Neutral Citation Number: [2009] EWCA Civ 98

Case No: A2/2008/1069

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT APPEAL TRIBUNAL
MR JUSTICE ELIAS (PRESIDENT)
UKEAT/0435/07/DA
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 20/02/2009
Before :

LORD JUSTICE SEDLEY

LORD JUSTICE KEENE
and
LADY JUSTICE SMITH
---------------------
Between :

Protectacoat Firthglow Ltd Appellant

- and -
Miklos Szilagyi Respondent
---------------------
(Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
---------------------
Mr George Foxwell (instructed by PJH Law) for the Appellant
Mr Miklos Szilagyi appeared in person

Hearing date : 2 December 2008

---------------------
 JudgmentLady Justice Smith:

Introduction

1. This is an appeal from the decision of the Employment Appeal Tribunal (EAT)
dated 26 April 2008 in which it dismissed, in part, the appeal of Protectacoat
Firthglow Ltd (Protectacoat) from the decision of an employment tribunal (ET).

2. The business of Protectacoat is the application of protective coatings to the

external walls of domestic dwellings. In proceedings begun in the ET, Mr
Szilagyi claimed that he had been employed by Protectacoat and that he had been
unfairly dismissed for refusing to work in what he alleged were unsafe conditions.
In its ET3, Protectacoat claimed that Mr Szilagyi was not an employee but an
independent contractor. It alleged that he worked in partnership with another
man, his assistant, and that the partnership contracted with Protectacoat. It relied
on documents signed by Mr Szilagyi which, it said, demonstrated the nature of the
contractual relationship between it and the partnership.

3. Protectacoat also alleged that Mr Szilagyi’s claim had been lodged too late.

4. A preliminary hearing was held at which the employment judge decided that Mr
Szilagyi was an employee and that, although his claim had been lodged late, time
for lodging the claim should be extended.

5. Protectacoat appealed to the EAT on both issues. The EAT allowed the appeal on
the time point but upheld the ET’s decision that Mr Szilagyi was an employee and
not an independent contractor. Protectacoat now appeals to this court on that
issue, with the permission of Mummery LJ.

Background to the Hearing

6. Before the date of the preliminary hearing, the appellant’s solicitor, Mr Hyland,
wrote to the ET requesting that Mr Szilagyi provide particulars of why he
considered himself to be an employee. Mr Hyland drew attention to the
company’s contractual documentation on which it would rely and mentioned the
case of Protectacoat Firthglow v Descombes [2004] UKEAT/0916/03/ILB in
which the EAT had held that two men who claimed to be employees of
Protectacoat had in fact been partners in firms which had contracted to do work
for Protectacoat and, as such, could not be employees. The documentation
scrutinised by the EAT in that case was similar to that which would be in issue in
the present case.

7. A tribunal chairman refused the application for particulars saying that they were
not necessary and that the issue of employment would be decided at the hearing.
 Thus it was that, prior to the preliminary hearing, Protectacoat did not know
exactly what Mr Szilagy was going to say about how he came to be taken on or
how he was going to put his claim that he was an employee rather than an
independent contractor.

The Hearing

8. At the hearing, in April 2007, Mr Szilagyi appeared in person. He gave evidence,

as follows, of the way in which he had begun to work for Protectacoat in March
2006. He had seen a Protectacoat van in the car park at Tesco’s and had asked the
driver if work was available. He was given a business card. He followed up this
enquiry by going to Protectacoat’s yard at Crawley where he met the depot
manager, Simon Squires. Mr Squires said that work was available. He asked Mr
Szalgyi if he had any experience of health and safety matters to which the reply
was negative. Nonetheless, Mr Squires told him to sign a health and safety
induction card, which he (Mr Squires) described as ‘a load of bollocks’. After
that, Mr Szilagyi was sent out in a van with two other men to learn the job. He
worked alongside them and received cash in hand for two or three weeks. Mr
Foxwell, counsel for Protectacoat, told us during the hearing that these two men
were other subcontractors and that the appellant had arranged and paid for an
experienced team to train Mr Szilagyi.

9. Although it is not recorded in the ET’s decision, it appears that Mr Squires told
Mr Szilagyi that he would need to find someone to work with him as his assistant.
Mr Szilagyi found a man called Glen Nesbitt. Mr Szilagyi said that Mr Squires
told him he must sign some documents. These documents were not explained to
him. Mr Squires just said: ‘Mick get in here and sign this. You are looking for
work, wife to support, men to pay, sign these’.

