. The
    question whether or not a contract of employment or
    employment relationship exists at that date must be assessed
    under national law, subject, however, to the observance of
    the mandatory rules of the Directive concerning the
    protection of workers against dismissal by reason of the
    transfer. It follows that the workers employed by the
    undertaking whose contract of employment or employment
    relationship has been terminated with effect on a date
    before that of the transfer, in breach of article 4(1) of the
    Directive, must be considered as still employed by the
    undertaking on the date of the transfer with the
    consequence, in particular, that the obligations of an
    employer towards them are fully transferred from the
    transferor to the transferee in accordance with article 3(1)
    of the Directive."

    In von Colson and Kamann v. Land Nordrhein-Westfalen
    (Case 14/83) [1984] ECR 1891, 1909 the European Court of

    - 5 -

    Justice dealing with Directive (76/207/E.E.C.), forbidding
    discrimination on grounds of sex regarding access to employment,
    ruled that:

    "the member states' obligation arising from a Directive to
    achieve the result envisaged by the Directive and their duty
    under article 5 of the Treaty to take all appropriate
    measures, whether general or particular, to ensure the
    fulfilment of that obligation, is binding on all the authorities
    of member states including, for matters within their
    jurisdiction, the courts. It follows that, in applying the
    national law and in particular the provisions of a national
    law specifically introduced in order to implement Directive
    [(76/207/E.E.C.)], national courts are required to interpret
    their national law in the light of the wording and the
    purpose of the Directive in order to achieve the result
    referred to in the third paragraph of article 189."

    Thus the courts of the United Kingdom are under a duty to
    follow the practice of the European Court of Justice by giving a
    purposive construction to Directives and to Regulations issued for
    the purpose of complying with Directives. In Pickstone v.
    Freemans Plc.
    [1989] AC 66, this House implied words in a
    regulation designed to give effect to Directive (75/117/E.E.C.)
    dealing with equal pay for women doing work of equal value. If
    this House had not been able to make the necessary implication,
    the Equal Pay (Amendment) Regulations (1983) would have failed
    their object and the United Kingdom would have been in breach of
    its treaty obligations to give effect to Directives. In the present
    case, in the light of Directive (77/187/E.E.C.) and in the light of
    the ruling of the European Court of Justice in Bork's case [1989]
    I.R.C.R. 41, it seems to me, following the suggestion of my noble
    and learned friend, Lord Keith of Kinkel, that paragraph 5(3) of
    the Regulations of 1981 was not intended and ought not to be
    construed so as to limit the operation of regulation 5 to persons
    employed immediately before the transfer in point of time.
    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. It
    would, of course, still be open for a new owner to show that the
    employee had been dismissed for "an economic, technical or
    organisational reason entailing changes in the workforce," but no
    such reason could be advanced in the present case where there
    was no complaint against the workers, they were not redundant
    and there were no relevant reasons entailing changes in the
    workforce. I would therefore allow the appeal and make the order
    proposed by my noble and learned friend, Lord Oliver of
    Aylmerton.

    LORD OLIVER OF AYLMERTON

    My Lords,

    This appeal raises, not for the first time, the broad question
    of the approach to be adopted by courts in the United Kingdom to

    - 6 -

    domestic legislation enacted in order to give effect to this
    country's obligations under the E.E.C. Treaty (Cmnd. 5179-11).
    The legislation with which the appeal is concerned is a statutory
    instrument (S.I. 1981 No. 1794) made on 14 December 1981
    pursuant to paragraph 2(2) of Schedule 2 to the European
    Communities Act 1972 and entitled "The Transfer of Undertakings
    (Protection of Employment) Regulations 1981." The Regulations
    were made by the Secretary of State - and this is common ground
    - in order to give effect to a Directive (77/187/E.E.C.) adopted by
    the Council of the European Communities on 14 February 1977 to
    provide for 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. The
    question which arises is whether it has achieved this object.

    The approach to the construction of primary and subordinate
    legislation enacted to give effect to the United Kingdom's
    obligations under the E.E.C. Treaty have been the subject matter
    of recent authority in this House (see Pickstone v. Freemans Plc.
    [1989] AC 66) and is not in doubt. If the legislation can
    reasonably be construed so as to conform with those obligations -
    obligations which are to be ascertained not only from the wording
    of the relevant Directive but from the interpretation placed upon
    it by the European Court of Justice at Luxembourg - such a
    purposive construction will be applied even though, perhaps, it may
    involve some departure from the strict and literal application of
    the words which the legislature has elected to use.

    It will, I think, be convenient to consider the terms of the
    Directive and the Regulations before outlining the circumstances in
    which the instant appeal arises. The broad scope of the Directive
    appears from the following two recitals:

    "Whereas economic trends are bringing in their wake, at
    both national and Community level, changes in the structure
    of undertakings, through transfers of undertakings, businesses
    or parts of businesses to other employers as a result of
    legal transfers or mergers;

    "Whereas 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."

    By article 1 it is provided that the Directive shall apply to the
    transfer of an undertaking, business or part of a business to
    another employer. Article 2 contains definitions, the relevant ones
    for present purposes being:

    "(a) 'transferor' means any natural or legal person who, by
    reason of a transfer within the meaning of article 1(1),
    ceases to be the employer in respect of the undertaking,
    business or part of the business;

    "(b) 'transferee' means any natural or legal person who, by
    reason of a transfer within the meaning of article 1(1),
    becomes the employer in respect of the undertaking,
    business or part of the business."

    - 7 -

    Section II is headed "Safeguarding of Employees' Rights" and
    contains five articles of which the relevant ones for present
    purposes are articles 3 and 4. These provide (so far as material):

    "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."

    Sub-paragraph 2 deals with the continuation of collective
    agreements and sub-paragraph 3 accepts from the preceding sub-
    paragraphs employees' rights to old age, invalidity or survivors'
    benefits under company pension schemes outside the member states
    social security schemes. The latter part of the sub-paragraph
    may, however, have a peripheral relevance in the present context,
    as indicating that the expression "on the date of the transfer" and
    "at the time of the transfer" are used interchangeably in the
    Directive. It provides:

    "Member states shall adopt the measures necessary to
    protect the interests of employees and of persons no longer
    employed in the transferor's business at the time of the
    transfer within the meaning of article 1(1) in respect of
    rights conferring on them . . . entitlement to old-age
    benefits . . . under supplementary schemes referred to in
    the first sub-paragraph."

    Article 4 is, so far as material, in the following terms:

    "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 organisational reasons entailing
    changes in the workforce. . . .

    "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."

