Aviation Union of SA & another v SAA (Pty) Ltd & others CCT 08/11[2011] ZACC31

Principle:
It is impossible 'in the air' to determine whether a 'second generation' outsourcing agreement amounts to a transfer of a business as a going concern. This is wholly dependent on the facts and circumstances of the particular case. Section 197 applies if 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: it contemplates a transferor who has the obligation to effect a transfer or allow a transfer to happen, and a transferee who receives the transfer.

Facts:
In 2000, SAA decided to outsource certain of its non-core business in order to reduce costs. To this end, it put its facilities management operations out to tender, and this was awarded to LGM. SAA concluded a collective agreement with three trade unions in terms of which its infrastructure and support services departments were transferred to LGM. SAA and LGM then concluded an outsourcing agreement, in terms of which the facilities management operations were transferred from SAA to LGM for 10 years, with SAA retaining the option to renew it for a further 5 years. The agreement provided that the contracts of employees would be transferred to LGM in terms of s 197 of the LRA. Assets and inventory of SAA relating to the transferred services were sold to LGM and, on termination of the outsourcing agreement, SAA was entitled to repurchase the assets and inventory of LGM. Of critical importance to the dispute was a provision in the agreement that SAA retained a right to (re)transfer these services to itself or to a third party at the end of the contract period.

During 2007, SAA terminated the outsourcing agreement due to a breach committed by LGM, and called for tenders for certain services previously performed by LGM. LGM gave notice of possible retrenchments in the light of SAA's cancellation of the agreement. The employees in question were all either transferred by SAA to LGM in terms of the original agreement or subsequently employed by LGM, and were all engaged in the services provided by LGM in terms of the agreement.

The question which arose in this case was whether the cancellation of the original outsourcing agreement, and the continued performance of these services by either SAA or a third party after the termination of the original agreement, amounted to a transfer as contemplated by s.197?

This dispute journeyed from the Labour Court to the LAC, and then on to the SCA and finally the Constitutional Court. The Constitutional Court overruled the SCA. The Court was clear in its view that s.197 applies to any transaction that transfers a business as a going concern, and that the SCA erred in finding that s.197 does not apply to second generation outsourcing agreements. But whether or not s.197 applied, would depend on the facts and circumstances of each case. Based on the facts of the SAA case and specifically the rights and obligations of the parties based on the contracts entered into between them, the Court found that the cancellation of the agreement between SAA and LGM obliges LGM to transfer a business as a going concern in terms of s.197.

In the Court's view, the focus should be on examining the facts of a case to determine whether there was a transfer of a business as a going concern by the old employer to the new employer. Whilst the Court's minority judgement expressed the view that too much weight was given by the lower courts to the word "by' in interpreting this section, the Court's majority judgment was clear that "by" should be given its ordinary meaning. It stated that section 197 applies if 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: it contemplates a transferor who has the obligation to effect a transfer or allow a transfer to happen, and a transferee who receives the transfer.

The Court differentiated between the transfer of a business (that delivers a service) and the outsourcing of a service. Only the former would be covered by s.197.

Extract from the judgment
[81] There is no debate that section 197 "applies to any transaction that transfers a business as a going concern", and that the majority judgment in the Supreme Court of Appeal erred in holding that "the section does not apply to second generation outsourcing agreements." However, this judgment adopts a somewhat different approach to this question. This judgment holds broadly that a permissible meaning of the word "by" inevitably leads to the construction of the section favoured by the Labour Appeal Court (LAC), and that it is unnecessary to equate the word "by" with "from" and conclude that a transfer from one person or entity to another suffices for purposes of section 197.

[105] A further general point must be made. An inquiry whether a transaction falls under the terms of section 197(1) and (2) would be misleading if it focuses solely or mainly on the "generation" of the transfer. It has the potential to bring about an incorrect result. It does not matter in principle what the "generation" of the outsourcing is, or even whether the transaction is concerned with contracting out at all. The true inquiry is whether there has been a transfer of a business as a going concern by the old employer to the new employer. That evaluation is complex enough without it being burdened with questions about the "generation" of outsourcing. A transfer of business may not be covered by section 197 even if it is a "first generation" contracting out. On the other hand, even a "fifth generation" outsourcing could be caught by the section if it is in reality the transfer of a business as a going concern.

