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||Neutral Citation Number:  EWCA Civ 98
||Case No: A2/2008/1069
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT APPEAL TRIBUNAL
MR JUSTICE ELIAS (PRESIDENT)
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE SEDLEY
LORD JUSTICE KEENE
LADY JUSTICE SMITH
|| Protectacoat Firthglow Ltd
||- and -
(Transcript of the Handed Down Judgment of
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Mr George Foxwell (instructed by PJH Law) for the Appellant
Mr Miklos Szilagyi appeared in person
Hearing date : 2 December 2008
HTML VERSION OF JUDGMENT
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Lady Justice Smith:
- This is an appeal from the decision of the Employment Appeal Tribunal (EAT) dated 26 April 2008 in which it dismissed, in part, the appeal of Protectacoat Firthglow Ltd (Protectacoat) from the decision of an employment tribunal (ET).
- The business of Protectacoat is the application of protective coatings to the external walls of domestic dwellings. In proceedings begun in the ET, Mr Szilagyi claimed that he had been employed by Protectacoat and that he had been unfairly dismissed for refusing to work in what he alleged were unsafe conditions. In its ET3, Protectacoat claimed that Mr Szilagyi was not an employee but an independent contractor. It alleged that he worked in partnership with another man, his assistant, and that the partnership contracted with Protectacoat. It relied on documents signed by Mr Szilagyi which, it said, demonstrated the nature of the contractual relationship between it and the partnership.
- Protectacoat also alleged that Mr Szilagyi's claim had been lodged too late.
- A preliminary hearing was held at which the employment judge decided that Mr Szilagyi was an employee and that, although his claim had been lodged late, time for lodging the claim should be extended.
- Protectacoat appealed to the EAT on both issues. The EAT allowed the appeal on the time point but upheld the ET's decision that Mr Szilagyi was an employee and not an independent contractor. Protectacoat now appeals to this court on that issue, with the permission of Mummery LJ.
Background to the Hearing
- Before the date of the preliminary hearing, the appellant's solicitor, Mr Hyland, wrote to the ET requesting that Mr Szilagyi provide particulars of why he considered himself to be an employee. Mr Hyland drew attention to the company's contractual documentation on which it would rely and mentioned the case of Protectacoat Firthglow v Descombes  UKEAT/0916/03/ILB, BAILII:  UKEAT 0916_03_1901 in which the EAT had held that two men who claimed to be employees of Protectacoat had in fact been partners in firms which had contracted to do work for Protectacoat and, as such, could not be employees. The documentation scrutinised by the EAT in that case was similar to that which would be in issue in the present case.
- A tribunal chairman refused the application for particulars saying that they were not necessary and that the issue of employment would be decided at the hearing. Thus it was that, prior to the preliminary hearing, Protectacoat did not know exactly what Mr Szilagy was going to say about how he came to be taken on or how he was going to put his claim that he was an employee rather than an independent contractor.
- At the hearing, in April 2007, Mr Szilagyi appeared in person. He gave evidence, as follows, of the way in which he had begun to work for Protectacoat in March 2006. He had seen a Protectacoat van in the car park at Tesco's and had asked the driver if work was available. He was given a business card. He followed up this enquiry by going to Protectacoat's yard at Crawley where he met the depot manager, Simon Squires. Mr Squires said that work was available. He asked Mr Szalgyi if he had any experience of health and safety matters to which the reply was negative. Nonetheless, Mr Squires told him to sign a health and safety induction card, which he (Mr Squires) described as 'a load of bollocks'. After that, Mr Szilagyi was sent out in a van with two other men to learn the job. He worked alongside them and received cash in hand for two or three weeks. Mr Foxwell, counsel for Protectacoat, told us during the hearing that these two men were other subcontractors and that the appellant had arranged and paid for an experienced team to train Mr Szilagyi.
- Although it is not recorded in the ET's decision, it appears that Mr Squires told Mr Szilagyi that he would need to find someone to work with him as his assistant. Mr Szilagyi found a man called Glen Nesbitt. Mr Szilagyi said that Mr Squires told him he must sign some documents. These documents were not explained to him. Mr Squires just said: 'Mick get in here and sign this. You are looking for work, wife to support, men to pay, sign these'.
- Although the decision does not describe these documents, it is apparent that the employment judge read them and it is convenient to describe them at this stage. We were told that the proforma documents were drafted by or on behalf of Protectacoat.