    Section III contains requirements for providing information to
    representatives of employees which do not need to be recited in
    any detail. The provisions of sub-paragraph 1, however, ought to
    be referred to in the context of the overall purpose of the
    Directive of ensuring that the interests of employees are to be
    safeguarded on any transfer of the undertaking in which they are
    employed. It provides as follows:

    "The transferor and the transferee shall be required to
    inform the representatives of their respective employees
    affected by a transfer within the meaning of article 1(1) of
    the following:

    - 8 -

    - the reasons for the transfer,

    - the legal, economic and social implications of the
    transfer for the employees,

    - measures envisaged in relation to the employees.

    The transferor must give such information to the
    representatives of his employees in good time before the
    transfer is carried out."

    Finally, article 7, which provides that the Directive shall not
    affect the rights of member states to apply or introduce measures
    more favourable to employees, contains the clear implication that
    the protection envisaged by the Directive is the minimum
    requirement for which the member states are obliged to give
    effect.

    Turning now to the Regulations, which came into operation
    in 1982 and which represent the British Government's perception at
    that time of its obligations under the Directive, these provide for
    relevant purposes as follows:

    Regulation 2

    "(1) In these Regulations - ... 'employee' means 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 under a contract
    for services and references to a person's employer shall be
    construed accordingly . . . 'the 1978 Act,' and 'the 1976
    Order' mean respectively . . . the Employment Protection
    (Consolidation) Act 1978 and the Industrial Relations
    (Northern Ireland) Order 1976 . . . 'relevant transfer' means
    a transfer to which these Regulations apply and 'transferor'
    and 'transferee' shall be construed accordingly; and
    'undertaking' includes any trade or business but does not
    include any undertaking or part of an undertaking which is
    not in the nature of a commercial venture."

    Regulation 3

    "(1) Subject to the provisions of these Regulations, these
    Regulations apply to a transfer from one person to another
    of an undertaking situated immediately before the transfer
    in the United Kingdom or a part of one which is so
    situated.

    "(2) Subject as aforesaid, these Regulations so apply whether
    the transfer is effected by sale or by some other disposition
    or by operation of law. . . .

    "(4) It is hereby declared that a transfer of an undertaking
    or part of one may be effected by a series of two or more
    transactions between the same parties, but in determining
    whether or not such a series constitutes a single transfer
    regard shall be had to the extent to which the undertaking
    or part was controlled by the transferor and transferee
    respectively before the last transaction, to the lapse of time

    - 9 -

    between each of the transactions, to the intention of the
    parties and to all the other circumstances."

    Regulation 5

    "(1) 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, on the
    completion of a relevant transfer -

    1. 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

    2. 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."

    Regulation 8

    "(1) Where either before or after a 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 to 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.

    "(2) Where an economic, technical or organisational reason
    entailing changes in the workforce of either the transferor
    or the transferee before or after a relevant transfer is the
    reason or principal reason for dismissing an employee -

    (a) paragraph 1 above shall not apply to his
    dismissals ..."

    Finally, regulation 12 provides that:

    "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 ..."

    - 10 -

    It will be seen that, as is to be expected, the scope and purpose
    of both the Directive and the Regulations are the same, that is,
    to ensure that on any transfer of an undertaking or part of an
    undertaking, the employment of the existing workers in the
    undertaking is preserved or, if their employment terminates solely
    by reason of the transfer, that their rights arising out of that
    determination are effectively safeguarded. It may, I think, be
    assumed that those who drafted both the Directive and the
    Regulations were sufficiently acquainted with the realities of life
    to appreciate that a frequent - indeed, possibly, the most frequent
    - occasion upon which a business or part of a business is
    transferred is when the original employer is insolvent, so that an
    employee whose employment is terminated on the transfer will
    have no effective remedy for unfair dismissal unless it is capable
    of being exerted against the transferee. It can hardly have been
    contemplated that, where the only reason for determination of the
    employment is the transfer of the undertaking or the relevant part
    of it, the parties to the transfer would be at liberty to avoid the
    manifest purpose of the Directive by the simple expedient of
    wrongfully dismissing the workforce a few minutes before the
    completion of the transfer. The European Court of Justice has
    expressed, in the clearest terms, the opinion that so transparent a
    device would not avoid the operation of the Directive, and if the
    effect of the Regulations is that under the law of the United
    Kingdom it has that effect, then your Lordships are compelled to
    conclude that the Regulations are gravely defective and the
    Government of the United Kingdom has failed to comply with its
    mandatory obligations under the Directive. If your Lordships are
    in fact compelled to that conclusion, so be it; but it is not, I
    venture to think, a conclusion which any of your Lordships would
    willingly embrace in the absence of the most compulsive context
    rendering any other conclusion impossible.

    My Lords, the circumstances in which the question has
    arisen for decision in the instant case are these. The first
    respondents, Forth Dry Dock & Engineering Co. Ltd., carried on a
    business of ship-repairers at the Edinburgh Dry Dock, premises
    which they held under a lease from the Forth Ports Authority. At
    the material time, the 12 appellants were tradesmen employed in
    that business. They were part of a permanent workforce of skilled
    shipworkers of various trades who had been continuously employed
    by the first respondent since 1981 or 1982. In the year 1983, the
    group of companies of which the first respondent formed part, was
    in financial difficulties and the receiver of the various companies
    in the group (including the first respondents) was appointed by the
    debenture holder, Lloyds Bank, on 28 September 1983. The
    workforce was then told by the receiver's representative, a Mr.
    Page, that the intention was to sell the business as a going
    concern and that their jobs would be safe. That belief may have
    been genuinely entertained at the time, but it was falsified in the
    event.

    On 23 November 1983, the second respondents, Forth
    Estuary Engineering Ltd. ("Forth Estuary") was incorporated. A
    few days before the transfer of the first respondents' assets, which
    took place on 6 February 1984, the capital of Forth Estuary was
    increased from £1,000 to £20,000. Eighty-five per cent. of the
    issued capital became vested in a Mr. Brooshooft, who had been a
    financial adviser to the first respondents' parent company, and 10

