Litster v Forth Dry Dock and Engineering Co Ltd

Factual and Procedural Background

Company A, a ship-repair business operating under lease at The Dock, entered receivership on 28 September 1983. Twelve long-serving employees (the Appellants) continued working while the receivers negotiated a sale. On 6 February 1984 the receivers agreed to sell the tangible assets of Company A to Company B, a newly incorporated entity formed by former advisers and managers of Company A. At approximately 3:30 p.m. that day the receivers handed the workforce dismissal letters stating that no further wages would be paid. One hour later, at 4:30 p.m., the asset sale was completed and Company B immediately carried on the same business, employing only three of the former workforce and replacing the remainder with cheaper labour.

The Appellants claimed unfair dismissal. An industrial tribunal upheld their claim and, applying the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE), held Company B liable for compensation. The Employment Appeal Tribunal (EAT) affirmed that decision. The Court of Session (Second Division) reversed, holding that because the Appellants were dismissed an hour before the transfer they were not “employed immediately before the transfer” for the purposes of regulation 5(3). The Appellants appealed to the House of Lords.

Legal Issues Presented

1. Whether employees dismissed shortly before a business transfer, for a reason connected with that transfer, are deemed to be “employed immediately before the transfer” under regulation 5(3) of TUPE 1981.
2. Whether, in light of Council Directive 77/187/EEC and decisions of the European Court of Justice (ECJ), regulation 5 must be construed purposively so that dismissal aimed at avoiding TUPE liability cannot defeat employee rights.
3. Whether the Court of Session erred in setting aside the EAT’s order that Company B was liable for the Appellants’ unfair dismissal compensation.

Arguments of the Parties

Appellants' Arguments

• The dismissals were effected solely to avoid the operation of TUPE and therefore contravened regulation 8(1) and Article 4(1) of the Directive.
• Regulation 5 must be read consistently with ECJ authority; words should be implied so that employees unfairly dismissed for transfer-related reasons are treated as still employed “immediately before” the transfer.
• The sequence of events showed a continuous business transfer; Company B therefore inherited all employment liabilities.

Respondents' Arguments

• The literal wording of regulation 5(3) confines protection to persons employed at the exact moment before transfer; because dismissals took place one hour earlier, liability did not pass.
• No “relevant transfer” occurred because the transaction involved surrender of one lease and grant of another by a third party.
• Even if TUPE applied, the dismissals were allegedly justified on economic or organisational grounds.

Table of Precedents Cited

Court's Reasoning and Analysis

The House of Lords (Judge Keith, Judge Brandon, Judge Templeman, Judge Oliver, and Judge Jauncey) delivered concurring opinions. Key steps in the analysis were:

• Purposive Interpretation Duty: Following ECJ jurisprudence and Pickstone, UK courts must construe implementing regulations so they achieve the Directive’s protective purpose.
• Defect in Literal Reading: A strict reading of “employed immediately before the transfer” in regulation 5(3) would allow easy evasion: a transferor could dismiss staff moments before completion, leaving them with worthless claims against an insolvent employer.
• ECJ Guidance Binding: Bork and related cases hold that workers dismissed in breach of Article 4(1) are deemed still employed at the transfer date. Domestic law must align with that principle.
• Implied Words: To secure conformity, the Lords implied the following sense into regulation 5(3): an employee is covered if he was employed immediately before the transfer or would have been so employed but for an unfair dismissal connected with the transfer.
• No Valid Economic Defence: Company B advanced no economic, technical, or organisational justification. The dismissals were orchestrated solely to avoid TUPE liability.
• Spence Distinguished: That case concerned dismissals for independent economic reasons; it remains correct on its facts but does not govern transfer-driven dismissals.

Holding and Implications

Appeal ALLOWED. The interlocutor of the Court of Session (18 March 1988) was recalled and the order of the Employment Appeal Tribunal (5 December 1985) restored. Company B is liable for the Appellants’ unfair-dismissal compensation; the Respondents must pay the Appellants’ costs in Scotland and before the House.

Implications: The decision firmly establishes that, under UK law, employees unfairly dismissed for transfer-related reasons are treated as still employed at the moment of transfer. Any attempt to sidestep TUPE by timed dismissals will fail unless justified by genuine economic, technical, or organisational reasons. The judgment aligns domestic law with EU jurisprudence, reinforcing purposive interpretation and setting a binding precedent on the scope of regulation 5(3).