- The first document was a partnership agreement. As completed it was an agreement between Mr Szilagyi as 'installer' and Mr Nesbitt as 'assistant'. The partnership was given the name M & G Coatings. The Partnership Act 1890 was to apply. Either party could terminate the partnership upon two weeks notice. If the assistant gave notice or died, the installer could acquire the assistant's share or interest. The installer could give notice to the assistant to terminate the assistant's interest in the partnership and would then automatically acquire the assistant's interest. The installer could then transfer the assistant's interest to a new assistant of his own choice, in which case the partnership would not be dissolved but would continue as between the installer and the new assistant. Under the heading of 'Capital and Profits' it was said that the installer would make such contributions to capital as he deemed fit and the assistant should not be required to make any such contribution. The installer would be entitled to all the partnership capital. The partnership profits were to be divided in the proportion set out in the schedule, which in the case of Mr Szilagyi and Mr Nesbitt was 60% to the installer and 40% to the assistant. The accounts were to be calculated 'on an annual basis'. Each partner could draw weekly sums as agreed between them. The assistant was to devote the whole of his time to the business of the partnership. Mr Szilagyi's signature was witnessed by Mr Squires. Mr Nesbitt's signature was also witnessed but not by Mr Squires. The deed was dated 20 April 2006.
- The second document was a contract whereby the partnership (M&G Coatings) undertook to provide services to Protectacoat (the company). I will call this document the services agreement. It provided that the partnership was retained to provide services in the form of application of exterior textured coating to buildings. The company would notify the partnership where the services were to be carried out. The partnership was to be responsible for travel arrangements to the place at which the services were to be carried out. The agreement was to commence on 18 April 2006 and would continue until terminated in accordance with clause 4. That provided that either side could give one week's notice of termination but, in addition, the company could terminate the agreement without notice on the happening of various events, which included the refusal or failure by the partnership without reasonable cause to perform the service. Clause 5 entitled 'Mutual Obligations' provided:
"Save to the extent that the Company is required to give the partnership notice to terminate this Agreement in accordance with clause 4 the company is under no obligation to provide the Partnership with work."
Clause 6 provided that the fee for services to be provided in respect of each customer would be agreed in advance between the company and the partnership. Once agreed, the fee would only be varied in exceptional circumstances. If rectification work were required, this was to be carried out by the partnership at its expense. Payment of fees would be made gross on completion of the provision of the service to each customer on receipt of an invoice from the partnership in the week following completion. The partnership would be liable to account to the Inland Revenue for tax and National Insurance contributions but the company reserved the right to deduct income tax under the 'subcontractor's tax deduction scheme'.
Clause 7 provided that the partnership was required to provide the necessary equipment. By Clause 8 the partnership promised that it would perform the services diligently and with reasonable skill and care, comply with the company's health and safety guidelines and not do anything 'to jeopardise the safety of the partnership, the client or members of the public'. By clause 9 it was provided that the partnership was not required to work any specific hours, save that the hours worked must be convenient to the client. By clause 10, the partnership was not prevented from providing services to others. This document appears to have been signed on 18 April 2006.
- Although we have not seen it, Mr Szilagyi also apparently signed a 'hire agreement' whereby he purported to hire a van, and various tools and equipment from Protectacoat for £210 per week.
- Before working for Protectacoat, Mr Szilagyi had a Construction Industry Scheme Registration Card, issued by the Inland Revenue. We were told that Mr Szilagyi re-registered in the name of the partnership, although there is no reference to this in the decision.
- From about 8 April 2006, Mr Szilagyi was sent out with Mr Nesbitt to do jobs for Protectacoat. He was provided with a Protectacoat van and most of the necessary tools and equipment. He was told that, if asked, he was to say that he was employed by Protectacoat. He worked for Protectacoat for some months. The arrangement with Mr Nesbitt did not last long and, on 30 May 2006, Mr Szilagyi and a Mr Eddie Belton signed an 'Amendment to the Partnership Agreement' under which Mr Belton became the assistant in Mr Nesbitt's place. The division of profits remained at 60:40. There was a further amendment on 24 October 2006 when Mr Sonny Weston became the assistant in place of Mr Belton. This time the profit shares were changed to 50:50.
- In November 2006, a dispute arose over whether a particular job required a scaffold or could safely be done from ladders. Mr Szilagyi wanted Protectacoat to provide a scaffold. Mr Squires considered that the ladders which had already been provided were adequate. As a result of this dispute, Protectacoat terminated the arrangement - to use a neutral expression - and Mr Szilagyi issued these proceedings.