    - 11 -

    per cent. in a Mr. Hughes, who had been a director of and had
    managed the business of the first respondents. On 6 February
    1984, an agreement was entered into between the first
    respondents, the receivers and Forth Estuary under which (a) all
    the first respondents' business assets, consisting of plant,
    machinery, equipment, furniture and office equipment specified in
    a schedule, were acquired by Forth Estuary at a price of £33,500
    payable on execution of the agreement, (b) the first respondents
    undertook to cease business at close of business on that day (at
    which time the sale and purchase was to be carried into effect)
    and (c) the first respondents undertook forthwith to relinquish their
    rights under the lease of the dry dock which they held from the
    Ports Authority. Before this - it is not clear exactly when -
    Forth Estuary had obtained from the Forth Ports Authority a new
    lease of the property previously let to the first respondents (with
    the exception of one shed). It is interesting to note that under
    clause 14 of this agreement, its construction, validity and
    performance were to be governed by English law and the courts of
    England were given exclusive jurisdiction. As a matter of English
    law, therefore, the ownership of the assets transferred passed in
    equity to Forth Estuary on the execution of the agreement and
    those assets were, assuming, as we must assume, that the
    consideration was then paid as provided by the agreement, then
    held by the transferor as a bare trustee for the transferee. Up to
    this point the appellants had continued to be employed by the first
    respondents. It had, however, clearly been determined by the
    receivers - and one infers by Forth Estuary - that that situation
    was not to be permitted to continue and it is difficult, if not
    impossible, to resist the inference that the reason why it was not
    to be permitted to continue was that both parties were very well
    aware of the provisions of the Regulations to which I have already
    referred. It can hardly have been merely a fortunate coincidence
    that officers from the redundancy payments section of the
    Department of Employment were already at the dock on that
    afternoon when Mr. Hughes and Mr. Page arrived at approximately
    3.00 p.m. having come straight from the office of Messrs. Brodies
    where the agreement had been signed. They addressed the
    workforce and told them that the business was to close down at
    4.30 p.m. that day and that they were dismissed "with immediate
    effect." Each of the appellants was given a letter from the
    receivers under the first respondents' letterhead which was dated 6
    February 1984 and was, so far as material, in the following terms:

    "We would advise you that no further funds can be made
    available to pay your wages with effect from the close of
    business today and accordingly we have to inform you that
    your employment with the company is terminated with
    immediate effect. No payments will be made in respect of
    your accrued holiday pay, or the failure to give you your
    statutory period of notice.

    Under the insolvency provisions of the Employment
    Protection Act 1978, any claim you may have for the above
    will, subject to certain limitations, be paid to you by the
    Department of Employment out of the Redundancy Fund. . .
    . Your wages up to the date of dismissal will be paid in the
    normal way and you will be issued with a P45 from the
    company's head office."

    - 12 -

    One of the less creditable aspects of the matter is that one of
    the appellants, Mr. Walker, who was the union shop steward, asked
    specifically whether the business was being taken over by Forth
    Estuary, and was told by Mr. Hughes that he knew nothing about a
    new company taking over, whilst Mr. Page said that he knew
    nothing about a company called Forth Estuary Engineering. This
    indicates a calculated disregard for the obligations imposed by
    regulation 10 of the Regulations. Within 48 hours of their
    dismissal, the appellants learned, at the local job centre, that
    Forth Estuary was recruiting labour and a group of them went to
    fill in application forms for employment. None was successful and
    indeed only three former employees of the first respondents were
    taken on. Work which was in progress on the vessels on 6
    February was subsequently continued and completed by Forth
    Estuary, which very soon had a workforce of similar size to that
    of the first respondents, embracing the same trade but recruited
    at lower rates of pay elsewhere than from the existing employees.
    The industrial tribunal, in their reasons for decision, commented:

    "The fact that Forth Estuary, apart from the three
    exceptions, has not retained or employed the former
    employees of Forth Dry Dock is consistent with Mr.
    Brooshooft's decision (which he referred to in his evidence)
    not to employ the existing employees as he wanted to start
    'with a clean sheet' although he had no criticism of them."

    It is difficult to resist the inference that Mr. Brooshooft was not
    unmindful of the disadvantages which might flow under the
    Regulations from the continuance of the employment of the
    existing workforce as compared with the advantages to be derived
    from the pool of unemployed tradesmen anxious for work on any
    available terms. Although the industrial tribunal made no finding
    as to this, the sequence of events and the secrecy with which they
    were enshrouded are such that they cannot rationally be accounted
    for otherwise than by the hypothesis that the dismissal of the
    existing workforce was engineered specifically with a view to
    preventing any liability for the obligations incidental to their
    contracts of employment from attaching to Forth Estuary, so as to
    leave them with nothing but a claim for redundancy on the
    Redundancy Fund under section 106 of the Act of 1978 and an
    illusory claim for unfair dismissal against an insolvent company.

    The appellants applied to an industrial tribunal complaining
    that they had been unfairly dismissed and by an order of 28
    September 1984, Forth Estuary was sisted as an additional and
    second-named respondent to that application. On 27 February
    1985, the industrial tribunal determined that the appellants had
    been unfairly dismissed by the the first respondents and that Forth
    Estuary was liable to pay monetary compensation which was
    assessed on the basis of 26 weeks loss of employment. From that
    decision Forth Estuary appealed to the Employment Appeal
    Tribunal on the grounds, first, that there had been no relevant
    transfer of the business within the terms of the Regulations;
    secondly, that the appellants were not employees employed in the
    business immediately before the transfer and that, accordingly, the
    obligation under their respective contracts of employment were not
    transferred to Forth Estuary; thirdly, that the appellants had not
    been unfairly dismissed; and, fourthly, that in any event there was
    no justification for the assessment of compensation on the basis of

    - 13 -

    26 weeks loss of employment. The appellants cross-appealed
    against the decision so far as it restricted the compensation to a
    figure based on 26 weeks loss of employment. On 5 December
    1985, the Employment Appeal Tribunal [1986] I.R.L.R. 59 affirmed
    the decision of the industrial tribunal, save that they concluded
    that the onus of establishing that, if the appellants had been
    employed by Forth Estuary, that company would have dismissed
    them in the future for some proper reason other than for the
    mere transfer of the business rested with Forth Estuary. There
    was, on the evidence, no ground for limiting the appellants' claim
    to the period assumed by the industrial tribunal. They accordingly
    remitted the case to the industrial tribunal to reconsider the basis
    for assessment of compensation.

    One of the curiosities of the appeal is that the principal
    and, substantially, the only question argued before this House on
    behalf of the respondents, that is to say, that adumbrated in the
    second ground mentioned in the notice of appeal to the
    Employment Appeal Tribunal, was not in fact relied upon there,
    the principal arguments being that there had been no relevant
    transfer so as to enable the appellants to invoke the Regulations
    at all and that, in any event, the appellants had not been unfairly
    dismissed for the reason specified in regulation 8(1). In my view,
    the latter point is really unarguable on the facts. It was entirely
    unsupported by any evidence on the part of the first respondent
    and was rightly rejected both by the industrial tribunal and the
    Employment Appeal Tribunal. Since, however, Mr. Osborne has
    sought, as he did before the Court of Session, to keep the first
    point alive, it may be convenient to deal with it at this point. It
    has not been contested, nor could it easily be with any conviction,
    that the business of the first respondents was not transferred to
    Forth Estuary; but what is said is that the transfer was not a
    "relevant transfer" within the Regulations, inasmuch as one of the
    steps involved the concurrence of a third party, that is to say, the
    Forth Ports Authority, which was involved to the extent of
    accepting the relinquishment of the first respondents' lease and
    granting a new lease to Forth Estuary. What is said is that
    regulation 3(4), which declares, ex abundanti cautela, that a
    transfer may be effected by a series of "two or more transactions
    between the same parties" rules out, by implication, as a relevant
    element in the transfer, a transaction between one of the parties
    and a third party. In fairness to Mr. Osborne, I should say that
    he was the first to acknowledge that this argument hardly
    qualified for the description of the jewel in his crown. In my
    judgment, there is no substance in it. I do not, for a start,
    consider that any such implication can be legitimately drawn from
    the words of the regulation, but in any event, regulation 3(4) does
    not purport to be anything more than declaratory and cannot be
    properly construed as in any sense an exclusive definition of what
    can constitute a transfer.

