Maluti-A-Phofung Local Municipality v Rural Maintenance (Pty) Ltd (JA79/2014) [2015] ZALAC 41 [2016] 1 BLLR 13 ; (2016) ILJ 128 (LAC) (21 October 2015) per Davis JA [Coppin JA and Savage AJA concurring]
The Labour Appeal Court allowed the appeal and reversed the order granted by the Labour Court, which meant that a transfer of a business as a going concern had not been proved and s 197(2) of the LRA did not apply.
LAC summary:
Outsourcing of business – local municipality’s manager outsourcing municipality’s function of electricity supply – party to agreement undertaking to manage, operate, administer, maintain and expand the municipal electricity distribution network – municipality later cancelling agreement – cancellation of agreement giving rise to transfer of the electricity supply back to municipality – transferor contending that transfer as going concern took place as contemplated in section 197 of the LRA. Labour Court finding that transfer as a going took place – Appeal – municipality contending lack of authority of the municipal manager to sign agreement and that no transfer of business as a going concern took place – concerning lack of authority, Oudekraal principle restated to the effect that until set aside an administrative decision stands. Whether transfer of a business took place – court finding that some components of the business not transferred and withheld by transferor – such components vital for the supply of electricity – municipality not with assets transferred to it able to manage, operate, administer, maintain, expand the municipal electricity distribution network so as to continue the same business run by the transferor – No transfer of business as a going concern took place.
Excerpts
Evaluation
“[32] To the argument that the case of Oy Liikenne is authority for the proposition that in an asset intensive industry such as the delivery of petroleum products by a tanker, the absence of a transfer of such assets or a significant part of them is decisive, in that in these circumstances the entity does not retain its identity, the Court of Appeal in P and O Trans-European Limited v Initial Transport Services Limited[1] said:
‘to determine whether the conditions for the transfer of an economic entity are satisfied, it is also necessary to consider all the factual circumstances characterising the transaction in question, including in particular the type of undertaking or business involved, whether or not its tangible assets such as buildings and movable property are transferred, the value of its intangible assets at the time of the transfer, whether or not the core of its employees are taken over by the new employer, whether or not its customers are transferred, the degree of similarity between the activities carried on before and after the transfer, and the period, if any, for which those activities were suspended. These are, however, merely single factors in the overall assessment which must be made, and cannot therefore be considered in isolation (see in particular Spijkers paragraph 13 and Süzen paragraph 14).’[2] See also Wynn-Evans The Law of TUPE Transfers (Oxford University Press 2013) at 41-44.
[33] It is clear therefore that the overall assessment depends on an examination of the totality of the business; in this case, the business operated by Rural prior to the transfer.
. . . . . .
[37] In my view, given that the onus rests upon the respondent to show, on the probabilities, that a transfer of a business as a going concern had taken place, it cannot be said that the same business conducted by Rural had been transferred so that it was now conducted by a different entity, namely appellant. Take but one critical issue, debt collection. For debt collection to be continued seamlessly by appellant, this component of the business had been conducted by Rural, it was necessary to meter the use of electricity, invoice the consumer and collect payments therefrom. Essential to this process would have been the use of software and information stored and used in digital form as had been employed by Rural. In short, the means to perform this debt collection activity had not been transferred. On its own, this was a significant component of the overall business. It supports the overall assessment that it cannot be said, on these papers, that the very business conducted by Rural had been transferred to appellant. Expressed differently, appellant would not have been able to continue business seamlessly after the “transfer”. For these reasons, the appeal must be upheld”.
[1] [2003] IRLR 128 (CA).
[2] At para 12 quoted in Oy Liikenne at para 33.
Now reported: [2016] 1 BLLR 13 (LAC)
Headnote:
Administrative law – Invalid acts by statutory functionary – Municipality cancelling agreement with service provider on ground that official who concluded contract lacked authority – Contract valid and binding unless and until set aside by court.
Rural Maintenance (Pty) Ltd and Another v Maluti – A – Phofung Local Municipality CCT 214/15
Date of hearing: 3 May 2016 – Judgment to be delivered on 1 November 2016
MEDIA SUMMARY
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The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.