- At the hearing, the question for the employment judge was whether Mr Szilagyi was an employee, which is defined in the Employment Rights Act at section 230 as 'an individual who has entered into … a contract of employment'. Mr Szilagyi's contention was that he had entered into a contract of employment. The documents he had signed did not represent the true relationship between him and Protectacoat; they were a sham. From the start, the actual working arrangements were different from those stipulated in the written contract. For example, the contract provided that payment for each job should be paid into the partnership bank account. But, he said, there never was a partnership account and payments were made, net of basic rate tax, directly into the accounts of Mr Szilagyi and his assistant. Further, the contract provided that the company would hire a van to the partnership at £210 per week. But in practice, the van was provided free of charge. Also, the contract provided that the partnership would provide its own tools and equipment but in fact they were provided by Protectacoat. Also the company paid for the fuel for the van.
- Mr Szilagyi also described a number of features of working life which were not consistent with the relationship of principal and subcontractor but were consistent with the relationship of employer/employee. For example, Mr Szilagyi and his assistant were required to attend at Protectacoat's yard every morning at 7.30 before going to the site on which they were working. Also, although the contract said that Mr Szilagyi and his assistant could undertake work for others, in fact this was not permitted and a friend of Mr Szilagyi (who had signed a similar contract with Protectacoat) was dismissed for doing that.
- Mr Squires was not at the tribunal to give evidence. The appellant's only witness was Mrs O'Regan the company secretary. She produced the contractual documents and explained how the appellant's system usually worked. She said that Protectacoat had taken advice from accountants and from the Inland Revenue as to how to make arrangements so that they would not be the employers of the men who carried out their installation work. They insisted that the men should work in partnership and their understanding was that neither a partnership nor its members could be employees. She said that Protectacoat insisted that the men work in pairs, first for health and safety reasons but also because that would underline the fact that they were in partnership and were not employees. She had no knowledge of the dealings between the respondent and Mr Squires or of the practice on the ground at the Crawley depot. She agreed with some aspects of the respondent's evidence. For example, she agreed that no charge was in fact made for the 'hire' of the van, tools or equipment but claimed that the services agreement allowed these charges to be waived. She agreed that workmen were told that, if asked, they were to say that they were employees of Protectacoat. The ET was shown Protectacoat's website and brochure which, inter alia stated that, to achieve its objective of looking after its customers and giving a first class service, it insisted on 'highly skilled craftsmen and absolutely no subcontractors'.
- When Mrs O'Regan's evidence was complete, Mr Hyland asked for an adjournment so as to bring Mr Squires to give evidence. He claimed that Protectacoat had been taken by surprise by Mr Szaligyi's evidence. This application was refused and the hearing came to an end.
- The employment judge gave his judgment with reasons in June 2007. He held that the written documents were a sham; they did not represent the true nature of the relationship between the parties. In truth, the respondent was an employee of Protectacoat.
The appeal in respect of the adjournment
- Protectacoat appealed to the EAT. First, it contended that the employment judge should have granted the adjournment to allow Mr Squires to give evidence. The EAT sought additional reasons from the Judge for this aspect of his decision. He said that Protectacoat should have realised that they would need Mr Squires. He was the only person who had had any dealings with Mr Szilagyi. They obviously needed him. As to this, the EAT said that the employment judge had been entitled to take that view. He had a wide discretion as to whether to grant an adjournment and he had not misdirected himself. The EAT was not prepared to say that the decision was perverse.
- That point is pursued on appeal to this court. The appellant submitted that it was reasonable for it to think that it would be able to defend the claim and prove that the respondent was not an employee solely by reference to the documents and Mrs O'Regan's evidence. That had been sufficient in the case of Descombes. No allegation had been made in that case that the documentation was a sham; the EAT had examined the documents and had accepted that their effect was as Protectacoat contended. In the present case, the appellant had had no indication from the respondent that he was going to allege a sham.
- I must confess that I was troubled by this point. I personally have some sympathy with the position of a party who asks for particulars of the way in which the case is to be put, is refused and then comes to the hearing ill- equipped. Had I been the employment judge, I think I might have granted an adjournment. However, that is not the test. The decision was a matter of judgment for the employment judge and neither the EAT nor this court should interfere with it unless he was plainly wrong in that an adjournment was necessary in the interests of justice.
- On reflection, I do not think that this court should interfere. The employment judge was of the view that it should have been obvious to Protectacoat that it would need Mr Squires to attend the hearing because he was the only person who had had any dealings with Mr Szilagyi. I see the force of that and his view is entitled to respect in this court. Mr Foxwell submitted that because the appellant's request for particulars had been refused, it was reasonable for it to rely only on the documentation to be produced by Mrs O'Regan. But, as Sedley LJ pointed out in argument, the fact that particulars had been refused (and the refusal not appealed) meant that Protectacoat needed to take the precaution of having Mr Squires available. It was their choice to rely on Mrs O'Regan alone.