    To continue with the history, the respondents appealed to
    the Court of Session [1987] I.R.L.R. 289 which by an interlocutor
    of the Second Division of the Inner House , dated 18 March 1988,
    sustained the appeal and ordered that the cases of all the
    appellants should be remitted to the industrial tribunal with a
    direction that Forth Estuary should be dismissed from the
    proceedings and that the industrial tribunal should proceed to
    consider the cases against the first respondents. It is against that
    interlocutor that the appellants now appeal to this House.

    - 14 -

    The ground upon which the Second Division of the Inner
    House sustained the appeal was that although the dismissal
    occurred on the same day as the transfer, regulation 5 did not
    apply to continue the employment of the appellants by Forth
    Estuary because the dismissal, having been effected before, albeit
    only shortly before, the transfer took effect, there was, at that
    point of time, no longer any contract of employment in existence
    and the appellants were not therefore employed by the first
    respondents at the time of the transfer. Accordingly, regulations
    5(1) and (2) never operated to transfer the appellants to the
    employment of Forth Estuary or to impose on that company any of
    the obligations of the first respondents as employers. In so
    deciding, the Second Division followed the decision of the Court of
    Appeal in England in Secretary of State for Employment v. Spence
    [1987] Q.B. 179, which was decided on 15 May 1986, that is to
    say, after the date of the decision of the Employment Appeal
    Tribunal. At the date of that decision the point was generally
    thought to be concluded against the respondents by two decisions
    of the Employment Appeal Tribunal in England in Alphafield Ltd,
    (trading as Apex Leisure Hire) v. Barratt
    [1984] 1 W.L.R. 1062,
    and Secretary of State for Employment v. Anchor Hotel (Kippford)
    Ltd
    . [1985] I.C.R. 724 In Spence's case the Court of Appeal
    overruled those decisions. Your Lordships are now invited to
    overrule Spence's case.

    There is, I think, a serious question whether, on the facts of
    the instant case, the question of the correctness of the decision in
    Spence's case arises at all. Having regard both to the terms of
    the agreement to which I have referred and to those of the letters
    of dismissal received by the appellants, there appear to be
    respectable arguments in favour of a contention that the
    appellants' employment was not, in fact, determined until after, or
    eo instante with, the transfer of the business. The point has,
    however, not been fully argued and your Lordships have been
    invited to approach the appeal on the footing that the dismissals
    took effect at about 3.30 p.m. on 6 February and that the transfer
    did not take place until 4.30 p.m. on that day. I therefore make
    that assumption.

    Two questions then arise. First, was the time which elapsed
    between the dismissals and the transfer of so short a duration
    that, on the true construction of regulation 5, the appellants were
    "employed immediately before" the transfer, as required by sub-
    paragraph (3) of that regulation? Secondly, if the answer to that
    question is in the negative, what difference (if any) does it make
    that the reason, or the principal reason, for the dismissals was, as
    it clearly was, the imminent occurrence of the transfer so that
    the dismissals were, by regulation 8(1), deemed to be unfair
    dismissals?

    The expression "immediately before" is one which takes its
    meaning from its context, but in its ordinary signification it
    involves the notion that there is, between two relevant events, no
    intervening space, lapse of time or event of any significance. If,
    for instance, the question is whether a deceased person was seized
    of property immediately before his death, attention is focussed
    upon the very instant at which the death occurred. In construing
    the Regulations with which this appeal is concerned, one gets little

    - 15 -

    help from the terms of the Directive to which they were intended
    to give effect. Article 3, as has been seen already, refers to an
    employment relationship existing "on the date of the transfer," but
    this expression seems to be used interchangeably with the
    expression "at the time of the transfer" - in the French text "au
    moment du transfert" - which appears to embrace the notion that
    what has to be regarded is the status of the employee vis-à-vis his
    employer at the very instant at which the employer's business is
    transferred.

    As will already have become apparent, there have been a
    number of decisions in which the provisions of regulation 5 have
    fallen to be construed and your Lordships' attention has, in
    addition, been drawn to a number of decisions in which articles 3
    and 4 of the Directive have fallen to be interpreted by the
    European Court of Justice. Before referring to these, however, it
    may be helpful to consider the Regulations without the assistance
    of authority, but bearing in mind their overall purpose of giving
    effect to the provisions of the Directive. To begin with, it is to
    be noted that the reference in regulation 5(1) to "a contract which
    would otherwise have been terminated by the transfer" is, strictly
    speaking, a mis-description. The reason why a contract of
    employment is said to "terminate" on a transfer of the employer's
    business is simply that such a transfer operates as a unilateral
    repudiation by the employer of his obligations under the contract
    and thus as a dismissal of the employee from his service. Because
    the relationship between employer and employee is of an
    essentially personal nature, the repudiation severs the factual
    relationship resulting from the contract, since the primary
    obligations on both sides are no longer capable of being performed.
    The contract itself, however, is not, strictly speaking, terminated
    but remains in being and undischarged so far as the enforcement
    of secondary obligations are concerned. This may seem a truism
    but it has, I believe, an importance in the analysis, in particular in
    relation to the meaning to be ascribed to the words "terminated
    by the transfer" in regulation 5(1) and the words "immediately
    before the transfer" in regulation 5(3). The necessary assumption
    in paragraph (1) of the regulation is that the contract of
    employment to which the consequence stated in the paragraph is
    to attach, is one which, apart from the transfer, would have
    continued in force and that what "terminates" it, or would, apart
    from the regulation, have terminated it, is the repudiatory breach
    constituted by the transfer. That paragraph can, therefore,
    operate only upon a subsisting contract. There is nothing in the
    terms of paragraph (2), if it stood alone, which necessarily involves
    the same restriction. It is, however, clearly intended merely to
    supplement the provisions of paragraph (1), and paragraph (3)
    supplies the connection by expressly limiting the operation of both
    paragraphs (1) and (2) to the case where the relevant employee is
    employed in the undertaking "immediately before the transfer,"
    that is to say, to the circumstances envisaged in paragraph (1) in
    which, apart from the regulation, the event producing the
    termination is the transfer. The crucial question, therefore, is
    what is meant by the reference to a contract being terminated
    "by" a transfer.


