Martin v Lancashire County Council (Bernadone v Pall Mall Services Group Ltd)

On a transfer governed by the Transfer of Undertakings (Protection of Employment) Regulations 1981, an employer’s accrued tortious liability to an employee transfers where it arises from, or is connected with, the contract of employment or employment relationship. This includes liability for workplace negligence and, where the circumstances establish the necessary connection, liability under occupiers’ liability legislation.

The transferor’s vested or contingent right to indemnity under employers’ liability insurance also transfers. Although that right derives from a third-party insurance contract, it is connected with the employment contract because it covers the transferred liability. This construction safeguards the employee’s existing protection and prevents the transferor’s insurer from retaining the premium while avoiding the insured liability.

These conjoined appeals concerned employees who allegedly suffered personal injuries before their employers transferred the relevant undertakings. In Martin’s case, His Honour Judge Fawcus held that the transfer did not pass Lancashire County Council’s tortious liability to its transferee. In Bernadone’s case, Blofeld J held that Pall Mall’s liability passed to the NHS trust which took over the undertaking. He also held that Pall Mall’s right to an insurance indemnity transferred, although he based that conclusion on an implied contractual term requiring insurance.

The Court of Appeal had to decide whether the Transfer of Undertakings (Protection of Employment) Regulations 1981 transferred accrued liabilities in tort and, if so, whether they also transferred the employer’s rights under its employers’ liability policy.

1. Disposition. The court unanimously allowed Lancashire County Council’s appeal, set aside Judge Fawcus’s order and declared that Martin’s rights against the Council had transferred to its transferee. It dismissed the challenges to Blofeld J’s conclusions that Pall Mall’s liability and its right to an insurance indemnity had transferred.

2. Peter Gibson LJ, with whom Henry and Clarke LJJ agreed, held that regulation 5(2) of the Transfer of Undertakings (Protection of Employment) Regulations 1981 was not confined to contractual liabilities. Article 3(1) of Council Directive 77/187/EEC referred broadly to obligations arising from a contract of employment or an employment relationship. Regulation 5(2)(a) likewise covered liabilities under or in connection with the employment contract, while regulation 5(2)(b) extended to things done in respect of the employee. Regulation 5(4)’s express exclusion of criminal liability further demonstrated the breadth of regulation 5(2).

3. An employer’s duty to provide a safe system and place of work arises from the employer–employee relationship. The employee may commonly sue for breach of that duty in either contract or tort. It would therefore be anomalous for the contractual claim to pass to the transferee while the materially identical tort claim remained against the transferor. The accrued negligence liabilities in both cases consequently transferred.

4. Whether another statutory liability transfers depends on its connection with the employment contract in the particular circumstances. Bernadone entered the hospital storeroom in the course of her employment. Her pleaded claim under section 2 of the Occupiers’ Liability Act 1957 was therefore sufficiently connected with her employment contract to transfer.

5. The transferor’s vested or contingent right to an indemnity under employers’ liability insurance also transferred. The right was held under a third-party insurance contract, but it arose from and was connected with the employment contract because the insured liability had that character. This purposive construction preserved the protection which the employee had enjoyed before the transfer, including potential recourse against an insurer following insolvency.

6. Blofeld J’s implied-term reasoning was rejected. An employment contract contains no implied term that the employer will maintain the insurance required by the Employers’ Liability (Compulsory Insurance) Act 1969. The insurance right transferred directly under regulation 5(2)(a).

1. Court of Appeal: In [2000] EWCA Civ 155, the court unanimously held that the accrued tort liabilities and relevant insurance rights transferred under the Transfer of Undertakings (Protection of Employment) Regulations 1981. Judge Fawcus’s order was set aside, while Blofeld J’s answers to the preliminary issues were upheld on the Court of Appeal’s reasoning.

2. High Court, Bernadone: Blofeld J answered both preliminary issues affirmatively. He held that Pall Mall’s liability transferred to the NHS trust and that the insurance indemnity transferred, although his implied-term basis for the latter conclusion was rejected on appeal.

3. High Court, Martin: On 12 February 1999, His Honour Judge Fawcus, sitting as a deputy High Court judge, declared that tortious liability did not transfer and granted permission to appeal.