England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONER

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th January 2007

Mr Justice Pumfrey :

1. Hudson Contract Services Limited ("Hudson") appeals from the decision of the Special Commissioner dated 23^rd August 2005 whereby he determined that Hudson was not entitled to a Construction Industry Scheme Certificate under s.561 of the Income and Corporation Taxes Act 1988 ("ICTA").
2. This case is concerned with sub-contracting in the construction industry. Section 559 ICTA requires a contractor making a payment to a sub-contractor to deduct from that payment a sum equal to "the relevant percentage of so much of the payment as is not shown to represent the direct cost to any other person of materials". The deduction is paid to HM Revenue & Customs on account of the payee's ultimate tax liability. Sub-contractors are defined by s.560(1) in the following terms:

"(1) For the purposes of this Chapter a party to a contract relating to construction operations is a sub-contractor if, under the contract –

(a) he is under a duty to the contractor to carry out the operations, or to furnish his own labour (that is to say, in the case of a company, the labour of employees or officers of the company) or the labour of others in the carrying out of the operations or to arrange for the labour of others to be furnished in the carrying out of the operations; or

(b) he is answerable to the contractor for the carrying out of the operations by others, whether under a contract or under other arrangements made or to be made by him."

3. Provision is made in s.561 for exceptions from the obligation to deduct contained in s.559, where the payee holds a certificate under s.561. Hudson's clients will pay Hudson without deduction if Hudson is entitled to a certificate, with the result that Hudson will account to the Revenue in respect of all deductions it makes to the ultimate sub-contractors. The conditions required to be satisfied by companies seeking such a certificate are prescribed by s.565 and are complemented by the provisions of the Income Tax (Sub-contractors in the Construction Industry) Regulations 1993.
4. Hudson provides sub-contracted services from about 1,300 individuals in a year, to whom it makes about 30,000 payments. The position is set out in full in the agreed statement of facts and the Special Commissioner's findings, which I reproduce under paragraph 6 below.
5. The moving force behind Hudson is Mr David Jackson. The Special Commissioner found that Hudson's business turned upon Hudson stepping into the shoes of the client in accepting contractually everything that the client and the operative have negotiated expressly non-contractually. He said that one might doubt that anyone would wish to enter into such a contract if the construction industry scheme did not exist. But this was not avoidance of the scheme; it was Hudson being paid for taking responsibilities under the scheme that would otherwise fall on the client. Upon the detailed findings of fact to which I shall turn, the Special Commissioner determined the first objection in favour of Hudson. HMRC cross-appeal from that decision, and it is this determination which is plainly central to the question of Hudson's future conduct. Accordingly, Mr Nawbatt opened the cross-appeal first.
6. The material facts as found by the Special Commissioner are set out in paragraphs 4 and 7 of the Decision. It is necessary to set these out here at length, since the attack that is made upon the determination must necessarily depend upon the effect of these findings:

"4. There was an agreed statement of fact as follows:

The Appellant

(1) Hudson Contract Services began life as a partnership in May 1996. The Appellant Company, Hudson Contract Services Limited, was formed on 21^st March 1997 and acquired and continued with the partnership trade as from April 1997.

(2) At all material times:

(a) the Appellant carries on business in the United Kingdom;

(b) that business is, to a substantial extent, carried on by means of an account with a bank;

(c) that business is carried on with proper records having regard to the obligations specified in s 562(8)-(12) of the Taxes Act 1988;

(d) that business is carried on from proper premises and with proper equipment stock and other facilities;

(e) the Appellant has complied with the obligations imposed on it by the provisions of the Companies Act 1985 stipulated in s 565(6) of the Taxes Act 1988 in so far as they fell to be complied with at material times; and

(f) there is reason to expect that the Appellant will continue to comply with all such obligations mentioned in paragraphs (a) to (e) of this paragraph.

(3) The Board has at no time given a direction under section 561(6) which is referable to the Appellant.

(4) Substantially the entirety of the Appellant's Clients operate as building contractors. They operate, variously, as general builders, civil engineers, roofers, scaffolders, plant hirers, joinery contractors, house builders, tunnelling contractors, surfacing contractors and otherwise as building contractors. Substantially the majority of those Clients have entered into a contract with the Appellant the form of which is substantially the same as the Appellant-Client contract.