    This could embrace a number of different possibilities. If
    nothing at ail occurs to disturb the relationship of master and
    servant apart from the simple unannounced fact of the transfer of

    - 16 -

    business by the employer, it is the transfer itself which constitutes
    the repudiatory breach which, apart from regulation 5(1),
    "terminates" the contract. If, however, the employer,

    contemporaneously with the transfer, announces to his workforce
    that he is transferring the business and that they are therefore
    dismissed without notice, it is, strictly, the oral notification which
    terminates the contract; yet it could not, as a matter of common
    sense, be denied that the contract has been "terminated by the
    transfer" of the business, particularly when reference is made to
    the supplementary provisions of paragraph (2) of regulation 5 when
    read in conjunction with paragraph (3). Similarly, if the employer,
    a week, or it may be a day, before the actual transfer, hands to
    each employee a letter announcing that he is proposing to transfer
    his undertaking at the close of business on the transfer date, at
    which time the employees are to consider themselves as forthwith
    dismissed, it could hardly be contended under the Regulations that
    their employment had not been terminated by the transfer, even
    though, at the date of the notice, the dismissal might be capable
    of taking effect independently, in the event, for instance, of the
    actual transfer of the business being postponed to a date or time
    later than the expiry of the notice. In each hypothetical case the
    employer's repudiation of the contract of service is differently
    communicated but its essential quality of a repudiation by the
    transfer of the undertaking remains the same and the contract can
    quite properly be described as having been terminated by the
    transfer. If, by contrast, the employer announces to his workforce
    that he is transferring his business to another person at 5.00 p.m.
    on the following Friday and that they are to consider themselves
    dismissed from his employment at 4.59 p.m. on that day, it is
    difficult to see any reason why the interposition of a one-minute
    interval between the express repudiation becoming effective and
    the transfer which would, in any event, have operated as a
    repudiation if nothing had been said, should invest the breach of
    contract by the employer with some different quality. In each
    case the effective cause of the dismissal is the transfer of the
    business, whether it be announced in advance or
    contemporaneously, or whether it be unannounced, and it would be
    no misuse of ordinary language in each case to speak of the
    termination of the contracts of the workforce as having been
    effected by the transfer. It is absurd to suggest that there is any
    distinction in substance between any of the hypothetical cases
    which I have envisaged. Can it, then, one asks, possibly have been
    the intention of the Secretary of State in framing legislation
    expressly directed to safeguarding the rights of employees when an
    undertaking is transferred, to make its effectiveness depend upon
    whether the transferor, as a result perhaps of a collusive bargain
    with the transferee, allows a scintilla temporis to elapse between
    the operation of a notice dismissing his workforce and the
    completion of the legal formalities of the transfer which is the
    true cause of their dismissal, particularly having regard to the
    provisions of regulation 8, which were clearly intended to have the
    same effect as article 4 of the Directive? My Lords, I should be
    reluctant so to construe the Regulations, quite apart from any
    authority. When, however, they are considered in the light of the
    interpretation placed by the European Court of Justice on the
    provisions of the Directive, it becomes, I think, clear that your
    Lordships are not compelled to do so.

    - 17 -

    In the case of Wendelboe v. L. J. Music ApS. (Case 19/83)
    [1985] E.C.R. 457, the original employer company was on the brink
    of insolvency. So far as appears, no transfer of their undertaking
    was in contemplation when financial stringency compelled closure
    of the business and the dismissal of the major part of the
    workforce with immediate effect. That occurred on 28 February
    1980. On 4 March 1980, the company was declared insolvent and
    a little over three weeks later an agreement was concluded
    transferring the business to a purchaser with effect from 4 March,
    the court having conduct of the insolvency having authorised the
    (then prospective) purchaser to use the company's premises and
    equipment from 5 March onwards. The three plaintiffs were part
    of the original workforce and had in fact been engaged by the
    purchaser on 6 March but on terms that they lost their rights to
    seniority. They sued the original employer for damages for
    wrongful dismissal and arrears of holiday pay and were met with
    the defence that under the Danish legislation, which had been
    passed to give effect to the Directive, all liabilities in respect of
    their employment had been transferred to the purchaser. The
    question submitted by the Danish court to the European Court of
    Justice, pursuant to article 177 of the E.E.C. Treaty, was whether
    the Directive required member states to enact provisions under
    which the transferee of an undertaking became liable in respect of
    obligations concerning holiday pay and compensation to former
    employees who were not employed in the undertaking on the date
    of the transfer. That question was answered in the negative, as
    might indeed have been surmised purely from a textual
    interpretation of article 3(1) of the Directive. The following
    extract from the judgment of the court, at pp. 466-467 is,
    however, of interest in relation to the question of the relationship
    between articles 3 and 4 of the Directive (which are reflected
    substantially in articles 5 and 8 of the Regulations):

    "That interpretation of the scope of article 3(1) is also in
    conformity with the scheme and the purposes of the
    Directive, which is intended to ensure, so far as possible,
    that the employment relationship continues unchanged with
    the transferee, in particular by obliging the transferee to
    continue to observe the terms and conditions of any
    collective agreement (article 3(2)) and by protecting workers
    against dismissals motivated solely by the fact of the
    transfer (article 4(1)). Those provisions relate only to
    employees in the service of the undertaking on the date of
    the transfer, to the exclusion of those who had already left
    the undertaking on that date.

    The existence or otherwise of the contract of
    employment or an employment relationship on the date of
    the transfer within the meaning of article 3(1) of the
    Directive must be established on the basis of the rules of
    national law, subject however, to observance of the
    mandatory provisions of the Directive and, more particularly,
    article 4(1) thereof, concerning the protection of employees
    against dismissal by the transferor or the transferee by
    reason of the transfer. It is for the national courts to
    decide, on the basis of those factors, whether or not on the
    date of the transfer, the employees in question were linked
    to the undertaking by virtue of a contract of employment or
    employment relationship."

