England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
LONDON MERCANTILE COURT
HIS HONOUR JUDGE MACKIE QC (Sitting in the London Mercantile Court)

		Royal Courts of Justice Strand, London, WC2A 2LL
		23 December 2016

Lord Justice Longmore:

Introduction

1. The context in which this appeal arises is the sad case of Mr Rodney Oliver who was employed as an engineering student apprentice between 1956 and 1961 in the course of which he was required to handle turbine generator equipment and fittings contaminated with asbestos. Over 40 years later, in August 2003 he was diagnosed with mesothelioma as a result of his exposure to that asbestos. He died two years later on 8^th August 2005. On 4^th August 2008 his widow made a claim against his 1961 employers Associated Electrical Industries Ltd ("AEI") and in due course obtained judgment for a basic sum of £250,000. The dry question of law for HHJ Mackie QC sitting in the London Mercantile Court in his last case and now, with the permission of Lewison LJ, for us is whether that liability can be passed down a contractual chain of agreements for the sale and purchase of AEI's turbine generator business.

Factual background

2. Mr Oliver's first employer from 1956-1960 was British Thompson Houston Ltd ("BTH") at Mill Road, Rugby. On 1^st January 1960 BTH changed its name to AEI (Rugby) Limited having on the previous day transferred its turbine generator business to its holding company AEI pursuant to a contract dated 31^st December 1959. Mr Oliver's apprenticeship was also transferred to AEI.
3. After Mr Oliver's apprenticeship with AEI came to an end in 1961, the General Electric Company Ltd ("GEC") acquired AEI in 1967. In 1968 GEC merged with the claimant The English Electric Co Ltd ("EEC").
4. On 1^st April 1970 AEI, as part of an internal reorganisation, sold its turbine business to EEC ("the 1970 agreement"). The only surviving evidence of this sale was recorded in a resolution of EEC's general purposes committee on 31^st March 1971 ("the 1971 resolution"). This document includes an indemnity provision which lies at the heart of this appeal because EEC claims it was by reason of this indemnity that it has become liable to AEI to indemnify it in respect of Mrs Oliver's claim.
5. On 21^st March 1989 EEC sold the turbine business to GEC Power Systems Ltd, which was the predecessor in title to the defendant and appellant Alstom UK ("Alstom"). This agreement also included an indemnity provision, but Alstom accepts that, if EEC is liable to indemnify AEI, then Alstom is liable to indemnify EEC in respect of Mrs Oliver's claim pursuant to the indemnity provision in that (1989) agreement.
6. Before these proceedings were instituted, EEC and Alstom had sensibly agreed they would each pay half of Mrs Oliver's claim without prejudice to the question of which of them was to be ultimately liable.
7. Since much will depend on the true interpretation of the 1971 resolution, it is sensible to set it out here:-

"THE ENGLISH ELECTRIC COMPANY LIMITED

Resolutions of the General Purposes Committee dated Wednesday 31^st March 1971.

Associated Electrical Industries Limited – Turbine Generator Business

1. The Committee ratified the purchase as at 1^st April 1970 subject to certain reservations as to trading and rights of the Turbine Generator business and goodwill carried on by Associated Electrical Industries Limited on the following terms:-

Plant machinery and other fixed

Assets, including the right to use

Letters Patent, trade marks and

registered designs at present used

in the said business, but excluding

land and buildings, at the net

written down book value as at

31^st March 1970. 2,604,457

Inventory at book value at 31^st

March 1970 6,150,728

Inter-company indebtedness 746,172

9,501,357

….

The Company assumed responsibility for the overdraft of Associated Electrical Industries Limited in respect of this business as at 31^st March 1970 amounting to £476,797 and Associated Electrical Industries Limited transferred to the Company the balance of its cash in hand relating to this business as at 31^st March 1970 amounting to £20,700. The resultant balance due by the company to Associated Electrical Industries Limited of £4,013,096 is for settlement in cash.

The Company agreed to collect the outstanding debts in respect of this business as at 1^st April 1970 amounting to £15,905,950 on behalf of Associated Electrical Industries Limited and to settle that company's outstanding trade indebtedness in respect of this business amounting to £10,126,223 on that date on behalf of Associated Electrical Industries Limited and to account to that company accordingly.

The Company subject to certain reservations taking the benefit of all outstanding and uncompleted contracts in respect of the above mentioned business agreed to assume the responsibilities therefor as at 1^st April 1970 and to indemnify Associated Electrical Industries Limited against any claims arising on completed and uncompleted contracts as at 1^st April 1970.

