When a business transfers from one company to another, does liability for personal injuries pass to the new employeeNULL Joe McManus, a partner at Hextall Erskine, looks at a recent High Court decision which highlights the uncertainty in this area.

Decisions involving the transfer of undertakings are of more than academic interest. Each year many thousands of employees are transferred from one business to another.

The recent case Bernardone v Pall Mall Services Group and Others (July 2, 1999) has highlighted the uncertain legal position that exists where a transfer of undertakings takes place.

To date most insurers have been resolving claims from employees where a "TUPE" (Transfer of Undertakings (Protection of Employment) Regulations 1981 transfer has taken place, on a pragmatic basis with the insurer on risk at the time of the claim dealing with it. As a consequence, until this year, there has been no High Court decision regarding this issue.

The Regulations
Regulation 5(2) of the Transfer of Undertakings (Protection of Employment) Regulations 1981 states inter alia:

On the completion of a relevant transfer: 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 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.

Employer's Liability (EL) insurance in the UK is written on an occurrence basis.

If tortious liabilities are transferred the result will be that where an injured employee has an accident and subsequently the business in which the injured employee is transferred then the transferee will be liable for the accident. However, on an occurrence basis, it will be the transferor who will be insured for the accident.

Case law
There have been differing court judgements in this area.

In the case of Cramer v Watts, heard before His Honour Judge Nelligan on December 31, 1997, at Bristol County Court, the Judge concluded that tortious liability did not transfer. Recorder Polawk, sitting in Romford County Court the same year in Taylor v ServiceTeam and London Borough of Waltham Forest, reached the opposite view.

The first relevant High Court is the case of Martin v Lancashire County Council (unreported), decided by His Honour Judge Fawcus sitting as a Deputy High Court Judge in Manchester District Registry on February 11, 1999.

This was a preliminary issue hearing to determine whether the defendant's pre-existing liabilities transferred to the claimant's new employers. The new employers were not represented at the hearing.

In his judgement, Judge Fawcus paid close attention to the introduction of the Acquired Rights Directive (which the TUPE regulations were drawn up to implement) which states that the directive was designed to safeguard the employee's rights in the event of a transfer of an undertaking.

The defendant (the transferor in this situation) submitted that there had been a transfer of liability and therefore they should not be liable to the claimant. The claimant submitted that if there was a transfer, many claimants could be prejudiced with transferees having no EL insurance cover prior to the transfer.

The effect of this would be to defeat the intention of the Acquired Rights Directive.

In his review of the authorities Judge Fawcus referred to the House of Lords decision in Litster v Forth Dry Dock Co. 1990 IAC .546.

This did not deal directly with the transfer of claims in tort but did involve a review of the Acquired Rights Directive and the TUPE regulations.

Judge Fawcus quoted Lord Templeman when he said: "The courts of the UK are under a duty to follow the practice of the European Court of Justice by giving a purposive co-instruction to directives and to regulations issued for the purposes of complying with directives."

He also noted Lord Oliver's comments: "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 have elected to use."

In his Lordship's judgement, the purpose of the Acquired Rights Directive was to safeguard employee rights on transfer.

He accepted the claimants submission that there was real prejudice in the context of insurance and also with regard to limitation and concluded that a transfer of tortious liability had not taken place.

The court in Martin took comfort from the words of the House of Lords in Litster and concluded that the court was entitled to apply a purposive interpretation of the regulations.

The court in Martin was not dealing with a case where both the transferor and the transferee were represented.

The arguments put by the claimant to the court focused on the potential prejudice to the claimant if a transfer took place.

One wonders whether his Lordship would have reached the same decision had he been faced with a transferee who was represented at the preliminary hearing and who was capable of meeting a judgment for damages.

The situation in Bernardone was subtly different.

At the preliminary hearing not only were the transferor and transferee represented but also the insurers of the transferor had joined as a Part 20 defendant and were represented at the hearing.