- Accordingly, I would not interfere with the employment judge's decision to refuse an adjournment. An additional reason for reaching that conclusion is that, despite pursuing this point before both the EAT and this court, Protectacoat has still not obtained a witness statement from Mr Squires and it is by no means clear to what extent his evidence would have been capable of discrediting that of Mr Szilagyi. Mr Foxwell could only say that Mr Squires would dispute Mr Szilagyi's account. So, for those reasons, the first ground of appeal fails.
The main substantive ground – were the written agreements a sham?
- The main point in this appeal is whether the employment judge was right to hold that the written documents were a sham and that the true relationship was that of employer and employee.
- The employment judge listed a number of factors which he had taken into account in holding that the documents were a sham or a fiction. First, he noted that Protectacoat claimed publicly and directly to its customers that its installers were employees not subcontractors; yet its contention to the tribunal was exactly the opposite. Moreover, men such as Mr Szilagyi were told to tell clients that they were employees.
- Second, he said that the document by which the van and tools etc were 'hired' to the partnership was a fiction because no charge was made. The services agreement required the partnership to provide its own equipment but that did not happen. Further the company paid for the fuel for the van even though the agreement said that the partnership was responsible for the 'travel arrangements' to the work sites.
- Third, the judge noted that payment for the work was made (with tax deducted) direct to the individuals and not to the partnership. It appears that he was of the view that, if the partnership were genuinely contracting independently with Protectacoat, one would expect to see an invoice and payment into the partnership account. But the partnership did not have an account.
- Another factor which the employment judge mentioned was that Mr Szilagyi had to attend the yard each morning and had to return to the yard after each job was completed. He accepted that installers had to work exclusively for Protectacoat. He accepted that one installer had been dismissed for doing work for someone else.
- The judge was of the view that the company dictated not only which jobs Mr Szilagyi was to do but also how they were to be done. For example, when Mr Szilagyi wanted to use scaffolding for a particular job and refused to do it from ladders, he was dismissed. If this had been a genuinely independent partnership, it would have been for the partnership to decide whether to use scaffolding and it would be for them to provide it. That was not the case.
- The judge also mentioned (apparently as one of the factors he was taking into account when deciding that the agreement for services was a sham) his view that the paperwork which Mr Szilagyi had signed (at Mr Squires' request) to say he had been given health and safety induction training was misleading. Mr Foxwell submitted that that factor was quite irrelevant to the question of whether Mr Szilagyi was an employee or an independent contractor. The need to give health and safety training was entirely consistent with either relationship. I agree and, to the extent that the judge took that factor into account in deciding that the agreement for services was a sham, he took an irrelevant matter into account. However, as the EAT noted in its judgment, this factor was only one of many.
- In response to Mr Foxwell's submission that the judge had been wrong to hold that the arrangements were a sham, the EAT held that the judge had had adequate reasons for so holding and had not misdirected himself.
- In this court Mr Foxwell made three main submissions. First, he submitted that, if Mr Szilagyi was a partner in a business which contracted with Protectacoat, he could not be an employee of that company. In Descombes, the ET had found that the partnership agreements, which were in the same form as in the present case, gave rise to genuine partnerships. But nonetheless, the ET had held that the men were employees of Protectacoat. The EAT said that that was wrong. If the men were in partnership they could not be employees. Speaking for myself, I would have thought that that was right and that if there is a genuine partnership which contracts with a company, the members of the partnership could not be employees. However, one of the questions in this case is whether the partnership agreements were genuine.
- Mr Foxwell submitted that Mr Szilagyi signed partnership agreements with three assistants as well as the services agreement with Protectacoat. There was no evidence from any of the partner/assistants that they regarded the partnerships as a sham. Therefore, the judge should have held that the partnership agreements were genuine and Mr Szilagyi could not be an employee.
- Mr Foxwell's second contention was that the judge had applied the wrong test in considering whether the agreements were shams. He submitted that, where parties have freely entered into a written agreement, it is not for the court to rewrite it merely because the subsequent conduct of the parties was not in accordance with the agreement. That is what the employment judge had done in this case. An agreement can only be 'torn up' or rewritten if it is a sham in the sense explained by Diplock LJ (as he then was) in Snook v London & West Riding Investments Limited  23 QB 786 at page 802 where he said:
".. it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (Yorkshire Railway Wagon Co v McClure and Stoneleigh Finance Ltd v Phillips) that for acts or documents to be a 'sham' with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."
