The High Court has considered whether a Transfer of Undertakings (Protection of Employment) (TUPE) indemnity for employment payments "which fall due" before the transfer date included sums whose payment dates had not yet crystallised.(1)
Urban Retreats Ltd (UR) operated a hairdressing and beauty salon and spa from Harrods department store, pursuant to a licence agreement. This arrangement was ended by a settlement agreement, with an agreed termination date of 22 April 2018. Harrods subsequently continued to operate the salon and spa and many of the staff were transferred to it under TUPE.
An issue arose as to whether an indemnity in the settlement agreement covered:
- salaries, commission payments and holiday pay between 1 April 2018 and 22 April 2018; and
- commission payments for March 2018 (which had been paid monthly in arrears).
The total sum of these disputed payments was £387,303.
The relevant indemnity clause stated that UR was to indemnify Harrods against all employment liabilities (defined in the agreement to include all contractual payments) in connection with:
(a) all salaries, emoluments or other sums payable... to or in respect of any member of any member of staff... which fall due... prior to the [termination date]...
(b) any liability or obligation arising under or in connection with any member of staff... prior to the [termination date]...
(e) any other claim by any member of staff the responsibility for which passes to [Harrods]... and which has its cause of origin... prior to the [termination date].
Overall, the High Court favoured Harrods' arguments. It acknowledged that the words "which fall due" in sub-clause (a) are commonly understood to mean that the obligation to pay has actually been triggered (as UR had argued). However, the High Court did not consider that this interpretation to be appropriate, noting that it would result in UR receiving a significant windfall – for example, it had received the benefit of the employees' work and the revenue generated in the period up to the termination date.
The High Court concluded that the indemnity's wording had not necessarily meant payments that had actually fallen due and could include obligations that had arisen. The High Court considered that this wider reading of the wording made "clear business sense".
The High Court also considered sub-clause (b) and an argument by UR that "any liability" should mean "any other liability" – this was also rejected. The High Court noted that the word 'other' had been expressly excluded from sub-clause (b), whereas it had been included in sub-clause (e). Therefore, the argument was dismissed.
Finally, the judge agreed with Harrods that sub-clause (e) had been a catch-all provision. The overall intention of the clause had been to ensure that everything that occurred before the termination date would be UR's responsibility, even if Harrods actually made the payments. Therefore, Harrods was entitled to be indemnified by UR for the disputed employment costs.
Although the words "and fall due" were ambiguous, this was a commercial and pragmatic decision by the High Court. It noted that a decision to the contrary "could lead to challenging commercial common sense" and it had clearly been swayed by the situation's equitable merits.
This case nonetheless serves as a warning to practitioners when drafting TUPE provisions, for example, in asset purchase or outsourcing agreements. A separate apportionment clause, sitting alongside the indemnities, should normally set out that all liabilities (eg, salaries, wages, commission and holiday pay entitlement) will be apportioned on a time basis, so that any part of the relevant charges attributed to before the transfer date are borne by the transferor.
Endnotes
(1) Urban Retreats Ltd v Harrods Ltd [2018] EWHC 3012 (Comm).
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