    - 18 -

    What is of particular interest here in relation to the questions
    raised by this appeal, is the statement that article 4(1), as well as
    article 3(1), "apply only to employees in the service of the
    undertaking on the date of the transfer" and the observation that
    the determination according to the rules of national law is "subject
    to observance of the mandatory provisions of article 4(1)." There
    is clearly scope here for the view that where the employment has
    been determined by the transferor solely on the ground of the
    transfer, which article 4(1) states is not "to constitute grounds for
    dismissal by the transferor or transferee" (emphasis added) the
    employee is to be treated as if he had continued to be employed
    at the date of the transfer. That was a point which did not in
    fact arise in the Wendelboe case but which is reflected in the
    following passage from the opinion of the Advocate General, Sir
    Gordon Slynn, at p. 460:

    "Whether or not a contract of employment or an
    employment relationship is terminated at the time of
    transfer is of course for national law to determine.
    However, the first sentence of article 4(1) provides that 'the
    transfer of an undertaking, business or part of a business
    shall not in itself constitute grounds for dismissal by the
    transferor or transferee.' . . . Where employees are
    dismissed, with a view to and before, a transfer falling
    within the Directive and are re-engaged immediately by the
    transferee thereafter, their dismissal must be regarded as
    contrary to article 4(1), subject to the exceptions specified
    in that paragraph. Whether the remedy for such unlawful
    dismissal consists in a court order declaring that dismissal
    to be a nullity or the award of damages or some other
    effective remedy is for the member states to determine. In
    any event the member states are required to provide for a
    remedy which is effective and not merely symbolic ... If
    the remedy consists in treating the dismissal as a nullity,
    then it would follow that the rights and obligations of the
    employee concerned are transferred to the transferee."

    The proposition that article 4(1) operates, in effect, to
    prohibit the exclusion of the rights conferred by article 3 by
    dismissal of the employee immediately before the transfer, except
    for one of the reasons specified in the second sentence of the
    article, receives some further support from the opinion of the
    Advocate General Sir Gordon Slynn in the later case of Foreningen
    af Arbejdslederre i Danmark v. A/S Danmols Inventar
    (Case
    105/84) [1985] ECR 2639, in which he commented on the
    Wendelboe case and observed, at p. 2641:

    "in Wendellboe v. L. J. Music ... it was held that only the
    persons employed by the transferor at the moment of a
    transfer fall within the provisions; it was also pointed out
    that article 4(1) prohibits an employee from being dismissed
    by reasons solely of such a transfer, subject however to
    certain exceptions. The effect of the Directive, in my
    opinion, is that an employee of the transferor at the time
    of the transfer is entitled to insist, as against the
    transferee, on ail the rights under his existing employment
    relationship. By virtue of article 3 he can thus claim to
    continue to be employed by the transferee on the same
    terms as he was employed with the transferor, or if the

    - 19 -

    transferee refuses or fails to observe those terms, he can
    bring a claim for breach of contract or the relationship
    against the transferee. Under article 4, the transfer does
    not by itself justify its dismissal by the transferor or the
    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. Otherwise if the dismissal or purported dismissal
    is based on the transfer of the undertaking or business, the
    employee can insist on his rights under article 3."

    The prohibitory nature of article 4 was emphasised again in
    the case of Foreningen af Arbejdslederre i Danmark v. Daddy's
    Dance Hall A/S
    (Case 324/86) [1988] IRLR 315, 317 where the
    court in the course of its judgment observed:

    " ... Directive [(77/187/E.E.C.)] aims at ensuring for
    workers affected by a transfer of undertaking the
    safeguarding of their rights arising from the employment
    contract or relationship. As this protection is a matter of
    public policy and, as such, outside the control of the parties
    to the employment contract, the provisions of the Directive,
    in particular those relating to the protection of workers
    against dismissal because of transfer, must be considered as
    mandatory, meaning that it is not permissible to derogate
    from them in a manner detrimental to the workers." (See
    also Landsorganisationen i Danmark v. Ny Molle Kro (Case
    287/86) [1989] I.R.L.R. 37).

    In a subsequent case: P. Bork International A/S v. Foreningen af
    Arbejdslederre i Danmark (Case 101/87) [1989]
    I.R.L.R. 41. the
    question arose whether the Directive applied to a situation where
    the workforce had been dismissed upon the termination by the
    employee of the lease of the premises on which the undertaking
    was carried on, the assets of the business having been purchased
    shortly afterwards by the new lessee of the premises, which re-
    engaged over half the original workforce. The court held that the
    Directive applied and in relation to the question of whether
    workers dismissed before the transfer could claim the benefit of
    the Directive as against the transferee, said, at p. 44:

    "the only workers who may invoke Directive [(77/187/E.E.C.)]
    are those who have current employment relations or a
    contract of employment at the date of transfer. The
    question whether or not a contract of employment or
    employment relationship exists at that date must be assessed
    under national law, subject, however, to the observance of
    the mandatory rules of the Directive concerning the
    protection of workers against dismissal by reason of the
    transfer. It follows that workers employed by the
    undertaking whose contract of employment or employment
    relationship has been terminated with effect on a date
    before that of the transfer, in breach of article 4(1) of the
    Directive, must be considered as still employed by the
    undertaking on the date of the transfer with the
    consequence, in particular, that the obligations of an
    employer towards them are fully transferred from the
    transferor to the transferee, in accordance with article 3(1)

    - 20 -

    of the Directive. In order to determine whether the only
    reason for dismissal was the transfer itself, account be must
    taken of the objective circumstances in which the dismissal
    occurred, and, in particular, in a case like the present one,
    the fact that it took place on a date close to that of the
    transfer and that the workers concerned were re-engaged by
    the transferee. The factual assessment needed in order to
    determine the applicability of the Directive is a matter for
    the national courts, and having regard to the interpretative
    criteria laid down by the court."
    (Emphasis added).

    It does not appear that the impact of article 4 (and thus of
    regulation 8) on the construction and effect of article 3 (or
    regulation 5) in relation to the employee's rights has previously
    fallen to be considered in any of the reported cases in the United
    Kingdom. In Alphafield Ltd, (trading as Apex Leisure Hire) v.
    Barratt
    [1984] 1 W.L.R. 1062, the receiver of an undertaking,
    having negotiated a transfer of the undertaking to be completed on
    Monday, 17 January 1983, dismissed the workforce at the close of
    business on the previous Friday, the 14 January, at the same time
    requesting them to report for work on the following Monday with
    a view to re-engagement by the transferee. On the afternoon of
    17 January, the applicant was told that his services would not be
    required. He claimed that the effect of regulation 5 was that his
    employment had been continued with the transferee and that he
    had, therefore, been unfairly dismissed by the transferee as a
    result of the latter's refusal to employ him. The principal
    question argued was whether he had been employed "immediately
    before" the transfer. Both the industrial tribunal and the
    Employment Appeal Tribunal held that he was. The decision of
    the Employment Appeal Tribunal was delivered by Tudor Evans J.
    who said, at pp. 1066-1067:

    "It seems to us to be a question of fact in each case
    dependent upon the particular circumstances whether or not
    a person was employed "immediately before' the transfer. It
    seems to us quite impossible, however desirable and helpful
    it might be, to say what period does and what period does
    not qualify. It must depend on the circumstances of each
    particular case whether dismissal is sufficiently proximate to
    the transfer. We think that, apart from analysis of the
    words used, it has to be remembered that if the words are
    construed in the strictest sense, as contended by the
    employers, it would be very easy for a transferor without
    funds to agree with a transferee, for reasons convenient to
    them both, that employees should be dismissed a short time
    before transfer, thus leaving them with a worthless remedy
    and so defeating the protection afforded by the
    Regulations."