(5) The Appellant enters into written contracts with the Client and Operatives. There is no written contract entered into between the Client and the Operative.

(6) Operatives will approach the Clients directly. Any negotiation about the amount of payment, the nature of work to be undertaken and the timescale for completing that work will be negotiated between the Operative and the Client. The Appellant has no involvement in these arrangements or negotiations. Once completed and signed, the Client will send the standard form contract to the Appellant.

(7) The Appellant does not introduce the Operatives to their Clients nor does it have a pool or database of operatives.

(8) The Appellant does not warrant the suitability of the operative and is not responsible for remedying any defects in the operatives' performance.

(9) The Appellant has held a certificate issued under s 561 of the Taxes act 1988 by the statutory predecessor to the Respondents for substantially the entirety of the period since it was incorporated.

(10) On 25 February 2002, the General Commissioners found that an oral contract was formed between the Client and the operative before any involvement of the Appellant and that the Appellant did not supply the workers to the Client.

(11) Shortly after the decision of the General Commissioners, the Appellant modified the terms of its standard form contracts and required that all existing and new Clients and Operatives sign those new contracts.

The application

(12) The Appellant applied for a renewal of its certificate on 16 February 2005. By letter of 25 May 2005, that application was refused. By letter of 13 June 2005, the Appellant appealed against that refusal. By letter of 8 July 2005, the appeal was transferred to the Special Commissioners.

Agreed issues of law

(13) The central issue that arises for determination is whether s 562(2) is satisfied and, in particular, whether the Appellant's business "consists of or includes the ... the furnishing or arranging for the furnishing of labour in carrying out construction operations".

(14) Both sides agree that the burden of proof is on the Appellant to satisfy the Commissioners that its business satisfies the requirements of s 562(2).

(15) The only other issue is whether any breach of Regulation 7F of SI 743/93 is "minor and technical" within the meaning of section 565(4) and does not give rise to doubt future compliance.

(16) It is agreed that the Special Commissioners' jurisdiction in relation to these three issues is to decide the questions before it de novo on the evidence before it and that its jurisdiction is not merely supervisory.

…

7. It will be seen from the above that there is a substantial measure of agreement between the parties and I can concentrate of the issue between them. As a result of the evidence and from the documents I find the following further facts:

(1) Before 1997 Mr Jackson carried on a traditional agency. Since then he changed to being a contractor of hired-in labour. The basic features and intention of the business has remained consistent since 1997. There has been an Appellant-Operative contract and an Appellant-Client agreement the form of which has changed, the latest revision being in use from about June 2002 following the General Commissioners' case, in which they found that there was an oral contract between the Client and the Operatives. The Employment Tribunal also found that the Appellant provided a payroll facility in Sheldon v Hudson Contract Services Ltd and Hewlett Civil Engineering Ltd (Case No.2801174/04) in October 2004, which is after the revision of the contracts following the General Commissioners' case.

(2) The Appellant advertises its services to construction industry contractors by direct marketing as a business that facilitates self-employment status. In outline the Appellant's objective is that instead of the Client engaging the Operative as a labour-only sub-contractor as would normally happen, the Appellant is interposed between them so that the Client contracts with the Appellant and the Appellant contracts with the Operatives for which the Appellant charges £15 per week per Operative. At present it has about 112 Clients who engage about 1,300 Operatives through the Appellant. There is no difference in the tax result but the effect is that the Client is relieved from the administrative and legal burden of dealing with status enquiries and returns to the Revenue.

(3) A new Client will be sent a welcome pack consisting of a supply of contracts with Operatives, introduction letters to give to the Operatives, a sheet setting out the engagement process, software for submitting payment data.

(4) The introduction letters to Operatives states: "We have been appointed to contract and pay labour-only sub-contractors, as a 'third-party' business service." It states that "We are paid a fee by our clients, the construction company, for providing contract, audit & payroll services. The contract for your services is with us, not our client the construction company."