Unfortunately, the parties in Bernardone were unaware of the decision in Martin and Mr.Justice Blofeld did not consider it.

The facts were that the claimant, a catering assistant at St Ann's Hospital in London, was injured in an accident at work on December 18, 1996.

At the time of the accident the first defendants, (the transferor), employed her. However, on March 31, 1998 the business in which she worked was transferred to the second defendants (the transferee).

As a consequence of the transferor's refusal to confirm that it was its responsibility to deal with the claimant's action, the transferor's insurer was joined to the action as a Part 20 defendant.

The preliminary issue came before Mr. Justice Blofeld on July 1 and he was asked to decide two questions:

- Whether the transferee had become liable for the acts and omissions of the transferor as a consequence of the TUPE regulations 1981?

- Whether the policy of liability insurance taken out by the transferor was by virtue of the TUPE regulations deemed to have been entered into by the transferee?

The claimant and the transferee submitted that the duty to take reasonable care for the safety of the claimant did not arise out of a contract of employment but as a consequence of the common law.

Mr Justice Blofeld did not accept this. He also dismissed the submission that problems may arise when an injured claimant is transferred but a negligent employee is not.

The Judge took the view that the crucial issue was the transfer of the injured claimant and it was this that brought about the transfer of liability.

While one cannot disagree with his Lordship's opinion in the context of this case (there was no allegation of another employee being negligent) it could, in fact, very well lead to many problems and considerable litigation.

If a transferee becomes liable to an injured claimant who was injured as a consequence of the transferor's negligent employee, undoubtedly the transferee's insurers may seek to make a recovery from the transferor for their employee's negligence.

Mr. Justice Blofeld, in concluding that tortious liability did transfer, paid close attention to Regulation 5(4) which states:

"Paragraph 2 above shall not transfer or otherwise affect the liability of any person to be prosecuted for, convicted of and sentenced for any offence."

While commenting that the section may be there to simply make matters crystal clear, Mr. Justice Blofeld felt that they might also be an indication that the words set out in Regulation 5(2) "all rights, powers, duties and liabilities under or in connection with any such contract" are to be interpreted widely.

In dismissing the claimant and transferee arguments that no transfer took place, Mr. Justice Blofeld approved the judgement of Recorder Polawk in the Taylor case.

Right to an indemnity
The transferor insurers submitted that it would not be right to transfer to the transferee a right enjoyed by the transferor under a contract with a third party. If the legislators wished to include contracts with a third party there would have been some appropriate reference to this in the regulations.

His Lordship rejected this submission, stating that there was an implied term that each individual employee would be protected by an appropriate insurance policy in accordance with the Employer's Liability (Compulsory Insurance) Act 1969.

He concluded the right to an indemnity was included within the words of Regulation 5(2)(a).

In reaching his decision Mr. Justice Blofeld endorsed the pragmatic view adopted by many insurers to date. The decision does give rise to some interesting issues.

A transferor's insurers may wish to consider whether liability can be avoided by making a policy personal to their insured.

It remains a moot point as to whether the courts would be prepared to accept this as the effect could be to deprive employees from the safeguard of an employer's insurance policy.

The decision in Bernardone could result in insurers being thrust into an uneasy relationship with companies with whom they have no contractual tie.

With EL policies in particular, insurers in the past been reluctant even to consider whether they might be able to avoid policy cover in view of the compulsory nature of EL insurance.

One wonders whether insurance companies may be more willing to consider policy breaches which may allow them to avoid cover.

The future
The conflicting decisions in Martin and Bernardone will create uncertainty.

For insurers the position has not greatly changed, as it remains the transferor's insurers who will have to deal with claims.

For claimants the decision in Bernardone does create confusion as to the correct defendant to sue. The Bernardone decision has been taken to the Court of Appeal.

- Joe McManus is a partner at Hextall Erskine and represented the successful second defendants in Bernardone.