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[2014] ZALAC 22
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City Power (Pty) Ltd v Grinpal Energy Management Services (Pty) Ltd and Others (JA55/2012) [2014] ZALAC 22; [2014] 10 BLLR 945 (LAC); (2014) 35 ILJ 2757 (LAC) (29 May 2014)
REPUBLIC
OF SOUTH AFRICA
IN
THE LABOUR APPEAL COURT OF SOUTH AFRICA, JOHANNESBURG
REPORTABLE
LAC
CASE NO: JA 55/2012
In
the matter between:
CITY
POWER (PTY) LIMITED
Appellant
and
GRINPAL
ENERGY MANAGEMENT SERVICES (PTY) LTD
First
Respondent
NATIONAL
UNION OF MINEWORKERS
Second
Respondent
EMPLOYEES
LISTED IN ANNEXURE “A” TO NoM
Third
and Further Respondents
Heard:
14 March 2014
Delivered:
29 May 2014
Coram: Tlaletsi
DJP, Davis et Ndlovu JJA
JUDGMENT
DAVIS
JA
Introduction
[1]
This is an appeal against the judgment of the Labour Court which held
that the cancellation of two service level agreements
concluded
between appellant and first respondent triggered an application of s
197 of the Labour Relations Act 66 of 1995 (‘LRA’),
as a
result of which the employment contracts of third and further
respondents (41 affected employees) were transferred to appellant
in
terms of s 197(2) of the LRA, with effect from 1 August 2012.
Background
[2]
First respondent manufactures, supplies and installs, operates and
maintains smart metering systems and electrical infrastructure
which
it provides primarily to municipalities and power utility companies.
In 2003 it was awarded a tender to supply a prepaid
metering system
to appellant. In that year a Project was launched in Alexander
Township.
[3]
Two service agreements, the last of which governs the relationship
between appellant and first respondent, are in issue in this
dispute. These are an installation agreement and a
maintenance agreement. These service agreements were concluded
to govern the manner in which first respondent supplied, installed,
operated and maintained the medium and low voltage systems,
related
infrastructure and smart metering systems that formed the basis of
the Project.
[4]
In March 2012 appellant purported to cancel the service agreements
with first respondent. According to Mr Mbuso
Dlamini,
whose version is not contradicted in appellant’s answering
affidavit deposed to by Mr Andrew Lishivha, appellant
was not in a
position, as at 14 March 2012, when the first respondent received an
email from Mr Lishivha in which appellant cancelled
the service
agreement, to take over the project and to run the operations which
hitherto had been conducted by first respondent.
According to Mr Dlamini, he gave instructions, that notwithstanding
the purported cancellation, first respondent should continue
with the
performance of its obligations under the service agreement at its own
risk, until a proper and complete handover of all
the necessary
aspects of the Project had been conducted. Correspondence
was then generated by first respondent’s
attorneys to appellant
on 4 May 2012 in which it was stated:
“
[o]ur client
continues to provide the necessary personnel on-sight as required in
terms of the (contracts) and also continues at
his own cost to
provide the vital communication services which were required to
maintain the integrity of the project, thereby
ensuring a continuity
of services to the end-users… Unfortunately this is no longer
viable from a financial point of view,
given the fact that you have
not yet paid (Grinpal’s) outstanding invoices…”
[5]
On 10 May 2012 first respondent terminated its operations pursuant to
these service agreements, as it had received no meaningful
response
to the previous correspondence. On 11 May 2012 appellant
replied to first respondent’s attorneys and undertook
“to
settle all Grinpal’s’ outstanding invoices by close of
business on Wednesday 16
th
day of May 2012 and all other
matters to be decided by a meeting next week. In the meantime,
we have been informed by the
Alexander residents that (Grinpal) has
indeed embarked in acts of switching off the system and thereby
leaving the area in darkness.
We believe that for genuine
negotiations to take place in this matter, you should call on
(Grinpal) to restore the system back
to its proper working conditions
whilst we are arranging for a meeting … This
restoration must be done as a
matter of extreme urgency to avoid a
service delivery uprising by the residents”.
[6]
On 15 May 2012 appellant confirmed that payment of the invoices,
which had been generated by first respondent for the services
that it
rendered, had been made. A letter requested further that first
respondent, in the light of these payments, restore
the services
according to the maintenance agreement in the affected areas in order
to avoid a service delivery protest.