- Mr Foxwell submitted that, in the present case, for there to be a valid holding that the documents were a sham, it had to be shown that all the parties to the impugned arrangements had a common intention that the documents were not to create the rights and obligations they purported to create. Here, there was no evidence from the assistants that they regarded it as such. Nor, he submitted, was there any such evidence from Mrs O'Regan as to the services agreement. To the contrary, her evidence was that Protectacoat had a genuine intention to contract with the partnership. Therefore there was no proper evidential basis for holding that either the partnership or the services agreements were shams. Mr Foxwell cited authority from the EAT and Court of Appeal which, he submitted, supported his contention.
- Finally, Mr Foxwell submitted that the ET's reasons had been inadequate.
- As a litigant in person, Mr Szilagyi was not able to contribute to the debate arising from Mr Foxwell's arguments. All he wanted to say was that ET had been right; the written agreements did not tally with reality. Then he asked a rhetorical question: 'If I had been careless while I was working at someone's house so that someone was injured, whose insurance would have paid out?' He said that he did not carry insurance against his own negligence and it was clear from the contract that Protectacoat had not required him to do so. Mr Foxwell acknowledged that, in a contract such as Protectacoat alleged this to be, one would expect to see Protectacoat place the obligation to insure upon the partnership. This was, in effect, another factor which might have been taken into account by the judge in holding that Mr Szilagyi was not an independent contractor. However, it was not considered because it was not raised at the hearing.
- The main thrust of Mr Foxwell's first submission was that it was not open to the judge to hold that the partnership agreement was a sham without hearing from the partners. I would reject that argument for the same reason as led to its rejection in the EAT. There cannot be an absolute requirement for the evidence of any particular person to be heard, provided there is evidence from somewhere which is sufficient to prove the point.
- However, it seems to me that the real questions in respect of the partnership agreements are whether the employment judge applied the correct test and whether there was sufficient evidence from any source to support his conclusion that those agreements were shams. It is necessary first to define the correct test. The test for a sham must be sensitive to context. The discussion which follows will be in the context of the question whether an agreement which purports to be a contract for services is a sham and the relationship between the parties is in truth that of employer and employee. However, in the present case, the test will have to be applied to the partnership agreements as well as the services agreement.
- Mr Foxwell submitted that the test of whether a written contract is a sham is found in Lord Diplock's definition in Snook set out above. However, that was a hire purchase case and the issue was not whether the written agreement was a sham (it clearly was) but whether the rights which the finance company appeared to have under the (standard form) written agreement were lost because the hirer and a broker (acting as agent for the finance company) had completed the form with fictitious information but presented it to the finance company as genuine. Thus, although it provides a definition, the case of Snook is not of uniform assistance is determining whether an agreement is in fact a sham.
- In an employment context, the question of whether a written agreement was a sham was considered by the Court of Appeal in Consistent Group Ltd v Kalwak and others  EWCA 430;  IRLR 505. There, a group of Polish work people (the claimants) had been taken on by an agency (Consistent) and contracted out to work for a food processing company. The written agreement signed by Consistent and each claimant stated that the claimant was not Consistent's employee. It said that there was no obligation on Consistent to provide work; nor was any obligation on the claimant to accept any particular work assignment. Where an assignment had been accepted, the claimant had to perform the services himself or, if he could not, he had to ensure that the services were performed by a suitable substitute. A dispute arose and the claimants commenced proceedings alleging that they were Consistent's employees.
- The ET held that the agreement was a sham and the claimants were Consistent's employees. On appeal, the EAT (Elias J, President) upheld the decision and also held that the ET's findings of fact and reasons were adequate. In the course of his judgment, Elias J (as he then was) considered Lord Diplock's definition of a sham in Snook and also examined Peter Gibson LJ's judgment in Express & Echo Publications Ltd v Tanton  IRLR 367.
- In Tanton there was a dispute as to whether the claimant was an employee or an independent contractor. It centred upon whether there was an obligation personally to perform the work. An express term in the written agreement said that there was not; a substitute could be provided. The ET held that that term was a sham because, in practice, the employee had always performed the work personally. The Court of Appeal held that the ET had applied the wrong test. Peter Gibson LJ said that the ET should have asked itself what were the legal obligations which bound the parties, rather than focusing on how the contract was actually performed. He also said:
"Of course, it is important that the industrial tribunal should be alert in this area of the law to look at the reality of any obligations. If the obligation is a sham, it will want to say so"
- In Consistent, Elias J interpreted and applied the principle expounded by Peter Gibson LJ in Tanton by saying:
"…If the reality of the situation is that no one seriously expects that a worker will seek to provide a substitute or refuse the work offered, the fact that the contract expressly provides for these unrealistic possibilities will not alter the true nature of the relationship. But if these clauses genuinely reflect what can realistically be expected to occur, the fact that the rights conferred have not in fact been exercised will not render the right meaningless."