(5) The engagement process sheet states "At the point when work is offered, the Operative should be made completely aware of who Hudson are, what we do, how we operate and what our responsibilities are, before the work is accepted & commenced." It also states "The Operative should fill out and sign an original Hudson Contract completely, and supply a copy of his CIS card. The contract must record details of pay negotiations with the Operate, before work is commenced." Both of these happen in practice.

(6) The contract between the Appellant and the Client includes the following terms (with obvious errors corrected):

"1. The following are the terms and conditions pursuant to which [the Appellant] undertakes to contract with an individual ('the Operative') the labour of whom the Client shall require for use in the course of its business.

2. The services to be provided by [the Appellant] are that of acting as an engager of such workers ('the Operatives' or individually, 'Operative') as the Client may wish pursuant to either of the documents stated in clause 3 following.

3. If the Client wishes to engage [the Appellant's] services under clause 1 above, the Client shall further either to: …

(ii) clause 3 of the document entitled 'Contract for the future provision of services (self-employed) to [the Appellant] which is attached hereto ('the Self-Employed Contract')';

notify [the Appellant] of the rate of pay agreed between the Client and the Operative. That notification shall take place on a form that [the Appellant] shall supply to the Client.

4. The negotiation of remuneration is for the Client and the Operative. For the avoidance of doubt, the Client may agree remuneration that is not dependant on time input such as measured rates, lump sums for tasks completed, fixed time sums per job as well as hourly remuneration.

5. The Client undertakes to, in respect of each Operative notified to [the Appellant] explain to the Operative that he will not contract directly with the Client but will contract with [the Appellant].

…

14. The Client hereby undertakes to indemnify [the Appellant] against the cost of complying with payroll transactions undertaken by [the Appellant] inclusive of fee charges and VAT stated in accordance with payment instructions sent to [the Appellant] by the Client and referred to in clause 7. This obligation excludes any subsequent tax or tribunal status rulings provided that the Client rigidly applies [the Appellant's] current Terms of Business conditions and Operative contract."

(7) The contract between the Appellant and the Operative has space for filling in the following details: company hiring, site address, person to report to, start date, type of work, pay basis. It includes the following terms:

"1. This contract sets out the terms pursuant to which you (the "Operative") will provide your labour (the "Contract Work") to [the Appellant's] clients (the "Client") operating in the construction sector.

…

3. The terms upon which the Contract Work is to be effected by the Operative shall be negotiated directly between the Operative and the client. Upon the conclusion of these negotiations, the client will notify [the Appellant] in writing as to the rate of pay agreed between the Client and the Operative.

4. Upon receipt of that notification, [the Appellant] will step into the shoes of the client and will contract with the Operative upon the terms negotiated between the Client and the Operative. However, [the Appellant] and the Operative also agree to be bound by the additional obligations placed upon them by this Contract.

5. The Operative hereby acknowledges that his contract is with [the Appellant] and that, in respect of any engagement notified to [the Appellant] by the Client, the Operative has no contract with the Client....

6. The Operative hereby agrees:… (v) to be bound to [the Appellant] to satisfy each and every obligation which he has negotiated with the client….

7. [The Appellant] hereby agrees:… (iii) to abide by such other obligations [that is, other than making payments] as the Client my explicitly accept in negotiations as between the worker and the Client…."

(8) Mr Simpson of DNC Scaffolding Ltd, who has used the Appellant's services since 1997, said (and I accept) that before any work arrangements are made the scaffolder is told that he must complete and sign the contract with the Appellant and he explains that his contract is with the Appellant rather than DNC. Scaffolders coming to DNC today are told that they will not be given any work unless they sign the contract with the Appellant. Scaffolders may not fully understand the arrangement with the Appellant but at the end of the day the Operative's real concern is to be paid for his work and he does not really mind with whom his contract is. Scaffolders who were working before the General Commissioners' case probably do not realise that anything has changed; they are happy to sign whatever contracts are required by the Appellant, as Mr Parkin confirmed was the case for himself. Mr Simpson considers that the protection offered by the Appellant over such matters, as tax, employment law and the Working Time Directive, which are a real worry for companies in the construction industry, is good value for money. I infer that all these points are the same for other Clients.

