This is an appeal from the judgment of Newman J dated 21 February 2003. It involves a point of statutory construction that arises in unusual circumstances. Council Directive 77/187/EEC, known as the Acquired Rights Directive (“ARD”) is designed to safeguard the rights of employees when the undertaking in which they are employed is transferred from one employer to another. In essence the ARD requires the new employer to continue to employ the employees on the same terms that they enjoyed before the transfer.

Article 1 of the ARD states that it applies to:

This action involves 122 claimants but it has proceeded by way of the claim of only one of these, Mr Ronald Davies, who has been treated as a representative claimant. Mr Davies represents not only the claimants in this action, but claimants in a number of similar actions. We have been told that this action will determine the fate of some 2000 employees.

Mr Davies was a refuse collector, employed by Liverpool City Council (“the Council”). The Council transferred its refuse collection service to a commercial company, Onyx UK Limited (“Onyx”). Onyx now collects Liverpool’s refuse under contract with the Council on terms that enable Onyx to make a profit. Onyx offered employment to some, but not all, of those who had been employed by the Council in its refuse collection service. The terms and conditions offered by Onyx were less favourable than those the employees had enjoyed when working for the Council. Mr Davies is one of those who accepted employment by Onyx on those terms.

It is now common ground that the transfer of the refuse collection service from the Council to Onyx was one which fell within the terms of Article 1 of the ARD. The United Kingdom should have introduced regulations that would have secured for Mr Davies and his fellow employees the protection required by the ARD. It is Mr Davies’ case that, by including in the definition of ‘undertaking’ in TUPE the words in italics, the United Kingdom erroneously excluded the transfer of the Liverpool refuse service from the protection of the regulations. If this is correct, Mr Davies and his fellow employees are entitled to recover damages from the Government to compensate them for the prejudice that they have been caused as a result of the United Kingdom’s error.

Newman J had to address two issues:

Newman J went on to hold that the refuse collection service was “in the nature of a commercial venture”. This meant that the employees were within the protection of TUPE and had no claim for damages against the Secretary of State. Mr Davies claims that Newman J erred in making the latter finding. He contends that the judge should have held that the refuse collection service was not “in the nature of a commercial venture” and upheld his claim for damages.

There is an unusual background to this appeal, which it is necessary to set out in a little detail. Only once before has the meaning of “in the nature of a commercial venture” in TUPE been considered by the Court of Appeal. That was in the case of Woodcock and others v Committee for the Time Being of the Friends School, Wigton [1987] IRLR 98. A school, which had been operated by Quakers as a registered charity, had been sold to a company. The issue was whether or not this was a transfer covered by TUPE. The Industrial Tribunal, the Employment Appeal Tribunal and the Court of Appeal held that it was not, on the ground that the school was not a business or undertaking “in the nature of a commercial venture”. In considering this question the focus was exclusively on the school before transfer. The report does not even disclose whether, as we suspect to have been the case, the company bought it in order to run it as a profit-making business.

The Industrial Tribunal held that the school was not “in the nature of a commercial venture” because it was not a business in which capital was invested with a view to profit. The Employment Appeal Tribunal took a broader view. They held:

In the only reasoned judgment in the Court of Appeal, with which the other two members of the court agreed, May LJ held:

In 1994 the European Commission brought enforcement proceedings against the United Kingdom, alleging a number of failures to comply with the ARD – Commission of the European Communities v UK [1994] ICR 664. The European Court dealt with the relevant complaint as follows:

It is to be noted that, notwithstanding the observations of this court in Woodcock, the United Kingdom did not seriously challenge the proposition that, as interpreted by the courts and tribunals in the United Kingdom, TUPE did not apply to non-profit making undertakings. Rather, the United Kingdom argued, unsuccessfully, that the ARD did not apply to transfers of non-profit making undertakings, because they were not engaged in “economic activities” and thus were not within the scope of the EEC Treaty. We would endorse this conclusion for the reasons given by the Employment Appeal Tribunal, Mummery J President, in Birch v Nuneaton and Bedworth Borough Council [1995] IRLR 518 at 522:

Of the two cases cited by the court as exemplifying undertakings covered by the ARD, Höfner involved a public employment agency and Dr Sophie Redmond Stichting involved a foundation which provided assistance to drug addicts and which was funded by subsidies from a Dutch municipality.

It was common ground before us that the decision of the European Court in the enforcement proceedings did not bind the English court as to the true interpretation of TUPE. In particular, it did not bind the court to find that an undertaking “in the nature of a commercial venture” had to be profit making.

The United Kingdom had, in fact, anticipated the result in the enforcement proceedings by removing the words in italics from the definition of ‘undertaking’ in TUPE. This was achieved by the Trade Union Reform and Employment Rights Act 1993, sections 33(1)(2), 51 and Schedule 10.

The 1977 ARD has now been replaced by Directive 2001/23/EC of 12 March 2001. A new definition of undertaking appears in Art 1.1(a) as follows:

At an early stage of these proceedings, Toulson J made the following declarations by consent:

In the course of the hearing we expressed concern as to whether declaration (a) was correct. Mr Paines did not seek to depart from it, but we do not consider that, in what is a test case, our analysis of the law can be fettered by the agreed declaration. We shall revert to this matter in due course.

Newman J recorded the concession made by Mr Paines that “the refuse collection service in the hands of the Council was not a ‘commercial venture’” and his submission that it was “in the nature of one”. He referred to authorities which demonstrated that the status of the Council as a local authority could not, of itself, prevent it carrying out a function “in the nature of a commercial venture”. One of these was the decision of the Employment Appeal Tribunal delivered by Morison J in UK Waste Control v Wren [1995] ICR 974. In that case, the facts of which were almost a carbon copy of the present, the Tribunal found that cleansing services operated by Eastbourne Borough Council were “in the nature of a commercial venture”.