On Tuesday 3 May 2016 at 10h00, the Constitutional Court will hear an application for leave to appeal the decision of the Labour Appeal Court, which overturned a judgment handed down by the Labour Court in favour of the applicants.
The applicants are Rural Maintenance (Pty) Ltd and Rural Maintenance (Free State) (Pty) Ltd (collectively Rural Maintenance). The matter concerns the interpretation and application of section 197 of the Labour Relations Act (LRA) in an outsourcing contract for the supply, maintenance and upgrade of electricity services between Rural Maintenance and the respondent, Maluti-A-Phofung Local Municipality (Municipality).
The Municipality outsourced the supply of electricity to the applicants in terms of an agreement intended to last 25 years. As part of that agreement, Rural Maintenance took over 16 employees of the Municipality who were in a unit that was responsible for electricity supply. Rural Maintenance also increased their workforce by employing additional employees. They also allege that they injected a massive capital investment to replace and upgrade the Municipality’s equipment. Subsequently, the Municipality sought to disregard the outsourcing agreement on the basis that its municipal manager who concluded the agreement on its behalf, had no authority to enter into that contract. The validity of the agreement is the subject matter of litigation pending before the High Court of South Africa, Free State Division, Bloemfontein.
In the meantime, Rural Maintenance handed back certain infrastructure and assets to the Municipality. They also submitted information on 127 employees who were affected by the handover, including the 16 employees who had been taken over from the Municipality at the commencement of the agreement. This was purportedly done in terms of section 197 of the LRA. The Municipality refused to take over the workers and a dispute between the parties arose on whether section 197 applied to the handover.
The matter was taken to the Labour Court. In resisting the applicability of section 197, the Municipality argued that there was no transfer of a business as a going concern because the applicants did not transfer all of the assets to it and the improvements on the infrastructure were minimal and, as a result, the Municipality could not resume the service. The Labour Court rejected this argument and held that there was a transfer of business as a going concern and that section 197 applied. It held that it was not necessary for all assets of the business to be transferred. Consequently, the Labour Court declared that when the outsourcing agreement was cancelled, the employment contracts of the 127 workers were transferred to the Municipality by operation of section 197(2) of the LRA.
The Municipality appealed to the Labour Appeal Court. The Labour Appeal Court held that the assets withheld by Rural Maintenance were necessary for the conduct of the business. Given that those assets were not transferred, the municipality could not seamlessly resume running the business without putting in further investment. The Labour Appeal Court concluded that in those circumstances it could not be said that the business had been transferred as a going concern. The provisions of section 197 were thus not applicable.
Before the Constitutional Court, Rural Maintenance seeks leave to appeal against the Labour Appeal Court’s decision. They argue that the Labour Appeal Court introduced a new test in respect of section 197 of ‘seamlessness’ that is more stringent than the test previously laid down by this Court.
The Municipality disputes that the Labour Appeal Court introduced and applied a new test. It submits that crucial assets necessary for the viability of the business as an economic entity were not transferred to it. It argues that it was therefore impossible for it to operate the business in substantially the same manner after transfer and that for this reason the business was not transferred as a going concern.
Going concern: Service business must be transferred
By a majority vote the Constitutional Court today refused leave to appeal and upheld the judgment of the LAC.
“[40] On the evidence on record it was common cause that certain components of Rural’s operation of the business that supplied electricity services to the Municipality were not handed back to the Municipality. [footnote omitted]. Despite having the opportunity to refute this evidence, Rural contended that they were peripheral to the operation of its business and need not have been handed back to the Municipality. Besides, Rural did not explain precisely what this business entailed.
The Labour Appeal Court, proceeding on the accepted test of an assessment of all the relevant factors to determine whether there was a transfer of business as a going concern under section 197 of the LRA, held to the contrary.
It did not apply any new test, nor has the Labour Appeal Court imported a different test in relation to the transfers of so-called “service provision changes”. That term was imported into the TUPE Regulations in Britain in 2006 and does not appear in section 197 of the LRA. The definition of “business” in section 197(1) of the LRA includes a service”.
Rural Maintenance (Pty) Ltd v Maluti-A-Phofong Local Municipality (CCT214/15) [2016] ZACC 37 (1 November 2016) per Froneman J (Moseneke DCJ, Cameron J, Khampepe J, Mhlantla J and Nkabinde J concurring)