2. IT WAS RESOLVED

THAT English Electrical-AEI Turbine Generators Limited be appointed the purchasing agent for the Company in connection with its Turbine Generator business with effect from 1^st April 1971.

3. It was agreed to market the products and services of the Company's Turbine Generator business through its subsidiary English Electric-AEI Turbine Generators Limited with effect from 1^st April 1971 on such terms and conditions as English Electric-AEI Turbine Generators Limited sells to its customers. In consequence of this decision English Electric – AEI Turbine Generators Limited will take over for completion all contracts for the sale of Turbine Generator products and services outstanding at 1^st April 1971 on the terms and conditions attached thereto and will collect and pay over to the Company the debts outstanding in respect thereof."

This internal EEC document is then signed by 3 of its then directors including Lord Nelson of Stafford.

The judgment

8. The judge first addressed two of Alstom's arguments that are not now pursued: time bar and failure to show that Mr Oliver had worked in the turbine business. He decided both these points in favour of EEC and I need say no more about them.
9. He then turned to a third contention made by Alstom that the terms of the indemnity in the 1970 agreement had never been spelled out or approved and that the indemnity did not cover claims for historical injuries arising under contracts of employment but only applied to what Alstom called "trading contracts".
10. The judge held that it was not open to Alstom to say that the evidence about the indemnity was incomplete because its pleading had admitted and averred that the terms of the indemnity were as set out in the fourth paragraph of the first section of the 1971 resolution. This admission had never been withdrawn and the contention of Alstom was not therefore open to it. To the extent that reliance was placed on the words "certain reservations", whatever reservations there were, were reservations as to trading and rights of the turbine generator business not as to any other "completed or uncompleted" contracts.
11. The judge then moved on to the question whether the indemnity covered employment contracts. He considered that the correct starting point was that the indemnity was part of "an informal and internal reorganisation within a group". Against that background it was unlikely to be the intention of the parties to exclude any particular types of contract from the indemnity. He said (para 86):-

"In general usage the expression ["all outstanding and uncompleted contracts" in the first part of the clause] does not automatically conjure up a company's relationship with a workforce. On the other hand the employees all have contracts creating rights and liabilities upon the company. The expression adopted is very wide and excludes no category of contract."

He accordingly held that EEC was liable to AEI in respect of Mrs Oliver's claim and he rejected a further submission that the indemnity could not apply to claims in which it had been alleged or accepted that Mr Oliver's death was caused by his employer's negligence.

Grounds of Appeal

12. There were five grounds of appeal:-

1) the learned judge erred in concluding that the defendant was not entitled to contend that the full terms of the 1970 agreement were not in evidence and before the court;

2) the learned judge erred in concluding that the full terms of the 1970 agreement were in evidence and before the court;

3) the learned judge erred in concluding that the 1971 Resolution "put [the 1970 agreement] into writing";

4) the learned judge erred in concluding therefore that the EEC Committee Resolution was to be characterised and construed as a contractual document agreed between the contracting parties; and

5) the learned judge erred in concluding that, as a matter of construction, the 1970 agreement and/or the 1971 Resolution provided for an agreement by the respondent to indemnify AEI in respect of AEI's liability to Mr Oliver (and/or his estate) for asbestos exposure.

13. In his oral argument, Mr James Drake QC for Alstom sensibly concentrated on the fifth and last ground of appeal. He still maintained that, in spite of Alstom's pleading, he was entitled to contend that the full terms of the 1970 agreement were not before the court but it emerged that this contention was a platform for submitting that the "certain reservations" referred to in the fourth paragraph of the first section of the 1971 resolution were not before the court and that, therefore, EEC could not prove that they were liable to AEI under the terms of the indemnity in that resolution. The judge did not shut out that contention and dealt with it. The question is whether he dealt with it correctly, a matter that can best be considered in construing the terms of the indemnity.
14. Insofar as the grounds of appeal seek to suggest that there was no agreement to indemnify AEI about anything or insufficient evidence of any such agreement, I would reject any such suggestion. The 1971 resolution, in terms, ratifies EEC's 1970 purchase of AEI's turbine generator business. The fact that 46 years later there is no contemporaneous document setting out that internal purchase within the group is neither surprising nor legally significant.