[106] The final general observation is that, in determining whether contracting out amounts to the transfer of a business as a going concern, the substance of the initial transaction, more specifically whether what is outsourced is a business as a going concern rather than the provision of an outsourced service remains significant during subsequent transfers. If the outsourcing institution from the outset did not offer the service, that service cannot be said to be part of the business of the transferor. What happens here is simple contracting out of the service, nothing more, nothing less.

[107] There is no transfer of the business as a going concern. The outsourcee is contracted to provide the service, and becomes obliged to do so. And it is the outsourcee's responsibility to make appropriate business infrastructure arrangements. These may include securing staff, letting appropriate property for office or other work space, and acquiring fixed assets, machinery and implements, computers, computer networks and the like. Cancellation of the contract in these circumstances entails only that the outsourcee forfeits the contractual right to provide the service. The whole infrastructure for conducting the business of providing the outsourced service would ordinarily remain the property of the outsourcee. As we shall see, that is not what happened here, either when the initial outsourcing contract was concluded between SAA and LGM, or when SAA cancelled it.

[111] I agree with the approach of the Labour Appeal Court. I might add that it is quite impossible to determine in the air that a "second generation" outsourcing arrangement does or does not amount to a transfer of a business as a going concern. As was said in NEHAWU, this determination is wholly dependent on the facts and circumstances of the particular case:


"The phrase 'going concern' is not defined in the LRA. It must therefore be given its ordinary meaning unless the context indicates otherwise. What is transferred must be a business in operation 'so that the business remains the same but in different hands'. Whether that has occurred is a matter of fact which must be determined objectively in the light of the circumstances of each transaction. 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. They must all be considered in the overall assessment and therefore should not be considered in isolation." (Footnotes omitted.)


[113] It cannot be doubted that the word "by" must be given its ordinary meaning. We must ask these questions in the inquiry whether a transaction in issue contemplates a transfer of business by the old employer to the 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 section 197, the transferee is the new employer and the transferor the old. The transaction attracts the section and the workers will enjoy its protection.
Determination of application of section 197

[114] It will be necessary to examine the agreement in issue to determine whether the rights and obligations it creates provide for the transfer of a business as a going concern by a transferor, the old employer, to a transferee, the new employer.

[120] Does this clause contemplate the transfer of a business or does it contemplate simply the outsourcing of a service? This question must be answered in context. SAA did not effect the mere outsourcing of a service to LGM through the agreement. It did much more. It transferred the business relative to delivering that service. Thus, LGM received transfer of fixed assets and inventory, the use of space at all airports, SAA computers, SAA computer network services and the lease of property necessary to conduct the service. In short as the agreement rightly states, LGM acquired the whole of the infrastructure necessary for the conduct of the business. It did not have to secure property, or computers, or network services or anything of the kind.

[121] The question to be answered now is whether clause 27 of the agreement contemplates merely outsourcing a service to SAA or to a third party or whether it contemplates the transfer of the business operation that delivered the service. The answer to this depends to a large extent on whether LGM, upon cancellation, would be entitled to continue to use the computers and airport space, to lease the property and to keep the fixed assets and inventory. 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.

[122] And the answer is clearly that these assets will not be kept by LGM. LGM did indeed become obliged to assist SAA in transferring certain services to SAA or to a third party. But the agreement went further. LGM was also obliged to provide SAA with reasonable access to the services, assets and inventory of LGM. LGM became obliged to sell all fixed assets and inventory dedicated only to providing the services in terms of the agreement back to SAA and to transfer or assign all third party contracts to SAA. What is more, both parties were entitled to the surrender of all information pertaining to the scope of work belonging to the other party.

[123] Moreover, the cancellation of the agreement would necessarily mean that LGM would no longer be entitled to the use of property and to the leases already described. In my view, it would be quite impossible for LGM to continue to conduct the business upon cancellation of the agreement. LGM might win a tender or a part of it but that is another transaction.

[124] In the circumstances, the cancellation clause of the agreement contemplated a transfer of the business as a going concern. The only debate was about whether the business as a going concern was to be transferred to SAA or to an interim service provider. As long as there is a transferor, the identity of that entity or person is of no material significance. The agreement contemplates transfer by LGM to SAA or to the interim service provider. It requires a transfer by a transferor, the old employer, to the transferee, the new employer.

[125] The cancellation is thus hit by section 197.

[126] In the circumstances Aviation Union was entitled to a declarator.