[7]
First respondent continued to articulate dissatisfaction with regard
to nonpayment of the services which it had supplied.
On 3
July 2012 first respondent’s attorneys wrote to appellant thus:
“
I last
communicated with you in connection with this matter in terms of my
email of 1 June 2012. That email was preceded by
a number of
earlier emails… in which regard I now record that you have not
responded to any of these emails, despite the
tenor thereof and
despite having been requested to do so.
This state of affairs is
quite unacceptable to (Grinpal) which now finds itself in the
invidious position where it has continued
to render services to City
Power in terms of the interim reinstatement (of the maintenance
agreement) at the specific instance
and request of City Power under
circumstances where, for whatever reason, City Power, has not yet
issued the relevant purchase
orders in respect of such services to
facilitate payment in respect thereof …”
The letter continues
“
The upshot of the
aforegoing is that in the absence of the long awaited meeting between
(our client), ourselves and City Power to
discuss the matter, and in
the absence of any response to my emails aforesaid and the purchase
orders which have been requested,
my instructions are to notify you
as I hereby do, that should City Power now not issue the relevant
purchase orders as set out
more fully in terms of my communication to
you of 1 June 2012 by noon on Thursday 5 July 2012, (my client) will
once again terminate
all its services to City Power in terms of the
(Maintenance Agreement) with immediate effect, and those services
will not be reinstated
under any circumstances, until such time as
the relevant purchase orders have been forthcoming.”
[8] Further
correspondence was then exchanged. Ultimately, on 16 July 2012
a meeting was held at appellant’s offices
between
representatives of first respondent and appellant.
According to Mr Dlamini the following occurred at
the meeting:
“
At this meeting
various aspects of the termination of the relationship were
discussed, as detailed below, and it was agreed that
there would be a
mutual cancellation of the Service Agreements, effective 31 July
2012. The issue of the handover to
City Power was
discussed in some detail. I mentioned that the affected
employees’ employment contracts would need to
be transferred to
City Power as part of the handover process. There was no
objection raised. Xulu (appellant’s
attorney) merely
asked me to provide details of these employees, including salary
details. These details were provided to
City Power under cover
of an email dated 26 July 2012 to which I refer elsewhere in this
affidavit.”
[9]
This version is supported by a detailed letter generated by first
respondent’s attorney on 17 July 2012 which set out
the
contents of the meeting of 16 July 2012 as well as what had been
agreed at that meeting. It was clear that, pursuant
to this
meeting:
“
1.
the termination of the Maintenance Agreement would take effect, by
mutual agreement
on 31 July 2012, subject to the conclusion of a
comprehensive termination (or ‘cancellation agreement’),
to be drafted
by City Power’s attorney;
2.
in the light of the proposed termination date of 31 July 2012, a full
handover
process would take place;
2.1
Grinpal would provide City Power with, inter alia:
2.1.1
customer databases, bearing numbers, customer details, stand numbers
and transformer linkages/connectivity
to customers;
2.1.2
the vending platform and the server;
2.1.3
the telecommunication platform, sim cards and contracts with service
providers; and
2.1.4
the names, identity numbers and contact numbers of all front-end used
staff and CLOs on its payroll for
absorption by City Power;
2.2
Grinpal would continue to provide system training as part of the
handover process at cost,
as and when the need arose; and
2.3
a competent person’s team (“the CPT”) with
representation from both parties
would be established.”
[10]
Pursuant to this agreement, the details of the handover process, as
set out, were confirmed in a minute of a meeting which
took place
between representatives of first respondent and appellant on 18 July
2012, the minute of which meeting is attached to
the founding
affidavit.
[11]
Significantly, in the founding affidavit, Mr Dlamini summarizes the
case of first respondent as follows:
“
1.
The entire business relating to all aspects of the Project is being
transferred to
City Power in terms of the handover process;
2.
the bulk of the steps in the handover process have already taken
place;
3.
the Project will continue after termination of the Service Agreements
and completion
of the handover process;
4.
all of the assets, both tangible and intangible, required to operate
the project,
have already been transferred to City Power, with the
only exceptions being the outstanding ‘communications issues
and the
confirmation by City Power of the transfer of the affected
employees;
5.
City Power cannot operate the Project without using all or most of
the affected
employees – they have the necessary expertise,
built up over years, to implement, maintain and operate the
Project.