- As I have said, Elias J went on to hold that the ET had not misdirected itself and upheld the decision that the substitution clause was a sham. In the Court of Appeal, Rimer LJ scrutinised Elias J's judgment and was critical of the reasoning by which he had upheld the ET's decision. The Court allowed Consistent's appeal, on the ground that the ET's decision was inadequately reasoned and remitted the case for rehearing. However, it does not appear to me that the Court was critical of Elias J's exposition of the test, set out above, which he had derived from Tanton. Indeed, it seems to me that Rimer LJ approved the test as enunciated by Elias J as being in compliance with Lord Diplock's definition of a sham.
- Rimer LJ summarised the position in his own words at paragraph 40 saying:
"It is not the function of the court or an employment tribunal to recast the parties' bargain. If a term solemnly agreed in writing is to be rejected in favour of a different one, that can only be done by a clear finding that the real agreement was to that different effect and the term in the contract was included by them so as to present a misleadingly different impression.
- The kernel of all these dicta is that the court or tribunal has to consider whether or not the words of the written contract represent the true intentions or expectations of the parties, not only at the inception of the contract but, if appropriate, as time goes by.
- With great respect to Rimer LJ, it appears to me that Elias J's way of putting the question may be of greater assistance to employment judges when deciding whether a services agreement is a sham – a question which appears to arise with increasing frequency. To speak of terms 'solemnly agreed in writing' is more redolent of a commercial agreement reached between two parties of equal bargaining power than the kind of 'take it or leave it' situation which can prevail in some agreements in the field of work.
- Similarly, Rimer LJ speaks of terms being 'included by the parties so as to give a misleadingly different impression'. In a commercial agreement, usually both parties will be in a position to require that the terms should reflect the nature of the agreement. They may agree on a form of words which does not represent their true intentions. However, in the field of work, it is sometimes one party and only one which dictates the terms of the 'agreement'. The reality may well be that the principal/employer dictates what the written agreement will say and the contractor/employee must take it or leave it.
- Further, although Rimer LJ stressed that there must be a finding that some words in the contract were included to create a misleadingly different impression from the true effect of the agreement, he did not say that there had to be an intention to deceive a third party. In the context of a bipartite agreement of the kind under consideration here, it is sufficient if the court concludes that the agreement as written did not reflect the true intention (or expectations) of the parties. I do not understand Rimer LJ to have said that it is necessary to identify anyone who it was intended to deceive.
- I share the view expressed by Elias J in Consistent when he said:
"The concern to which tribunals must be alive is that armies of lawyers will simply place substitution clauses or clauses denying any obligation to accept or provide work in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship."
- It seems to me that Peter Gibson LJ, Rimer LJ and Elias J have, between them, enunciated the principle or test for determining whether a written contract is a sham. The question is always what the true legal relationship is between the parties. If there is a contractual document, that is ordinarily where the answer is to be found. But, if it is asserted by either party, or in some cases by a third party, that the document does not represent or describe the true relationship, the court or tribunal has to decide what the true relationship is.
- Tribunals will be well aware that contracts may be partly written and partly oral and that they can also be constituted or evidenced by conduct. While a document which can be shown to be a sham designed to deceive others will be wholly disregarded in deciding what is the true relationship between the parties, it is not only in such a case that its contents cease to be definitive. If the evidence establishes that the true relationship was, and was intended to be, different from what is described in the document, then it is that relationship and not the document or the document alone which defines the contract.
- In a case involving a written contract, the tribunal will ordinarily regard the documents as the starting point and will ask itself what legal rights and obligations the written agreement creates. But it may then have to ask whether the parties ever realistically intended or envisaged that its terms, particularly the essential terms, would be carried out as written. By the essential terms, I mean those terms which are central to the nature of the relationship, namely mutuality of obligation: see Carmichael v National Power  ICR 1226 and the obligation of personal performance of the work.