(9) The Appellant-Client contract is different in many respects from a normal agency contract. In particular, the Appellant has little contact with the Operatives apart from a few telephone calls; is not provided in advance with information about the type or numbers of Operatives required by the Client; is under no obligation to find labour for the Client; is under no obligation to provide a substitute Operative for one who does not turn up (but the Operative is in breach of contract with the Appellant and the Appellant is in breach of contract with the Client); is under no obligation in advance to provide the Operative with work, but once the Appellant-Operative contract is entered into is obliged to provide the Appellant with the work specified in that contract; has no control over the commencement or termination of its contract with the Operative; has no control over the level of remuneration; is informed of the fact of the contract and the rate of pay after these are negotiated (and those terms become binding on the Appellant on receipt of written notification); is not informed of all the terms agreed between the Client and the Operative, for example, the time-scale for completion of the job, the detailed nature of the work, what equipment each will provide, whether the Operative may send a substitute, and what level of supervision the Operative will be subject to; will be unaware of any variations, except in relation to pay, agreed between the Operative and the Client."

7. The Special Commissioner put the question in this way in paragraph 8 of the Decision:

"The parties have agreed labour is being furnished to the Client pursuant to a contract. On the basis solely of the written contractual position the only possible contract for the furnishing of labour is the Appellant-Client contract."

He then proceeded to consider why it was said that that was not the position. Before him, as before me, Mr Nawbatt's submissions were based upon a contrast between the case advanced by Hudson now and the case advanced before the General Commissioners in 2002, when the issue was whether certain named individuals were to be treated as "Employed Earners" in respect of their engagements with Hudson during a certain period, so that Hudson was liable to pay primary and secondary Class 1 Contributions in respect of the earnings from these engagements. Before the Special Commissioner, as before me, Mr Nawbatt further submitted that Hudson was in truth merely a payroll facility, and that the only proper view the Special Commissioner could have taken on the question whether there existed a contractual relationship between the operatives and the clients under the new arrangements was that such a contractual relationship existed; and that the Special Commissioner had erred in his approach to the decision of the Court of Appeal in Dacas v. Brook Street Bureau [2004] IRLR 358 and in Muscat v. Cable & Wireless [2006] EWCA Civ 220.

8. The question which is to be decided is whether Hudson is carrying on a business which "consists of or includes … the furnishing or arranging for the furnishing of labour in carrying out construction operations" – see s.562(2)(a), applied by s.565(2) to companies.
9. The policy issues surrounding the construction industry scheme are not ones with which I am concerned. It is well known that the triangular relationship between client, operative and intermediate (to use a neutral term) is surrounded by difficult policy issues to which a classical legal analysis provides only part of the answer. That this is so is demonstrated by the dissenting judgment of Munby J in Dacas's case and by the unanimous decision of the Court of Appeal in Muscat's case. These are cases which are concerned with the question whether a contract of employment exists between (to use the terminology of the present case) the client and the operative. Now, while the subsistence of a contract of employment between the client and the operative will, I imagine, normally negative any possibility of a relevant contract of employment subsisting between the intermediate and the operative, the subsistence either of a contract for services or, obviously, no contract at all between operative and client will not necessarily negative a contract for services between the operative and the intermediate. Many of the employment cases are devoted to analysing the distinction between the contract of employment on the one hand and the contract for services on the other.
10. In employment agency cases where there subsists a contract between the intermediate and the operative, under which the operative agrees to provide services to the client, there will not normally be an express contract of any kind between the client and the operative. If such a contract is to be implied, it must be according to normal principles – chief among which will be what for short I can call necessity.
11. A classic employment agency relationship, in which there are just two express contracts, between operative and intermediate and between intermediate and client, will, in the normal case, provide the operative with none of the advantages of being employed by the client or by the intermediate under a contract of employment. There are, therefore, cases in which the facts have been scrutinised with great care by the Tribunal in order to satisfy itself that in truth there is no subsisting contract of employment. In order to answer the question that arises under s.560(1)(a), viz., is Hudson under a duty to its clients to furnish … the labour of others in the carrying out of the operation or to arrange for the labour of others to be furnished in the carrying out of the operations, it is first of all necessary to ascertain what the contractual nexus is between the parties. I start with the guidance given in Dacas's case itself.
12. Mrs Dacas was a cleaner registered with the Brook Street Bureau under a "temporary worker agreement". Her services were provided by Brook Street Bureau to the London Borough of Wandsworth who, following an incident involving Mrs Dacas, requested that she be withdrawn from the contract between Brook Street Bureau and the borough. In turn, the agency informed her that it would find no work for her in the future. Mrs Dacas complained of unfair dismissal on the footing that she was an employee either of the agency or of the borough. The Employment Tribunal concluded on the facts that she had not been employed by either. The EAT allowed Mrs Dacas's appeal, finding that she was employed by Brook Street Bureau. Brook Street Bureau's appeal was allowed, the Court of Appeal holding by a majority that a contract of employment was to be implied between the borough and Mrs Dacas. The case is important for the observations made by Mummery and Sedley LLJ on the analysis of triangular relationships in this area. Mummery LJ put the matter as follows:

"16. The statutory definition of a contract of employment as a 'contract of service' expressly includes an 'implied' contract. This should not be overlooked. I think that it has been. Like other simple contracts, a contract of service does not have to be in any particular form. Depending on the evidence in the case, a contract of service may be implied – that is, deduced – as a necessary inference from the conduct of the parties and from the circumstances surrounding the parties and the work done. As already indicated, the overall situation under consideration is shaped by the triangular format used for the organisation of the work: the applicant, the employment agency and the end-user are all involved. Each participant in the triangular situation may have an express contract with either one of, or with each of, the other two parties.

17. The critical point is that, although the construction of the contractual documents is important, it is not necessarily determinative of the contract of service questions, as contractual documents do not always cover all the contractual territory or exhaust all the contractual possibilities. In determining the true nature of the relationship (if any) between each of the respective parties, it is necessary to consider the total situation occupied by the parties. The totality of the triangular arrangements may lead to the necessary inference of a contract between such parties, when they have not actually entered into an express contract, either written or oral, with one another. Although there was no express contract between the applicant and the end-user in this case, that absence does not preclude the implication of a contract between them. That depends on the evidence, which includes, but may not be confined to, the contractual documents.

18. As a matter of law, when an issue is raised about the status of the applicant in unfair dismissal proceedings, an implied contract between parties who have no express contract with one another is a possibility that should be considered by the employment tribunal in making its findings of fact. It is relevant to the decision whether the applicant works under a contract, and, if so, what kind of contract it is and with whom it was made. There may be no contract of any kind, because it is found that there is no mutuality of obligations. There may be an implied contract, which may be characterised as a contract of service or as a contract for services. There may be an implied contract of some as yet unclassified kind, wedged within the traditional dichotomy, such as a 'semi-dependent worker's contract', as mentioned by Professor Freedland in his book, or a quasi-dependent worker's contract, as mentioned in the work of Professors Deakin and Morris on Labour Law (2001) at p.168.

19. If the applicant has a contract of service in a triangular situation of this kind, it may be with (a) the end-user, the contract usually being an implied one, or (b) the employment agency, depending on the construction of the express contract between the applicant and the agency and on other admissible evidence or, though this is more problematical, (c) more than one entity exercising the functions of an employer, namely the employment agency and the end-user jointly (see Freedland at pp.42-43)."

13. After considering the facts of the relationship between Mrs Dacas, Brook Street Bureau and the borough, and the decision of the EAT, Mummery LJ said this in paragraph 51 of his judgment:

51. … I should make it clear there is nothing unlawful or wrongful in what Brook Street, as the employment agency, and the council, as the end-user, are evidently seeking to achieve for their own mutual advantage: that, if possible, Mrs Dacas works as a cleaner, but not under a contract of service with either of them. They are entitled to arrange their affairs with that lawful aim in mind. As in other areas of the law, however, they must be prepared, if and when the matter is contested, to meet the challenge of general interpretative principles that the legal nature and effect of connected or associated transactions and the documents evidencing them are not ascertained by considering them in isolation from each other or by divorcing them from their context. It is legitimate to have regard to the fact, if it be the case, that a series or number of transactions are intended to operate in combination with one another or are ingredients of a wider transaction intended as a whole.