Submissions on the construction of indemnity

15. I turn then to the question of the construction of the indemnity contained in the fourth paragraph of the first section of the 1971 resolution. Mr Drake submitted:-

1) the agreement of 31^st December 1959 made when AEI had acquired the BTH turbine business at Rugby specifically excluded contracts for personal service although it did contain a clause requiring BTH (referred to as AEI's subsidiary) to use its best endeavours to procure that all its employees would agree to transfer their contracts of service to AEI as from the date of sale;

2) the factual matrix of the 1970 agreement with EEC was no different from the factual matrix of the 1959 agreement with BTH since both were internal re-organisations within a group;

3) since the 1959 agreement had specifically excluded contracts of service from its provisions, the indemnity provision in the 1970 agreement could not have been intended to extend to contracts of service;

4) there was no evidence that in 1970 any of AEI's then labour force was transferred to EEC; the effect of the third of the resolutions in the 1971 resolution was that contracts for sales and servicing were to be completed by another company and EEC did not, therefore, need AEI's workforce to be transferred;

5) there was in 1970 considerable overcapacity in the electricity industry, which needed rationalisation and redundancies; for this reason also it was most unlikely that there would be any need for any transfer of employment contracts; against that background the indemnity provision of the 1970 agreement could not have been intended to apply to claims arising from AEI's contracts of employment with its workforce;

6) the whole tenor of the 1970 agreement related to the turbine generator business and taking the benefit (and assuming the burden) of outstanding and uncompleted contracts in respect of that business and its customers; when therefore EEC agreed to indemnify AEI "against any claims arising on completed and uncompleted contracts" the indemnity only related to the business contracts not contracts of service with AEI's employees;

7) the phraseology of "completed and uncompleted contracts" was not apt to describe contracts of service which may be "terminated" or "unrenewed"; one did not describe them as being "completed" let alone "uncompleted";

8) the judge allowed himself to be led astray by commercial considerations when Arnold v Britton [2015] UKSC 36: [2015] AC 1619 made it clear that such considerations could not be allowed to subvert the meaning of the words; and

9) since no one now knows (or can tell) what reservations were being referred to in the fourth paragraph of the resolution, they could easily have referred to employment contracts or something else relevant to the enquiry.

16. Mr David Lewis QC for EEC supported the decision of the judge and submitted that, if anything, the 1959 agreement supported EEC's position because the fact that the parties to the 1970 agreement made no special provision for contracts of service meant that they were intended to be included in the phrase "completed and uncompleted contracts". To the extent that it was relevant, AEI's workforce were probably transferred to EEC since the third resolution only took effect a year after the 1970 agreement. He said that Mr Drake's "rationalisation" argument was a new point raised in this court for the first time which he was not equipped to meet, though he did point out that the 1989 agreement with Alstom showed that the 1970 business was still continuing both at Manchester, to which at any rate part of the Rugby business had been transferred, and at Rugby so that there would have been a need for the workforce to be transferred in 1970. There was no reason not to apply the indemnity to all contracts when no exceptions were made in the wording and it was clear that the reservations referred to could only be in relation to the business side of the transfer.

Factual background

17. It is not altogether easy to assess the factual background to an agreement made as long as 46 years ago. It was well before the enactment of the Transfer of Undertakings (Protection of Employment) Regulations first promulgated in 1981 ("TUPE") but sales of businesses would often not be effective if there was no attempt to transfer the employees as well. One way of doing this is shown by the 1959 agreement between BTH and AEI but I do not get any assistance from that agreement in construing the 1970 agreement. The judge appears to have thought (para 59) that it was uncommon for a transferor company to retain responsibility for employment contracts and drew on his own experience as a solicitor dealing with employment issues in the early 1970s representing companies in the Midlands similar to the parties to the contracts in the present case. I cannot lay claim to any such experience which, in any case, would probably vary from company to company. But I agree with the judge that the correct starting point is that of "an informal and internal organisation within a group" and that the natural inference from an inter-company transfer within a group of companies is that there would be an out and out transfer of the entire undertaking, unless the contrary was specified. The fact that pre-TUPE there might, by reason of the doctrine of privity of contract, be legal impediments to such a transfer as exemplified by Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014 would not mean that transfer of employment contracts would not be the aim of the transaction and one of the incidents of such transfer would normally be the transfer of liabilities arising pursuant to such employment. There was, of course, no question of Mr Oliver himself transferring his employment to EEC in 1970 because he had already stopped working for AEI in 1961 but, if there was a liability arising in respect of his contract, such liability would ordinarily be part of the transfer of the business. The fact that Mr Oliver (or his widow in the event of his death) would have to sue AEI (as the company to whom Mr Oliver had been apprenticed) does not in any way detract from the contractual consequence of the sale of the business.
18. All this must, however, always be subject to the words of the agreement, which must be the first port of call for any one charged with the question of construction.
19. That this is so emerges from the first and third of the seven important factors emphasised by Lord Neuberger in paras 17 and 19 of Arnold v Britton:-

"First … the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed …

The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from that natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made."