City Power does not have this expertise
available in its pool of employees. The training provided by
Grinpal to City Power
employees is by no means intended to replace
the services of any of the affected employees – rather it is
required in order
for City Power to better understand the Project, so
that in due course, after a full handover (including the affected
employees),
City Power will be able to run the Project with the
minimum continued support from Grinpal.”
[12]
In the answering affidavit none of these averments were disputed.
All that Mr Lishivha said in his answering affidavit
is the
following:
“
I
deny the allegations and contentions in this paragraph. In
light of the fact that this is mainly a legal issue, I
reserve City
Power’s right to deal more fully with the allegations and
contentions during the hearing of the matter.”
Court
a quo
[13]
Appellant’s case before the court
a quo
was essentially
the following: the consequences of the termination of the two
agreements was that the old contractor (first respondent)
would exit
the scene with all its equipment and its employees. A new
contractor would then render similar services
with its own equipment
and its own employees. This argument was rejected by
Rabkin-Naicker J in the court
a quo
as follows:
“
In
my judgment, on the facts and circumstances of this case, the
infrastructure for conducting the business in question does not
remain in the hands of Grinpal the outsourcee. It is, albeit
temporarily, in the hands of the original outsourcer, City Power.
The ‘holding operation’ that City Power itself
avers it is involved in, cannot be immune to the operation of
s 197.
This is the case, notwithstanding the reasons for the cancellation of
the contract with Grinpal.” (para 17)
The
appeal
[14]
On appeal, appellant contended that when the learned judge in the
court
a quo
employed the phrase ‘holding operation’,
she did so because appellant could not run the relevant service
previously
provided by first respondent. Therefore the
business of providing power in the manner which hitherto had been
performed
by first respondent could not have been transferred to
appellant. Accordingly, there could not have been a transfer of
a
business as a going concern from first respondent to appellant to
justify the application of s 197 of the LRA.
Section
197 of LRA
[15]
Section 197 of the LRA to the extent that it is relevant to this
dispute reads thus:
“
(1)
In this section and in section 197A –
(a)
“
business
” includes the whole or a part of any
business, trade, undertaking or service; and
(b)
“
transfer
”
means the transfer of a business by one employer (“the old
employer") to another employer (“the new employer”)
as a going concern.
(2)
If a transfer of a business takes place, unless otherwise agreed in
terms of subsection
(6) –
(a)
the new employer is automatically substituted in the place of the old
employer in
respect of all contracts of employment in existence
immediately before the date of transfer;
(b)
all the rights and obligations between the old employer and an
employee
at the time of the transfer continue in force as if
they had been rights and obligations between the new employer and the
employee
;
(c)
anything done before the transfer by or in relation to the old
employer, including
the
dismissal
of an employee or the
commission of an unfair labour practice or act of unfair
discrimination, is considered to have been done
by or in relation to
the new employer; and
(d)
the transfer does not interrupt an
employee’s
continuity
of employment, and an
employee’s
contract of employment
continues with the new employer as if with the old employer.”
[16]
This provision was subjected to a careful and definitive scrutiny by
the Constitutional Court in
Aviation Union of South Africa and
another v South African Airways (Pty) Ltd and others
2012 (1) SA
321
(CC). As the facts of
Aviation
are relevant to the
present dispute they require recitation.
[17]
In 2000, South African Airways (SAA) took a decision to outsource
certain of its non-core business in order to reduce its maintenance
costs which were in excess of R 130 million per annum. It
put its facilities management operation out to tender.
The
tender was awarded to LGM. Following the award of the
tender, LGM and SAA concluded an outsourcing agreement in
terms of
which the facilities management operations were transferred from SAA
to LGM. The agreement was to endure for
ten years,
terminating on 31 March 2010. In terms of the
agreement, LGM would provide services for a fee.
The
assets and inventory relating to these services were sold to LGM, but
on termination of the agreement, SAA would be entitled
to repurchase
these assets, LGM would be afforded the use of office space,
workshops, airport, aprons, computers and the SAA network
at all
designated airports. Upon termination of the agreement, SAA
would be entitled to have the services transferred back
to it or to a
third party and to obtain assignment of all third party contracts of
the LGM. Employees of SAA, who were
engaged in the
performance of these services, were automatically transferred to LGM
in terms of s 197 of LRA.