10. Although the decision does not describe these documents, it is apparent that the
employment judge read them and it is convenient to describe them at this stage.
We were told that the proforma documents were drafted by or on behalf of
Protectacoat.

11. The first document was a partnership agreement. As completed it was an

agreement between Mr Szilagyi as ‘installer’ and Mr Nesbitt as ‘assistant’. The
partnership was given the name M & G Coatings. The Partnership Act 1890 was
to apply. Either party could terminate the partnership upon two weeks notice. If
the assistant gave notice or died, the installer could acquire the assistant’s share or
interest. The installer could give notice to the assistant to terminate the assistant’s
interest in the partnership and would then automatically acquire the assistant’s
 interest. The installer could then transfer the assistant’s interest to a new assistant
of his own choice, in which case the partnership would not be dissolved but would
continue as between the installer and the new assistant. Under the heading of
‘Capital and Profits’ it was said that the installer would make such contributions
to capital as he deemed fit and the assistant should not be required to make any
such contribution. The installer would be entitled to all the partnership capital.
The partnership profits were to be divided in the proportion set out in the
schedule, which in the case of Mr Szilagyi and Mr Nesbitt was 60% to the
installer and 40% to the assistant. The accounts were to be calculated ‘on an
annual basis’. Each partner could draw weekly sums as agreed between them.
The assistant was to devote the whole of his time to the business of the
partnership. Mr Szilagyi’s signature was witnessed by Mr Squires. Mr Nesbitt’s
signature was also witnessed but not by Mr Squires. The deed was dated 20 April
2006.

12. The second document was a contract whereby the partnership (M&G Coatings)
undertook to provide services to Protectacoat (the company). I will call this
document the services agreement. It provided that the partnership was retained to
provide services in the form of application of exterior textured coating to
buildings. The company would notify the partnership where the services were to
be carried out. The partnership was to be responsible for travel arrangements to
the place at which the services were to be carried out. The agreement was to
commence on 18 April 2006 and would continue until terminated in accordance
with clause 4. That provided that either side could give one week’s notice of
termination but, in addition, the company could terminate the agreement without
notice on the happening of various events, which included the refusal or failure by
the partnership without reasonable cause to perform the service. Clause 5 entitled
‘Mutual Obligations’ provided:

“Save to the extent that the Company is required to give the

partnership notice to terminate this Agreement in
accordance with clause 4 the company is under no
obligation to provide the Partnership with work.”

Clause 6 provided that the fee for services to be provided in respect of each
customer would be agreed in advance between the company and the partnership.
Once agreed, the fee would only be varied in exceptional circumstances. If
rectification work were required, this was to be carried out by the partnership at its
expense. Payment of fees would be made gross on completion of the provision of
the service to each customer on receipt of an invoice from the partnership in the
week following completion. The partnership would be liable to account to the
Inland Revenue for tax and National Insurance contributions but the company
reserved the right to deduct income tax under the ‘subcontractor’s tax deduction
scheme’.

Clause 7 provided that the partnership was required to provide the necessary
equipment. By Clause 8 the partnership promised that it would perform the
services diligently and with reasonable skill and care, comply with the company’s
 health and safety guidelines and not do anything ‘to jeopardise the safety of the
partnership, the client or members of the public’. By clause 9 it was provided that
the partnership was not required to work any specific hours, save that the hours
worked must be convenient to the client. By clause 10, the partnership was not
prevented from providing services to others. This document appears to have been
signed on 18 April 2006.

13. Although we have not seen it, Mr Szilagyi also apparently signed a ‘hire
agreement’ whereby he purported to hire a van, and various tools and equipment
from Protectacoat for £210 per week.

14. Before working for Protectacoat, Mr Szilagyi had a Construction Industry Scheme
Registration Card, issued by the Inland Revenue. We were told that Mr Szilagyi
re-registered in the name of the partnership, although there is no reference to this
in the decision.

15. From about 8 April 2006, Mr Szilagyi was sent out with Mr Nesbitt to do jobs for
Protectacoat. He was provided with a Protectacoat van and most of the necessary
tools and equipment. He was told that, if asked, he was to say that he was
employed by Protectacoat. He worked for Protectacoat for some months. The
arrangement with Mr Nesbitt did not last long and, on 30 May 2006, Mr Szilagyi
and a Mr Eddie Belton signed an ‘Amendment to the Partnership Agreement’
under which Mr Belton became the assistant in Mr Nesbitt’s place. The division
of profits remained at 60:40. There was a further amendment on 24 October 2006
when Mr Sonny Weston became the assistant in place of Mr Belton. This time the
profit shares were changed to 50:50.