20. I turn then to the wording.

The wording

21. The indemnity is economically expressed to be

"against any claim arising on completed and uncompleted contracts as at 1^st April 1970."

It only recognises two categories of contracts, "completed" and "uncompleted". The natural and ordinary meaning of this phrase is "all contracts to which the transferor is or has been a party". It is only because it can be said (a) that the phrase "completed and uncompleted" takes its colour from the earlier phrase in the same clause "outstanding and uncompleted contracts" and (b) that that phrase must refer to outstanding and uncompleted contracts with customers, that an argument that the relevant phrase must refer only to contracts with customers begins to take shape. Of course the phrase does refer to and include contracts with customers but there is no reason why it should not also refer to contracts of employment. In my judgment it does so refer and the parties must have intended it to so refer. Otherwise rights and responsibilities would not have been fully transferred but part of such rights and responsibilities would stay with the transferor and the rest be transferred to the transferee – an untidy and unlikely result as between companies in the same group.

22. It is no doubt a little unusual to refer to a contract of employment being "completed" or "uncompleted" but it is by no means impossible or unintelligible. On any view Mr Oliver's contract was completed when his apprenticeship/employment finished in 1961. If he had still been employed in 1970 his employment could be said to have been uncompleted. Either way, liabilities incurred up to that date are transferred. Mr Lewis was able appositely to cite section 1(2) of the Apprenticeship, Skills, Children and Learning Act 2009 which uses the expression "A person completes an English apprenticeship ….".
23. This is, in my judgment, the beginning and end of the matter; speculation (and it is speculation) whether the labour force was in fact transferred in 1970 does not help and I agree with Mr Lewis that the new point of rationalisation of workforces in the electricity industry in 1970 has been raised too late for him to deal with at this stage and should not, therefore, be taken into account. Any argument, moreover, that the indemnity should not apply to employment contracts because liability under such contracts will only arise because the employer was negligent is misplaced since negligence is the most common reason why employers are liable to their employees.

"Subject to certain reservations"

24. What then of this phrase which occurs at the beginning of the fourth paragraph of part 1 of the 1971 resolution? No one can now trace what those reservations were.
25. There was some debate about onus of proof and where the responsibilities lay for the absence of this documentary evidence. The position seems to be that all relevant documentation passed from AEI to EEC on the transfer in 1970 and then from EEC to Alstom on the transfer in 1989. Alstom then passed the documentation to a yet further transferee, Converteam, as part of a further transfer of the turbine generator business to that company. For whatever reason, Alstom does not seek an indemnity from Converteam. Either side could have required Converteam to attend court with any documents relevant to the 1970 agreement but neither side has done so. I would, for my part, be reluctant to say in Alstom's favour that the claim must fail purely because the "reservations" might be relevant when it is Alstom who parted with documentation which might tell the parties and the court what the reservations were, see Malhotra v Dhawan [1997] 8 Med LR 319, 322 per Morritt LJ.
26. As it is, it is unnecessary to decide the case on such a formalistic basis because it is, to my mind, tolerably clear that the phrase "subject to certain reservations" refers back to the first paragraph of the first part of the resolution in which EEC ratifies the purchase

"subject to certain reservations as to trading and rights of the Turbine Generator business and goodwill carried on by AEI."

These are reservations as to trading and rights of the business and goodwill and can have no reference, therefore, to contracts of employment. The reservations are likely, moreover, to be those of the transferor (or grantor) of the business and there would be no reason or sense in the transferor wishing to make reservations (against its own interest) in relation to any contracts of employment. In any event the reservations appear to relate to "outstanding and uncompleted contracts" in the words of the first half of the fourth paragraph; on no view was Mr Oliver's contract outstanding or uncompleted. I am therefore satisfied that there cannot have been anything of relevance to the current dispute in any reservations that there were in the 1970 agreement.

Conclusion

27. I therefore agree with the judge in all relevant respects and would dismiss this appeal.

Lord Justice Beatson:

28. I agree.

Lord Justice Sales:

29. I also agree.