    In Secretary of State for Employment v. Anchor Hotel (Kippford)
    Ltd.
    [1985] I.C.R. 724, the question was whether the original
    employer, who had given his employees a notice to terminate their
    employment which expired upon the same date as that on which
    the transfer of the business took effect and who had made
    redundancy payments to them following the transfer, was entitled
    to claim a rebate from the Redundancy Fund pursuant to section
    104 of the Act of 1978. The argument on behalf of the Secretary
    of State, which was accepted by the Employment Appeal Tribunal,

    - 21 -

    was that no rebate was due inasmuch as the claimant was never
    liable to make the redundancy payments, since his liability had
    been transferred to the transferee of the business pursuant to
    regulation 5, the employees having been employed "immediately
    before" the transfer. In giving the decision of the tribunal, Waite
    J. observed that it would serve no purpose to remit the case to
    the Industrial Tribunal for a determination of the precise order in
    which the relevant events took place, since that was irrelevant,
    adding, at p. 729:

    "We hold that when a dismissal notice given by the
    transferor expires on the same day as the transfer date,
    then it matters not for the purposes of the Regulations in
    precisely which order on that day the two events have
    occurred or whether they have occurred exactly
    simultaneously. The result will in every case be the same -
    a substitution of the transferee for the transferor as the
    party responsible for the dismissal and so liable to make a
    redudancy payment to the employee."

    The decisions in both the Apex and Anchor Hotel cases
    were, however, disapproved by the Court of Appeal in England in
    Secretary of State for Employment v. Spence [1987] Q.B. 179,
    which was followed and applied by the Second Division of the
    Inner House in the instant case. In that case the transferor
    company was in receivership and the receivers had been
    negotiating a transfer of the business under a threat by the
    company's major customer to withdraw its work unless a transfer
    of the business had been agreed by 24 November 1983. No sale
    had been agreed by that date and although on 28 November 1983
    the negotiations were continuing, the receivers had to decide
    whether it was proper in the interests of the debenture holders to
    continue to employ the workforce and to continue trading. Since
    there was no guarantee that the negotiations would be successful,
    the decision was taken to cease trading immediately and, at 11.00
    a.m. on that morning the employees were notified that they were
    dismissed with immediate effect. In fact, the negotiations were
    successful and an agreement for the sale of the undertaking was
    signed at 2.00 p.m. on that day. The employees were in fact re-
    employed by the transferee but claimed redundancy payments from
    the Redundancy Fund under section 106 of the Act of 1978. The
    claim was resisted on the ground that, since the claimants were
    employed "immediately before the transfer" their employment was
    continued with the transferee of the business by regulation 5(1),
    following the decision in the Anchor Hotel case [1985] I.C.R. 724.
    It is worth noting that it was found as a fact by the industrial
    tribunal, first, that the sequence of events was the result of
    independent action by the receivers and the transferees and that
    there was no collusion between them and, secondly, that the
    reason why the receivers decided to dismiss the workforce was
    that, until a contract could be renegotiated with the company's
    principal customer, there was no prospect of any work for the
    business. It follows from these findings that the reason for the
    dismissal was not one connected with the transfer but was due to
    economic considerations, with the result that regulation 8(1) did
    not render the dismissals unfair. The only question for decision,
    therefore, was whether having regard to the very short time which
    in fact elapsed between the dismissals taking effect and the
    conclusion of the transfer agreement, the workforce was employed

    - 22 -

    "immediately before the transfer." After a careful analysis of the
    cases, the Court of Appeal rejected the approach of the
    Employment Appeal Tribunal in Apex [1984] 1 W.L.R. 1062 and
    Anchor Hotel [1985] I.C.R. 724 and held that regulation 5(1) can
    apply only where, at the very moment of transfer, the contract of
    employment (in the sense of the existing relationship of employer
    and employee) is still subsisting. If it is not, then there is nothing
    upon which the regulation can bite, even though the employment
    has been determined only a matter of minutes (or, it may be,
    seconds) before the transfer. My Lords, for my part, I can detect
    no flaw in the reasoning by which Balcombe L.J., who delivered
    the leading judgment in the Court of Appeal, reached the
    conclusion on the facts of that case that regulation 5(1) did not
    operate to transfer the obligations of the original employer to the
    transferee. Where, before the actual transfer takes place, the
    employment of an employee is terminated for a reason
    unconnected with the transfer, I agree that the question of
    whether he was employed "immediately" before the transfer cannot
    sensibly be made to depend upon the degree of temporal proximity
    between the two events, except possibly in a case where they are
    so closely connected in point of time that it is, for practical
    purposes, impossible realistically to say that they are not precisely
    contemporaneous. Either the contract of employment is subsisting
    at the moment of the transfer or it is not, and if it is not, then,
    on the pure textual construction of regulation 5, neither paragraph
    (1) nor paragraph (2) (which is clearly subsidiary to and
    complementary with paragraph (1)) can have any operation. But
    Spence's case [1987] Q.B. 179 was decided - and quite properly
    decided - entirely without reference to the effect of Regulation
    8(1) and in the context of the two important findings of fact by
    the Industrial Tribunal to which I have drawn attention.- The
    Court of Appeal did not consider, and was not called upon to
    consider, a position where, whether under a collusive bargain or
    otherwise, an employee is dismissed from his employment solely or
    principally because of the prospective transfer of the undertaking
    in which he is employed, so that his dismissal is statutorily
    deemed to be unfair; and, of course, the case was decided without
    reference to the important Bork case [1989] I.R.L.R. 41 already
    referred to which had not been decided at the date of the Court
    of Appeal's judgment and which had not been reported at the time
    when the instant case was argued before the Court of Session.

    It is, I think, now clear that under article 4 of the
    Directive, as construed by the European Court of Justice, a
    dismissal effected before the transfer and solely because of the
    transfer of the business is, in effect, prohibited and is, for the
    purpose of considering the application of article 3(1), required to
    be treated as ineffective. The question is whether the Regulations
    are so framed as to be capable of being construed in conformity
    with that interpretation of the Directive.

