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Worklaw subscribers receive a monthly newsletter containing commentary on the latest labour law cases and trends. The subscriber newsletter contains an article on The practical effect of the 2012 LRA Bill on ‘non standard’ employment. We also look at three new cases: the first looks at the consequences of a settlement agreement being made an order of court.  The second considers when a director binds the company in the course of negotiations. The third revisits the complex question of the transfer of a business as a going concern.

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What is the effect of making a settlement agreement an order of court?

In the context of a strike, a settlement agreement is reached. It includes an incentive scheme.  The settlement agreement is made an order of court. Three years later, there is an economic downturn and the employer says it can no longer afford the incentive bonus. The employees go to court for an order that the employer is in contempt of court for reneging on the settlement agreement. What should the court do?

These were the facts in Public Servants Association of SA v Gwanta and Another NNO (LC J439/2010). In court the employer argued that the settlement agreement was concluded at a time when the economy was booming. It also argued that when the parties concluded the settlement agreement they were committed to resolving the issue and averting the strike. At that stage the question of what would happen in the case of an economic downturn was not discussed. Whether or not the incentive scheme would remain in place indefinitely was also not discussed, nor was it addressed in the settlement agreement.

The applicant (the trade union) on the other hand argued that as the settlement agreement was an order of court, it stands until it is set aside or varied by a subsequent order of court.  The union also contended that the settlement agreement, as an agreement which regulated the terms and conditions of employment of its members, varied the contracts of employment concluded between its members and the employer. As a result, even if the employer was entitled to terminate the settlement agreement, this did not have the effect of undoing the variation of the individual contracts of employment as they existed between the employer and each of the union’s members. The court was clear: The fact that a settlement agreement is made an order of court does not mean that all the terms of the settlement agreement automatically become terms of the court order. The court asked the following questions, which pointed to the difficulties faced in this case:

  • Is the result that one or both of the parties are in breach of the court order, and may such party/parties in these circumstances be compelled to comply with the court order even if non-compliance may be contractually excused?  If not, what is the object and purpose of the court order if it cannot be enforced?

  • Is it expected of contracting parties to approach the court every time they amend or change their contract, to apply for an order varying the court order?

  • If the object and purpose of the court order is to allow either or both contracting parties to proceed immediately to execution without resolving their contractual disputes, may any of the parties be deprived of their contractual rights or remedies, including the right to have their disputes settled in a court of law? If not, again the rhetorical question: What then is the purpose and effect of incorporating a contract into an order of court?”

The court said that it is arguable in this case that when the court made the settlement agreement an order of court, all that it was doing was acknowledging that the matter before it was withdrawn, and that the parties had reached an agreement as to how they would address the underlying dispute going forward.  In other words the specific terms of the settlement agreement do not necessarily form part of the court order. The court approved of the following approach: if it is found that a court order is merely a recording of a settlement agreement between the parties without an element of the court requiring obedience with its terms as a court order, it cannot and should not be treated as a court order.  In such a case the remedy of the applicant is to sue on the contract and for the court to decide the matter on contractual principles.

The lesson of this case is that parties need to be clear what can be achieved by making a settlement agreement an order of court.  Section 142A of the LRA provides that the CCMA may, by agreement between the parties or on application by a party, make any settlement agreement in respect of any dispute that has been referred to the CCMA, an arbitration award. Section 143 provides that an arbitration award may be enforced as if it were an order of the Labour Court. This case is clear: a settlement agreement has to specifically provide for a court enforcement role, failing which the court may not assist in its compliance.

When is a company bound by the actions of a director?

If a manager goes to the CCMA to represent the employer and agrees in conciliation to a settlement for which s/he has no mandate, is the employer bound? Or if in the course of negotiations a manager appears to agree to proposals, can the employer later get out of the apparent agreement because the manager was not authorized to reach a final agreement?

This situation arose in the case of Solidarity and Others v Eskom Holdings Ltd (2012) 33 ILJ 464 (LC). Solidarity, the trade union acting for its members, alleged an agreement between it and the employer, Eskom Holdings Ltd, giving reactor operators at Koeberg Nuclear Power Station the right to early retirement without the loss of benefits. It argued that there was an actual agreement to this effect; alternatively, it relied on Eskom’s so called ‘manifestation of assent’.

Solidarity relied on an agreement contained in a Management Directive in terms of which Eskom undertook to defray the loss otherwise incurred through early retirement, by making the requisite contribution to the pension fund. Solidarity contended that the agreement was proposed – effectively, in principle - in a meeting by the Executive Director (Generation) (authorised by the Eskom CEO) and accepted in principle by the operators present at the meeting. Solidarity argued that the agreement was ultimately finalised by the adoption of Management Directive, signed under the authority of the Power Station Manager.

Eskom denied that such an agreement was reached, whether in principle or at all. It denied that the Executive Director (Generation) was authorised to enter into any such agreement. According to Eskom, the agreement, once drawn up by ‘a task team’, would only come into force once approved by him and the Executive Director: Human Resources. It contended that no consensus was reached on the implementation of the alleged agreement, that the early retirement scheme had not been authorised by Eskom’s Head Office, and that no manager or official at Koeberg was authorised by Head Office to give effect to, or publish any changes to the retirement scheme for licensed operators.