Newman J approached the question of whether the waste disposal service was “in the nature of a commercial venture” as essentially a matter of the impression made by the material facts. He explained his conclusions as follows:

Mr Underhill QC, for Mr Davies, submitted that both UK Waste Control v Wren and the judgment of Newman J were wrongly decided. He submitted that “in the nature of a commercial venture” had to be given the same meaning as “a commercial venture”. The words “in the nature of” were no more than grammatical linkage, adding nothing to the meaning of “commercial venture”. He submitted that it was in the nature of a commercial venture that the activity under consideration should be carried on for reward. A commercial venture was one in which there was a transaction, or series of transactions, in which the person carrying on the venture supplied something and was paid something in return.

Mr Underhill criticised the statement by Newman J that the waste disposal service was provided to members of the public “who, by reason of charges imposed upon them, were obliged to pay for the service”. He submitted that the judge failed to have regard to the evidence, which was that the service was funded, to a small degree, out of the community charge, but principally out of subvention from central funds. As to this last point, it is plain from paragraph 28 of the judgment that the judge was well aware of this evidence. Mr Underhill submitted that the waste removal service, being provided by the Council under statutory obligation in circumstances where they did not charge for the service, did not make a profit from the service and, indeed, were not permitted by law to make a profit from the service, was a paradigm example of an undertaking which was not in the nature of a commercial venture.

Mr Paines supported the reasoning of Newman J. He submitted that the issue was essentially one of fact and that we should not interfere with the judge’s decision unless it was outside the bounds of reasonable judgment, relying on Edwards v Bairstow [1956] AC 14 and Moyna v Secretary of State for Works and Pensions [2003] 1 WLR 1929 at p.1935.

Newman J observed at paragraph 21 of his judgment that “some regard can be paid to the principle that the court should attempt to interpret the offending exception so far as possible to accord with the purposes of the Directive”. Mr Underhill challenged this proposition. He submitted that it was plain that the words in italics restricted the ambit of TUPE so that it did not have as wide a scope as the ARD. It was not possible to give to the words in italics a meaning that accorded with the Directive. In these circumstances the correct approach was to give the words their natural meaning.

We do not accept Mr Underhill’s submission. Nor do we think that Newman J put the matter sufficiently strongly. The Court is under an obligation, in so far as the language of TUPE permits, to construe TUPE in a manner which accords with the ADR. If it is not possible to give the two the same scope, the Court must go as far towards this as is possible.

An example of just how far this purposive approach can legitimately go is provided by the decision of the House of Lords in Litster v Forth Dry Dock and Engineering Co Ltd [1990] 1 AC 546. In that case the House implied into a clause which defined a person protected by TUPE as “a person so employed immediately before the transfer” the additional words “or would have been so employed if he had not been unfairly dismissed in the circumstances described by regulation 8(1)”.

The jurisprudence of the European Court of Justice has led to ‘undertaking’ in the ARD acquiring the definition of “an organised grouping of resources which has the objective of pursuing an economic activity”. The question that has concerned us is whether it is not possible, without stretching the meaning of the phrase to breaking point, to give an undertaking “in the nature of a commercial venture” precisely the same meaning. If so, it is the duty of the court to do so. It does not seem to us that the concession that appears to have been made in the enforcement proceedings that the words in italics meant ‘non-profit making’ can preclude such an approach.

Our conclusion is that the words “in the nature of a commercial venture” are sufficiently imprecise and elastic to enable TUPE in its original form to be construed as having the same scope as the ARD. We do not, however, have to go this far in order to decide this appeal.

To succeed in his claim, Mr Davies has had to show that there was a transfer of an undertaking. More precisely, in order to bring this case within the scope of the ARD, he had to show that there was a transfer of an economic entity which retained its identity . This he has succeeded in doing. In so doing he has been keen to demonstrate that the undertaking has had almost all the same characteristics before and after the transfer. If an undertaking loses its essential features in the course of a transaction, that transaction does not constitute a transfer of the undertaking but the bringing to an end of the undertaking. In this case it is common ground that the waste removal service was “a commercial venture” after transfer. We asked Mr Underhill why the test of whether the service was an “undertaking” within TUPE fell to be applied by considering the position before transfer, rather than after. He was unable to give a rational explanation for this, other than to say that other cases have proceeded on this basis. In that last submission Mr Underhill was correct – see Expro Services v Smith [1991] ICR 577 and Woodcock but we think that this approach is open to question .

The distinction that Mr Underhill makes between the refuse disposal service before transfer and the same undertaking after transfer is that before transfer it was not operated for profit whereas after transfer it is so operated. It is not possible to see any reason in principle why employees should not have the protection of TUPE when their employers, who do not operate for profit the undertaking in which they are employed, transfer that undertaking to employers who intend to operate it for profit. The truth is, of course, that the wording of TUPE was designed to do no more and no less than give effect to the ARD. The ARD draws no such distinction.

Our conclusion is that where (i) the undertaking after transfer is a commercial venture and (ii) the undertaking before transfer had all the characteristics that it had after transfer, save that it was not operated for profit, the undertaking before transfer will normally be capable of being described as “in the nature of” a commercial venture. We are satisfied that that is so in the present case. The elastic phrase “in the nature of” bridges the gap between before and after and enables the provisions of TUPE, prior to amendment in 1993, to be read in a manner which accords with the ARD.

For this reason we have reached the same conclusion as Newman J by a somewhat different route. We note that our reasoning mirrors that of the Employment Appeal Tribunal in UK Waste Control v Wren at p.986.

For these reasons this appeal will be dismissed.

Appellants to pay the respondents costs of the appeal to be subject to detailed assessment if not agreed