    This cannot, I think, be effected by adopting the flexible
    construction of the words "immediately before" suggested in the
    Apex case [1984] 1 W.L.R. 1062, for the meaning to be given to
    those words, taken alone, cannot sensibly be made to depend upon
    whether the reason for the determination of the employment was
    the transfer or something else. Such an approach would involve
    the conclusion that the obligations of the transferor would be
    transferred to the transferee even in the case where, as in

    - 23 -

    Spence's case [1987] Q.B. 179, the employment had been
    terminated for economic, technical or organisational reasons. That
    cannot, I think, have been intended, and I, for my part, agree with
    the rejection by the Court of Appeal in Spence's case of the
    reasoning of the Employment Appeal Tribunal in Apex [1984] 1
    W.L.R. 1062 and Anchor Hotel [1985] I.C.R. 724. Nor do I find a
    solution in the suggestion canvassed by Mr. Edwards that a
    dismissal accepted by the transferor solely because of the
    impending transfer is to be treated as ineffective by some form of
    estoppel on the ground that the parties to the transfer cannot be
    permitted to take advantage of their own wrong. A termination
    for economic reasons, for instance, if effected without proper
    notice, would be as much a "wrong" as a termination by reason of
    the transfer and, in any event, a termination effected without the
    collusion of the transferee could not be a "wrong" on the part of
    the transferee, to whose benefit the termination of the
    employment would enure.

    The critical question, it seems to me, is whether, even
    allowing for the greater latitude in construction permissible in the
    case of legislation introduced to give effect to this country's
    Community obligations, it is possible to attribute to regulation 8(1)
    when read in conjunction with regulation 5, the same result as
    that attributed to article 4 in the Bork case [1989] I.R.L.R. 41.
    Purely as a matter of language, it clearly is not. Regulation 8(1)
    does not follow literally the wording of article 4(1). It provides
    only that if the reason for the dismissal of the employee is the
    transfer of the business, he has to be treated "for the purposes of
    Part V of the 1978 Act" as unfairly dismissed so as to confer on
    him the remedies provided by sections 69-79 of the Act (including,
    where it is considered appropriate, an order for reinstatement or
    re-engagement). If this provision fell to be construed by reference
    to the ordinary rules of construction applicable to a purely
    domestic statute and without reference to Treaty obligations, it
    would, I think, be quite impermissible to regard it as having the
    same prohibitory effect as that attributed by the European court
    to article 4 of the Directive. But it has always to be borne in
    mind that the purpose of the Directive and of the Regulations was
    and is to "safeguard" the rights of employees on a transfer and
    that there is a mandatory obligation to provide remedies which are
    effective and not merely symbolic to which the Regulations were
    intended to give effect. The remedies provided by the Act of
    1978 in the case of an insolvent transferor are largely illusory
    unless they can be exerted against the transferee as the Directive
    contemplates and I do not find it conceivable that, in framing
    Regulations intending to give effect to the Directive, the
    Secretary of State could have envisaged that its purpose should be
    capable of being avoided by the transparent device to which resort
    was had in the instant case. Pickstone v. Freemans Plc. [1989]
    A.C. 66, has established that the greater flexibility available to
    the court in applying a purposive construction to legislation
    designed to give effect to the United Kingdom's Treaty obligations
    to the Community enables the court, where necessary, to supply by
    implication words appropriate to comply with those obligations.
    See particularly the speech of Lord Templeman at pp. 120-121.
    Having regard to the manifest purpose of the Regulations, I do
    not, for my part, feel inhibited from making such an implication in
    the instant case. The provision in regulation 8(1) that a dismissal
    by reason of a transfer is to be treated as an unfair dismissal, is

    - 24 -

    merely a different way of saying that the transfer is not to
    "constitute a ground for dismissal" as contemplated by article 4 of
    the Directive and there is no good reason for denying to it the
    same effect as that attributed to that article. In effect this
    involves reading regulation 5(3) as if there were inserted 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)." For my part, I would
    make such an implication which is entirely consistent with the
    general scheme of the Regulations and which is necessary if they
    are effectively to fulfil the purpose for which they were made of
    giving effect to the provisions of the Directive. This does not
    involve any disapproval of the reasoning of the Court of Appeal in
    Spence's case [1987] Q.B. 179 which, on the facts there found by
    the industrial tribunal, did not involve a dismissal attracting the
    consequences provided in regulation 8(1).

    The only reservation that I have with regard to that case is
    in relation to the approval by the Court of Appeal of a passage
    from the judgment of the Employment Appeal Tribunal in Premier
    Motors (Medway) Ltd, v. Total Oil Great Britain Ltd.
    [1984] 1
    W.L.R. 377, in which, after correctly pointing out that where an
    employee's contract is continued by virtue of regulation 5, the
    transferee who plans to employ him, will be liable for a
    redundancy payment, Browne-Wilkinson J. observed, at p. 382:

    "To protect himself, the transferee must agree with the
    transferor either that the transferee will dismiss the
    employee before the transfer or will indemnify the
    transferee against redundancy payments and other
    employment liabilities."

    It follows from the construction that I attach to regulation 5(3)
    that where an employee is dismissed before and by reason of the
    transfer the employment is statutorily continued with the
    transferee by virtue of the Regulations and the first of the two
    options referred to in the passage quoted above is not, therefore,
    one which will effectively protect the transferee from the
    employee's claim for a redundancy payment. It also follows that
    both Apex [1984] 1 W.L.R. 1062 and Anchor Hotel [1985] I.C.R.
    724, in each of which the employment was clearly terminated by
    reason of the impending transfer, were correctly decided on their
    respective facts albeit not for the reasons given.

    In the instant case it is quite clear that the reason for the
    dismissal of the appellants was the transfer of the business which
    had just been agreed and was going to take place almost at once.
    The effect of regulation 5, construed as I have suggested that it
    should be, is that their employment continued with Forth Estuary.
    I would therefore allow the appeal. On behalf of the respondents,
    Mr. Osborne has submitted that in the event of the appeal being
    allowed, the order of the Employment Appeal Tribunal should be
    varied so as to remit back to the industrial tribunal the question
    whether the receivers had acted reasonably in dismissing the
    workforce in the context of section 57(3) of the Act of 1978. The
    respondents had the opportunity before the industrial tribunal of
    demonstrating, if they could, that there were some economic,
    technical or organisational reasons for the appellants' dismissals
    and it was therefore reasonable. They did not do so and I see no

    - 25 -

    grounds now for allowing that question to be reopened. I would
    accordingly reverse the interlocutor of the Second Division of the
    Inner House and restore the Order of the Employment Appeal
    Tribunal.

    LORD JAUNCEY OF TULLICHETTLE

    My Lords,

    I have had the advantage of reading in draft the speeches
    prepared by my noble and learned friends Lord Keith of Kinkel,
    Lord Templeman and Lord Oliver of Aylmerton. I agree with
    them and for the reasons given therein I would allow the appeal
    and make the order which they propose.

    - 26 -


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