The court used this principle to resolve the dispute: Third parties dealing with a company are entitled to assume that a company’s board of directors, managing director or a director who purports to be acting on behalf of the company, is acting within his or her “scope of authority” and can bind the company. (In legal jargon this is called the doctrine of quasi-mutual assent and the application of an old company law rule called the Turquand rule).

The court said that it could not have been expected of the employees to interrogate the Executive Director (Generation) and the Power Station Manager as to whether they had the requisite authority from the Board of Eskom to enter into the agreement as they did. The Executive Director was quite obviously acting as the agent of Eskom – he flew to Koeberg from Megawatt Park in order to address their concerns on behalf of Eskom, not on a frolic of his own. The employees quite rightly assumed that internal processes had been complied with.

That perception was also strengthened by the Power Station Manager’s letter to them, three days later, in which he reiterated that proposals were “made and endorsed” by the Executive Director; and that they “could be readily implemented within the authority of the Executive Director (Generation) and Koberg Power Station”.  The court found that the employees were entitled to rely on Eskom’s manifestation of assent.

What can we learn from this case? An employer will be estopped (ie prevented) from denying that an agreement was reached, where employees are entitled to assume that the management representative in the negotiations had the authority to act on behalf of the employer. Management representatives need to make clear at the commencement of negotiations that any agreement reached is subject to approval, if this is the case.

A transfer of a business as a going concern

  • Slag is a by-product from smelting ore. The business involved in this case comprised slag management and processing services performed by Harsco to AMSA in terms of six separate service contracts, two each in Vanderbijlpark and Newcastle, and one each at Vereeniging and Saldanha. These service agreements were terminated, and Phoenix and Tube City were appointed to continue these services.

  • The key question raised was whether section 197 of the LRA (dealing with transfers of a business as a going concern) applied on termination of the service agreements between Harsco and the AMSA and the appointment by AMSA of Phoenix and Tube City to continue these services. Harsco said that it did; AMSA, Phoenix and Tube City said that it did not.

  • Harsco had provided the services for some 40 years. Shortly before the expiry of the service agreements, AMSA initiated a tender process in respect of all the operations mentioned above, except for Vanderbijlpark Slag where the service agreement with Harsco remained in force. Harsco, Phoenix and Tube City, all direct competitors in the South African market, were amongst those who submitted tenders. But for Vanderbijlpark Slag, Harsco was unsuccessful in its bid to renew its agreements with AMSA. Phoenix was awarded the tender in respect of the operations in Vereeniging, Newcastle Slag and Newcastle; Tube City was awarded the tender in respect of the operations in Vanderbijlpark and Saldanha Bay.

  • These were the facts in Harsco Metals SA Ltd and Another v Arcelor Mittal SA Ltd and Others (LC J 2923/11 29 December 2011). In an urgent application, a declaratory order was sought to the effect that the transfer of the business to Phoenix and Tube City was ‘a transfer of a business as a going concern’ for the purposes of s 197 of the LRA. What was at stake was the impact of s 197 – such as, the new employer is automatically substituted in the place of the old employer; all the rights and obligations between the old employer and the employee continue in force; and there is no interruption in an employee’s continuity of service.

The papers in this application exceeded 1200 pages. The application was argued the day before Christmas Eve, and the judge made a ruling on the morning of 29 December. That alone deserves particular praise, but it does stress the high stakes in this transfer, due to happen on 1 January. Much of the court’s decision turns on the very complex factual situation that existed.

The court relied heavily on the recent Constitutional Court judgement in Aviation Union of SA & another v SAA (Pty) Ltd & others CCT 08/11 [2011] ZACC 31 in coming to its conclusions. It is important to note that court decisions in applying s 197 inevitably look very closely at the specific facts of each case in deciding whether ‘a transfer of a business as a going concern’ has taken place for the purposes of that section. The detail is important.  Following from that CC judgement, the court said s 197 is triggered when on the facts there is

  • a transferby one employer to another,

  • in circumstances where the transferred entity is the whole or part of a business, and

  • where the business (or part of it) is transferred as a going concern.

For businesses that regularly tender for work and who effectively compete with an outgoing service provider with whom they have little or not contact, an important aspect further clarified by this judgement is that the absence of a contractual link between the ‘old’ and the ‘new’ employer is not decisive for the purpose of s 197. What is more significant than the mode of transfer is whether what is transferred is a business in operation that remains the same but in different hands. In answering this question, the court said that the most important factual circumstances are the degree of similarity of the activity carried on before and after the transfer, the type of undertaking concerned, and the question whether or not the majority of the employees are to be taken over by the new employers.

In this case the court found on the facts that the transfer complied with this test – the business operations had continued as a discrete economic entity in the hands of a new service provider. In the court’s view, s 197 accordingly applied.


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Bruce Robertson
April 2012
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