52. This means that, in ascertaining the overall legal effect of the triangular arrangements on the status of Mrs Dacas, the employment tribunal should not focus so intently on the express terms of the written contracts entered into by Brook Street with Mrs Dacas and the council that it is deflected from considering finding facts relevant to a possible implied contract of service between Mrs Dacas and the council in respect of the work actually done by her exclusively for the council at its premises and under its control, until it took the initiative in terminating that arrangement. The formal written contracts between Mrs Dacas and Brook Street and between Brook Street and the council relating to the work to be done by her for the council may not tell the whole of the story about the legal relationships affecting the work situation. They do not, as a matter of law, necessarily preclude the implication of a contract of service between Mrs Dacas and the council. There may be evidence of a pattern of regular mutual contact of a transactional character between Mrs Dacas and the council from which a contract of service may be implied by the tribunal. I see no insuperable objection in law to a combination of transactions in the triangular arrangements, embracing an express contract for services between Mrs Dacas and Brook Street, an express contract between Brook Street and the council and an implied contract of service between Mrs Dacas and the council, with Brook Street acting in certain agreed respects as an agent for Mrs Dacas and as an agent for the council under the terms of the express written agreements."

14. Sedley LJ's judgment proceeds from the proposition that "the conclusion that Mrs Dacas was employed by nobody is sim-ply not credible. There has to be something wrong with it." He was particularly influenced (as was Mummery LJ – see [2]) by an argument (see [72]) that the borough would not have been vicariously liable for Mrs Dacas's torts in any circumstances.
15. In Cable & Wireless PLC v. Muscat [2006] EWCA Civ 220, [2006] IRLR 354, the Court of Appeal was requested to reconsider the guidance given to employment tribunals by Dacas's case. The facts of Muscat's case were very different from those of Dacas. In outline, Mr Muscat was employed as a telecommunications specialist by a company called Exodus. Exodus sought to reduce the number of its employees in order to facilitate a potential buy-out, but wished to retain Mr Muscat's services. He was told that he would have to provide his services through a company and he incorporated E-Nuff which thereafter contracted with Exodus. Somewhat later, Exodus was taken over by Cable & Wireless. Mr Muscat continued to work as before, although necessarily now under the direction of Cable & Wireless. Cable & Wireless considered Mr Muscat to be an independent contractor. He continued to submit invoices for his services through E-Nuff, but Cable & Wireless did not pay them. He was told that Cable & Wireless did not deal with contractors direct and that he must deal with them through an agency called Abraxas, with whom Cable & Wireless had an agreement. Accordingly, E-Nuff entered into a contract for services with Abraxas by which E-Nuff agreed to provide services to Cable & Wireless for a prescribed period. Thereafter, the practical relationship appears to have continued as before, the only difference being that Mr Muscat was paid (through E-Nuff) by Abraxas. When Cable & Wireless informed Mr Muscat that it would no longer require his services, the issue was whether he had a contract of employment. Applying the guidance given by the Court of Appeal in Dacas, the EAT held that Mr Muscat had an implied contract of employment with Cable & Wireless. It held that the fact that it was E-Nuff who had contracted with Abraxas and had submitted the invoices for Mr Muscat's work did not affect the situation. Mr Muscat's status was unaffected, whether he had contracted with Abraxas as an individual or through E-Nuff. The later finding was unchallenged. Cable & Wireless appealed to the EAT, saying that the guidance of the Court of Appeal in Dacas was wrong. The EAT dismissed the appeal. The question for the Court of Appeal was accordingly whether the guidance given in Dacas was correct. While it is not necessary to refer to any more of the facts of that case in detail, the Court of Appeal provided a helpful series of observations on Dacas's case.
16. First, in [24], the analysis of triangular relationships in this area is described in terms which make it clear that the starting point is that the worker will usually be held not to be an employee of the agency, and that this caused concern if employers were using agencies in an attempt to ensure that their workers could not acquire employment rights.
17. Second, Dacas was only a case providing guidance to the approach that the employment tribunal should take, and did not in any way suggest the finding which should be made.
18. Third, whether such a contract should be implied in fact is, as are all matters of implication, a question of necessity. It was suggested in Muscat's case that Mummery LJ had failed to mention this factor, but the Court of Appeal rejected this submission in the light of what Mummery LJ had said in [16] of the judgment, which I have quoted above. Mummery LJ's reference to "necessary inference" was to be taken as a recognition and acceptance of the principles articulated by Bingham LJ in The Aramis [1989] 1 Lloyds Rep 213, where in well-known passages he said this:

"As the question whether or not any such contract is to be implied is one of fact, its answer must depend upon the circumstances of each particular case – and the different sets of facts which arise for consideration in these cases are legion. However, I also agree that no such contract should be implied on the facts of any given case unless it is necessary to do so; necessary that is to say, in order to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist.

…

Most contracts are, of course, made expressly, whether orally or in writing. But here, on the evidence, nothing was said, nothing was written. So regard must be paid to the conduct of the parties alone. The questions to be answered are, I think, twofold: (1) whether the conduct of the bill of lading holder in presenting the bill of lading to the ship's agent would be reasonably understood by the agents (or the shipowner) as an offer to enter into a contract on the bill of lading terms. (2) whether the conduct of the ship's agent in accepting the bill or the conduct of the master in agreeing to give delivery or in giving delivery would be reasonably understood by the bill of lading holder as an acceptance of his offer.

I do not think it is enough for the parties seeking the implication of a contract to obtain 'it might' as the answer to these questions for it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the conduct relied on is no more than consistent with an intention to contract than with an intention not to contract. It must surely be necessary to identify conduct referable to the contract contended for or at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implication of contract if the parties would or might have acted exactly as they did in the absence of a contract."

19. In [51] of Muscat the Court of Appeal applied the words of the test established in The Aramis, saying that it was necessary to infer the continuing existence of the employment contract in order to give business reality to the relationship and arrangements between Mr Muscat and Cable & Wireless. Before the Abraxas transaction, there were enforceable obligations between Mr Muscat and Cable & Wireless, and after it, the Court of Appeal held, it could not be said that those obligations had disappeared. Abraxas had not affected them and, had Abraxas for some reason ceased to function, that would not have brought the relationship between Mr Muscat and Cable & Wireless to an end.
20. The logic is that Abraxas had no power to remove Mr Muscat from Cable & Wireless and provide somebody in his place. At this point, it is convenient to recall the findings of the Special Commissioner in respect of the contract between Hudson and the operative, set out in [7] of the Decision that I have quoted above. Clauses 3, 4 and 5 are crucial. The client negotiates terms and notifies Hudson. When Hudson is notified, Hudson steps into the shoes of the client and contracts with the operative upon the terms just negotiated. The operative acknowledges that his contact is with Hudson and that he has no contract with the client. The operative agrees, among other things, to be bound to Hudson to satisfy each and every obligation negotiated with the client, and Hudson agrees to abide by the obligations accepted by the client in negotiations with the operative.
21. The scheme of obligations entered into in this manner is, from the practical point of view at least, efficacious. There is no question of seeking to infer a contract of employment between the client and the operative; rather, what HMRC seek to do in the present case is to imply a contract for service between the client and the operative on the footing that if such a contract subsists, then Hudson cannot be said to satisfy the requirements of the section.
22. For the reasons set out in his detailed findings of fact, it is clear that the contents of the contractual relationships, once concluded, are certainly unusual and directed more to meeting the exigencies of s.560 than to any other purpose. However, it must be remembered that absent a finding that the contracts are a sham and not intended to bring about the legal relationship between the parties that they appear to do, it must be accepted that the parties have intended to bring about the legal result that they have done. The Special Commissioner was addressed on Dacas in detail, and Mr Maugham relied expressly upon The Aramis in support of his submission (correct, as it turned out, in the light of the Court of Appeal's decision in Muscat's case) that the contract is to be implied between the client and the operative only where necessary. The Special Commissioner expressed his conclusions in [17] as follows:

"This appeal concerns the same general area of law as Dacas and it is clearly relevant. In my view, however, the facts here are significantly different from those in Dacas in which the only contract negativing the existence of an implied contract with Wandsworth was in the contract between Mrs Dacas and Brook Street. Here all parties have negatived the existence of a contract between the Client and the Operative: the [Hudson]-Client contract requires the Client to explain to the Operative that his contract is with [Hudson] and not with the Client, which I have found the Client does explain; and the [Hudson]-Operative contract states that the contract is not with the Client. To find that an implied contract existed between the Client and the Operative would go against the express terms of contracts that they have both entered into and statements between the Client and the Operatives, which is going further than upsetting what was merely the unexpressed expectations of Wandsorth that by entering into a contract with Brook Street they would not be entering into a contract with Mrs [Dacas], and the express term of the contract between Mrs Dacas and Brook Street to which Wandsworth was not a party. Mr Nawbatt pointed out the parties cannot change the substance of the relationship between them by labels, but I do not consider that this is an apt description of what the parties have done. Acting in accordance with the principles in Dacas that I am not limited to the contractual documents and should take into account the total situation between all the parties viewing these with practical reality and common sense, I find there was no such implied contract. I also agree with Mr Maugham['s] contention that even if I am wrong about this and there is an implied contract it must be made by conduct taking place after the work starts, which is necessarily after the labour has been provided pursuant to the [Hudson]-Client contract. Since I am concerned with the contract under which the labour is provided, any implied contract arising later must be irrelevant to the question I have to decide. There seem to be other tax implications following from Dacas which fortunately do not arise in this appeal."

23. Having found, therefore, that there is no obligation to be implied between the client and the operative, the Special Commissioner accordingly held that the only contract under which labour was contracted to the client was provided by the appellant, and accordingly its business consisted of or included such furnishing of labour.
24. It may perhaps be added to this that the Court of Appeal in Dacas was concerned with a relationship that had subsisted for some considerable period of time, Sedley LJ quite plainly taking the view that "conduct which might not have manifested such a mutual intention had it lasted only a brief period of time may become unequivocal if it is maintained over weeks or months" and Mummery LJ speaking of regular mutual contact of a transactional character between Mrs Dacas and the council, from which a contract of service may be implied. Such considerations may point to a case-by-case analysis, but neither of the parties in the present case suggested that that was appropriate. This is perhaps unsurprising in the light of oral evidence which I was told by Mr Maugham (without dissent from Mr Nawbatt) was given to the Special Commissioner, to the effect that a particular engagement may last for any period from a day to many years. It is, on the face of it, difficult to see why the same structure should at its outset not exhibit features permitting the inference of an implied contract to be drawn, but subsequently do so: but in any event, the point in time which matters for present purposes is, as the Special Commissioner found in [17], the relationship as it existed at the time the work started.
25. Mr Nawbatt submits that the contracts in Muscat contained terms purporting to negative the existence of a contract between the worker and the client, and yet the EAT and the Court of Appeal did not regard that of itself as sufficient. No doubt that is true, but the Special Commissioner did, it seems to me, properly approach the question as one of an assessment of all the facts. Mr Nawbatt submits furthermore that if the Special Commissioner did answer the relevant question, then his reasons are inadequate. In this respect, the Special Commissioner was entirely correct, in my judgment, to focus upon the contractual relationship between the parties, and I do not accept, in the light of the guidance given by the Court of Appeal in Dacas and Muscat, that he was wrong to do so. Mr Nawbatt describes the most recent changes to the contractual arrangements, following the decision of the General Commissioners to which I have referred, as changes of form but not of substance: but in each case it is not irrelevant to see upon whom the ultimate contractual obligations rest. This is not merely a matter of form, given that Hudson now assumes obligations which it did not assume before. In my judgment, the Special Commissioner's approach is not to be criticised in this respect.
26. Accordingly, I conclude that the cross-appeal is unsuccessful. Pursuant to the order of Lawrence Collins J of 9^th October 2006, the substantive appeal is withdrawn.