High Court construes TUPE indemnity

Facts of the case

Urban Retreats Ltd (“UR”) operated a hairdressing and beauty salon and spa from Harrods department store, pursuant to a licence agreement. This was brought to an end by a settlement agreement, with an agreed termination date of 22 April 2018 (“the Termination Date”). Harrods subsequently continued to operate the salons and spa and many of the staff transferred to it under TUPE.

An issue arose as to whether an indemnity in the settlement agreement covered salaries, commission payments and holiday pay in respect of the period 1 April 2018 to the Termination Date, as well as commission payments for March 2018 (which were 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]…"

High Court’s decision

Overall, the High Court favoured the arguments put forward by Harrods. It acknowledged that the words “which fall due” in sub-clause (a) were commonly understood to mean that the obligation to pay had actually been triggered (as argued by UR). The HC did not, however, consider that this interpretation was appropriate, noting it would result in UR receiving a significant windfall - they had received the benefit of the employees’ work and the revenue generated in the period up to the Termination Date.

The HC concluded that the wording of the indemnity did not necessarily mean payments that had actually fallen due, and could include obligations that had arisen. The HC considered that this wider reading of the wording made “clear business sense”.

The HC also considered sub-clause (b) and an argument by UR that “any liability” should mean any other liability. This was also rejected. The HC noted that the word “other” was expressly excluded from sub-clause (b), whereas it had been included in sub-clause (e). The argument was therefore dismissed.

Finally, the judge agreed with Harrods that sub-clause (e) was a “catch all” provision. Its overall intention was to ensure that everything that occurred prior to the Termination Date should be UR’s responsibility, even if Harrods actually made the payments. Harrods was therefore entitled to be indemnified by UR in respect of the disputed employment costs.

Implications

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 was clearly swayed by the equitable merits of the situation.

This case nonetheless serves as a warning to practitioners when drafting TUPE provisions in, for example, an asset purchase or outsourcing agreement. A separate apportionment clause, sitting alongside the indemnities, should normally set out that all liabilities (including salaries, wages, commission, holiday pay entitlement etc) shall 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.

Urban Retreats Ltd v Harrods Ltd [2018] EWHC 3012 (Comm)