- Applying the principle to the present case, it seems to me that the employment judge was entitled to conclude that both the partnership and the services agreements were shams in that they did not describe or represent the true intentions and expectations of the parties. It is true that the employment judge began by doing what Peter Gibson LJ had said was not sufficient. He listed the factors which demonstrated that the performance of the services contract was different from that envisaged by the written agreement. But in my view, he went much further than that. It is necessary to read the judgment as a whole to understand the judge's conclusions and the factors underpinning them.
- It appears to me that the judge was of the view that Protectacoat wanted to enjoy the advantages of being able to control its installers without the disadvantages of being an employer. It wanted to tell its customers that its installers were employees. It would want to do that in order to assure customers that it had full control over the installation process both as to when it took place and the standard to which it was performed. Thus Protectacoat's intention was to have installation teams that it could rely on for attendance and could control as to the manner in which the work was done - in other words could control as employees. That is what Protectacoat and Mr Szialgyi intended and envisaged would happen and it is what actually happened. But, on Protectacoat's own evidence, it had taken advice as to the contractual format it should use to avoid a finding that its installers were employees. Protectacoat wanted the ha'penny of treating their installers as employees when it came to attendance and control and also wanted the bun of not having to give them the rights they would enjoy as employees, such as their rights under the Employment Rights Act 996.
- The contractual format which Protectacoat had devised included an arrangement whereby members of the installation teams would be required to sign partnership agreements, so that they could not be regarded as employees. Were the agreements between Mr Szilagyi and his assistants genuine partnership agreements? It is well established that the fact that a document describes a relationship as a partnership is not the test for the existence of a partnership. In Weiner v Harris  1KB 285, Cozen Hardy MR said , at page 290:
"Two parties enter into a transaction and say 'It is hereby declared there is no partnership between us'. The Court pays no regard to that. The Court looks at the transaction and says 'Is this, in point of law, really a partnership?' It is not in the least conclusive that the parties have used a term or language intended to indicate that that the transaction is not that which in law it is."
- Street v Mountford  1AC 809 at 821 C contains dicta to similar effect in the context of a dispute about whether a contractual document created a licence or a tenancy. It was said that the parties cannot turn a tenancy into a licence merely by calling it one. The same must be true of a partnership; one cannot create a partnership by signing a document which calls itself a partnership agreement. And the same must also be true of a contract for the performance of work in return for pay. The court must look at the substance not the label.
- The term 'partnership' is defined in section 1(1) of the Partnership Act 1890. It provides as follows:
"Partnership is the relation which subsists between persons carrying on a business in common with a view to profit."
- It seems to me clear that there was no real partnership between Mr Szilagyi and his assistants. They had no business in common. They had no common assets. They did not have a bank account. Their remuneration was paid directly into their individual bank accounts. If this had been a genuine partnership, payment would have been made directly to the partnership business account. It would have been of no concern to Protectacoat in what proportions any profits were to be shared; indeed that information would normally be confidential to the partners. In my view, it is clear on the evidence that these men signed 'partnership agreements' not with the intention of creating any business relationship between them but only for the purpose of satisfying a requirement of Protectacoat before they would be given any work. The 'partnership agreements' were entered into in order to create an illusion of partnership which would comply with the scheme which Protectacoat believed would avoid creating an employment relationship. They were shams.
- As for the services agreement, it is true to say that, when considering the contractual relationship between Mr Szilagyi and Protectacoat, the employment judge did not examine the essential terms of the agreement in as much detail as one might have wished. Some of the factors he mentioned (such as whether any hire was charged for the van and who paid for the petrol) were not central to the nature of the relationship. I am not suggesting that those factors were irrelevant; they were not in that they were part of the overall picture.
- It is unfortunate that the judge did not specifically mention clause 5, headed 'Mutual Obligations' which was to the effect that the company would be under no obligation to provide the partnership with work. He made no express finding as to the parties' intentions or expectations as to the provision of work. However, he did mention clause 10, headed 'Non Exclusivity' which provided that there was nothing in the agreement to prevent the partnership from providing services to others. He accepted that another installer had been 'dismissed' for working for someone else, saying that 'again all is not as it appears to be on the document'. It is apparent that the judge considered that that was the usual position as between Protectacoat and its installers, including Mr Szilagyi. There are other aspects of the evidence which clearly show that Protectacoat expected Mr Szilagyi to work for them exclusively. So it is clear that the important provision in Clause 10 did not reflect the intentions or expectations of the parties. Although it said that Mr Szilagyi could work for others while under a retainer with Protectacoat, in fact it was always the intention and expectation of the parties that Mr Szilagyi would work for Protectacoat exclusively.