[18]
In June 2007 SAA terminated the agreement, owing to a breach
committed by LGM. Two months later it put out to tender
certain of the services performed by LGM. According to LGM,
employees who had been employed by LGM, pursuant to its obligations
under the outsourcing agreement with SAA, were now to be retrenched.
The appellant sought from assurance of SAA that, upon
termination of
the outsourcing agreement, LGM’s employees would be
retransferred to SAA. SAA’s stance was that there
was no legal
obligation requiring it to take the workers back. It was
within this context that appellant launched an
application for
declaratory relief against SAA and LGM pursuant to s 197 of LRA.
[19]
The dispute was heard in the Labour Court, this Court and the Supreme
Court of Appeal. Suffice to note that it
finally reached
the Constitutional Court where two judgments were delivered, one by
Jafta J, on behalf of a minority, and one by
Yacoob J, on behalf of
the majority of the court. Of particular relevance is the
approach adopted by Yacoob J to the proper
enquiry to be conducted to
determine whether the transaction in issue contemplates a transfer of
business by an old employer to
a new employer.
“
Does
the transaction concerned create rights and obligations that require
one entity to transfer something in favour or for the
benefit of
another or to another? If so, does the obligation imposed
within a transaction, fairly read, contemplate
a transferor who has
the obligation to effect a transfer or allow a transfer to happen,
and a transferee who receives the transfer?
If the answer to both
these questions is in the affirmative, then the transaction
contemplates transfer by the transferor to the
transferee.
Provided that this transfer is that of a business as a going concern,
for purposes of s 197, the transferee
is the new employer and the
transferor the old. The transaction attracts the section and
the workers will enjoy its protection.”
(para 113)
[20]
Applying this approach to the facts of SAA, Yacoob J found that LGM
had received the transfer of fixed assets, inventory, the
use of
space at airport, SAA computers, computer network service and lease
of property all of which was necessary to conduct the
services to be
supplied by LGM. Thus,
“
[a]s
the agreement rightly states LGM acquired the whole of the
infrastructure necessary for the conduct of the business.
It
did not have to secure a property or computers or network services or
anything of the kind.” (para 120)
The
question that vexed the Constitutional Court concerned the effect of
the termination of the outsourcing agreement between LGM
and SAA.
This required the court to examine the so-called second generation
transfer, that is, one from the original
outsourcee to the
outsourcer. Yacoob J found that the answer to whether s
197 of LRA applies in this case, to a large
extent, depended on
whether once the contract was cancelled LGM would be entitled to
continue to use the computers, airport space,
lease the property and
return the fixed assets and inventory. Thus,
“
if
the assets necessary to operate the business stay with LGM, then the
business would not be transferred. If they do
not stay
with LGM but go back to SAA, or to another service provider, there is
a transfer of business.” (para 121)
[21]
On the basis of this conclusion, the majority of the court found that
the effected termination of the agreement contemplated
a transfer of
the business as a going concern. The only question remained as
to whether the business as a going concern was
to be transferred to
SAA or to an interim service provider. So long as there
was a transferor, the identity of that
entity or person was of no
material significance to the issuing of the declarator sought by the
appellant.
[22]
Given that the difference of approach between the minority and
majority judgments turned essentially on the appropriate remedy,
it
is significant for the purposes of this dispute that Jafta J
reiterated the test for determining whether a business was
transferred
as a going concern, as being that which had been adopted
by the Constitutional Court in
National Education Health and
Allied Workers Union v UCT and others
2003 (3) SA (CC) at para
56:
“
In deciding
whether a business has been transferred as a going concern, regard
must be had to the substance and not the form of
the transaction.
A number of factors will be relevant to the question whether a
transfer of a business as a going concern
has occurred, such as the
transfer or otherwise of assets both tangible and intangible, whether
or not workers are taken over by
the new employer, whether customers
are transferred and whether or not the same business is being carried
on by the new employer.
What must be stressed is that this list
of factors is not exhaustive and that none of them is decisive
individually.”
[23]
All of these factors indicate that a court is required to
examine the substance of the agreement to terminate the outsourcing,
in this case between appellant and first respondent. In
essence, the approach adopted in
Nehawu
,
supra
follows
that of the European Court of Justice in the application of the
Business Transfers Directive (2001/23/EC) which is applicable
in the
European Union, and dictates that a transfer must relate to an
autonomous economic entity (defined to mean an organized
group of
persons and assets facilitating the pursuit of an economic activity
that promotes a specific objective). In
turn this
involves a determination whether that entity retains its identity
after the transfers; that is, the transferor must carry
on the same
or similar activities with the personnel and/or the business assets
without substantial interruption. See in
this connection
Spijkers v Gebroeders Benedik Abbatoir
CV
(1986) CMLR 296
and
the instructive judgment of Van Niekerk J in
Unitrans Supply
Chains Solutions (Pty) and others v Nampak Glass (Pty) Ltd and others
[2014] ZALCJHB 61 at para 15.
[24]
The transfer of a going concern does not mean that, upon the
termination of a service contract by one party and a subsequent
appointment of another service provider, a transfer of the contract
is sufficient to satisfy the requirements of s 197 has been
effected. The question is whether the activities conducted by a
party, such as first respondent, constitute a defined set
of
activities which represents an identifiable business undertaking so
that when a termination of an agreement between first respondent
and
appellant takes place, it can be said that this set of activities,
which constitutes a discrete business undertaking has now
been taken
over by another party.
Application
to the facts
[25]
The uncontested facts in this case are that the assets, both tangible
and intangible, were required to operate the Project,
that is, for
the installation and maintenance of a prepaid metering system for
electricity in Alexandra. This entire operation
was transferred
to appellant in terms of the handover process between appellant and
first respondent described in this judgment.
It is clear from
the evidence that the business of providing prepaid electrical
services to residents of Alexandra was handed over
by first
respondent to appellant, upon termination of the contracts which they
had previously concluded and the arrangements agreed
upon as set out
in the subsequent correspondence and meetings which took place to
effect termination. The business
is identifiable and it
is discrete. It involves equipment and expertise which is
required to continue the Project of
providing electricity.
According to the uncontested version of Mr Dlamini, training was to
be provided by first respondent
to appellant specifically to ensure
that appellant would have the necessary expertise and know how ‘to
be able to run the
project’.
[26]
Ultimately what occurred was that a business of providing a system of
prepaid electricity to residents of Alexandra continued,
save that it
was now conducted by a different entity. In similar
fashion to the decision of the majority in
Aviation Union
,
supra
the only debate concerned whether the business, as a
going concern, was transferred to first appellant or ultimately to a
third
party. When the court
a quo
referred to
appellant acting in a ‘holding operation’, it clearly
meant that appellant would run the business in the
interim, until
such time as a new contract was concluded with a third party.
Conclusion
[27]
I reach this decision with some anxiety. The implication
of the jurisprudence of the Constitutional Court in
Aviation Union
supra,
means that where an organ of State such as the
municipality enters into an outsourcing agreements for a defined
period, it runs
the risk, upon the termination of that contract, that
the municipality is required to assume the obligation of financing
the ongoing
employment contracts of those who had previously been
employed by the initial service provider. This concern is
raised
within the specific context of a second generation transfer as
applied both in
Aviation
,
supra
and in this case.
The consequences of the application of s 197 of the LRA to second
generation transfers may be to
impose significant financial burdens
on municipalities which are already constrained by limited available
public resources to fulfill
their important obligations of providing
services to all residents who fall within their jurisdiction.
[28]
It may be that consideration should be given by the legislature as to
whether s 197, viewed within the specific context of
a second
generation transfer, should be applicable to such contracts.
For this reason, a copy of this judgment will be delivered
to the
Minister of Labour for her consideration.
[29]
In my view however, the law has been set out clearly by the
Constitutional Court in
Aviation Union
. The
principles set out therein are applicable to this case and I accept
that the only reason available on the record
as to why there was no
transfer of employees to appellant was because of the latter’s
refusal to assume the role of employer.
On the papers as
presented to the court
a quo
the provisions of s 197 were
manifestly applicable to this case.
For
these reasons, therefore, the appeal is dismissed with costs.
_______________
Davis
JA
Judge
of the Labour Appeal Court
Tlaletsi
DJP and Ndlovu JA concur in the judgment of Davis JA
Appearances:
For
the Appellant:
Adv R. Ramashia
Instructed
by:
Hewu Attorneys
For
the First Respondent: Adv G. Fourie
Instructed
by:
Webber Wentzel Attorneys