- I have considered whether the employment judge's decision is fatally undermined by his failure to mention clause 5 and expressly to consider the real intentions of the parties as to the provision of work by Protectacoat. I have come to the conclusion that it is not. I quote three extracts from the judge's account of Mr Szilagyi's evidence.
"4.19 …The claimant worked every day. On finishing one job the claimant would return to the yard to be given a job the next day. The requirement was that the claimant would report to the yard every morning. The company insisted on this and would never allow the claimant to go straight to a job.
4.21 … the claimant was told "if you don't fucking get down here to do the work you wont get any more work" and Mr Squires further informed the claimant that if he did not do the job he was fired.
4.22 …the agreement purports to say that the claimant could work only if he wished to Mr Squires informed the claimant that the claimant had to work until 24 December 2006. "
- While it may be said that those passages primarily support the conclusion that the parties intended that Mr Szilagyi would devote the whole of his time to his work for Protectacoat, they do also imply a mutuality of obligation. The agreement was described as a retainer which suggests that both parties intended that it would be a continuing relationship. If under that retainer, the 'worker' was expected (by both sides) to devote his full attention to the work provider and not to work for anyone else, it is hard to imagine that the parties intended that it would be open to the employer to decide not to give the worker work if any was available. The situation that work might not always be available and, if it was not, there would be no pay is not inconsistent with the relationship of employer and employee. In my judgment, although on its face clause 5 excused Protectacoat from providing work, the expectation and intention of the parties was that, if work was available, Mr Szilagyi would be given some.
- In my judgment, although the employment judge did not articulate his reasoning as clearly as one might wish, he did make the necessary findings of fact to support the conclusion that neither the partnership agreements nor the services agreement represented the true intentions or expectations of the parties.
- The employment judge also considered aspects of the control exercised by Protectacoat and, in my judgment, the degree of control exercised was entirely consistent with the relationship of employer and employee. I did not understand Mr Foxwell to argue to the contrary. Thus, I would uphold the employment judge's conclusion by holding that, when the true intentions of the parties were understood, it was clear that Mr Szilagyi was an employee of Protectacoat.
- Accordingly, I would dismiss this appeal.
Lord Justice Keene : I agree.
Lord Justice Sedley
- For the reasons given by Lady Justice Smith I too agree that this appeal fails.
- So far as concerns the refusal of an adjournment by the employment judge, it has not been shown by Mr Foxwell that an adjournment ought in fairness to have been granted. I put it this way because, like Smith LJ, I do not consider that the correct appellate approach to the grant or refusal of an adjournment is to regard it as a matter of discretion, able to be impugned only on classic review grounds. As the Divisional Court held in R. v. South West London Supplementary Benefits Appeal Tribunal, ex p Bullen. (May 7, 1976), per Lord Widgery CJ: "I do not think it necessary strictly to show that no equivalent tribunal properly instructed would have reached this decision. I think it suffices if this Court can say with perfect confidence and conviction that this decision not to adjourn was wrong." I find it impossible to say that the chairman, in the situation before him, was wrong not to adjourn the hearing.
- So far as concerns the substantive issue, it seems to me that, in the field of employment at least, it is more helpful and relevant, in the light of the principles which Smith LJ has derived from the decided cases, to ask in a case like this not whether the written agreement is a sham but simply what the true legal relationship is. Although there will be in many cases (as there was in this one) an intention to conceal or misrepresent the actual relationship, there is no logical reason why this should be a universal requirement. The courts not uncommonly have to decide whether the entirety of a contractual relationship is constituted or evidenced by a document which one party says is definitive, without any need to decide whether that party has studied to deceive or is simply mistaken. I would wish to keep this question open for other cases in which the facts found are not as sharp as those found here.
- The other question I would wish to keep open is whether the genuineness of the partnership agreement matters. Here it has been found, tenably, to have been a mere device to give colour to the purported contract for services and so to be part of a sham. But I have some difficulty in seeing why it should have made a difference if, for example, Mr Szilagyi and his mate had chosen to form a partnership before being taken on by Protectacoat. Protectacoat would still, in law, have been taking on two men, not a corporate entity, on terms and in circumstances which amounted, for exactly the same reasons as we have upheld in relation to Mr Szilagyi, to contracts of employment. The fact that in the present case the partnership was an instrument devised by Protectacoat for its own purposes, while it does nothing to help Protectacoat, does not seem to me to be a necessary element of Mr Szilagyi's case.
Note 1 (1882) 21 Ch.D. 309, C.A. [Back]
Note 2  2 Q.B. 537. [Back]
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