16. In November 2006, a dispute arose over whether a particular job required a
scaffold or could safely be done from ladders. Mr Szilagyi wanted Protectacoat to
provide a scaffold. Mr Squires considered that the ladders which had already been
provided were adequate. As a result of this dispute, Protectacoat terminated the
arrangement - to use a neutral expression - and Mr Szilagyi issued these
proceedings.

17. At the hearing, the question for the employment judge was whether Mr Szilagyi
was an employee, which is defined in the Employment Rights Act at section 230
as ‘an individual who has entered into … a contract of employment’. Mr
Szilagyi’s contention was that he had entered into a contract of employment. The
documents he had signed did not represent the true relationship between him and
Protectacoat; they were a sham. From the start, the actual working arrangements
were different from those stipulated in the written contract. For example, the
contract provided that payment for each job should be paid into the partnership
bank account. But, he said, there never was a partnership account and payments
were made, net of basic rate tax, directly into the accounts of Mr Szilagyi and his
assistant. Further, the contract provided that the company would hire a van to the
partnership at £210 per week. But in practice, the van was provided free of
 charge. Also, the contract provided that the partnership would provide its own
tools and equipment but in fact they were provided by Protectacoat. Also the
company paid for the fuel for the van.

18. Mr Szilagyi also described a number of features of working life which were not
consistent with the relationship of principal and subcontractor but were consistent
with the relationship of employer/employee. For example, Mr Szilagyi and his
assistant were required to attend at Protectacoat’s yard every morning at 7.30
before going to the site on which they were working. Also, although the contract
said that Mr Szilagyi and his assistant could undertake work for others, in fact this
was not permitted and a friend of Mr Szilagyi (who had signed a similar contract
with Protectacoat) was dismissed for doing that.

19. Mr Squires was not at the tribunal to give evidence. The appellant’s only witness
was Mrs O’Regan the company secretary. She produced the contractual
documents and explained how the appellant’s system usually worked. She said
that Protectacoat had taken advice from accountants and from the Inland Revenue
as to how to make arrangements so that they would not be the employers of the
men who carried out their installation work. They insisted that the men should
work in partnership and their understanding was that neither a partnership nor its
members could be employees. She said that Protectacoat insisted that the men
work in pairs, first for health and safety reasons but also because that would
underline the fact that they were in partnership and were not employees. She had
no knowledge of the dealings between the respondent and Mr Squires or of the
practice on the ground at the Crawley depot. She agreed with some aspects of the
respondent’s evidence. For example, she agreed that no charge was in fact made
for the ‘hire’ of the van, tools or equipment but claimed that the services
agreement allowed these charges to be waived. She agreed that workmen were
told that, if asked, they were to say that they were employees of Protectacoat. The
ET was shown Protectacoat’s website and brochure which, inter alia stated that, to
achieve its objective of looking after its customers and giving a first class service,
it insisted on ‘highly skilled craftsmen and absolutely no subcontractors’.

20. When Mrs O’Regan’s evidence was complete, Mr Hyland asked for an
adjournment so as to bring Mr Squires to give evidence. He claimed that
Protectacoat had been taken by surprise by Mr Szaligyi’s evidence. This
application was refused and the hearing came to an end.

21. The employment judge gave his judgment with reasons in June 2007. He held
that the written documents were a sham; they did not represent the true nature of
the relationship between the parties. In truth, the respondent was an employee of
Protectacoat.

The appeal in respect of the adjournment

22. Protectacoat appealed to the EAT. First, it contended that the employment judge
 should have granted the adjournment to allow Mr Squires to give evidence. The
EAT sought additional reasons from the Judge for this aspect of his decision. He
said that Protectacoat should have realised that they would need Mr Squires. He
was the only person who had had any dealings with Mr Szilagyi. They obviously
needed him. As to this, the EAT said that the employment judge had been entitled
to take that view. He had a wide discretion as to whether to grant an adjournment
and he had not misdirected himself. The EAT was not prepared to say that the
decision was perverse.

23. That point is pursued on appeal to this court. The appellant submitted that it was
reasonable for it to think that it would be able to defend the claim and prove that
the respondent was not an employee solely by reference to the documents and Mrs
O’Regan’s evidence. That had been sufficient in the case of Descombes. No
allegation had been made in that case that the documentation was a sham; the
EAT had examined the documents and had accepted that their effect was as
Protectacoat contended. In the present case, the appellant had had no indication
from the respondent that he was going to allege a sham.

24. I must confess that I was troubled by this point. I personally have some sympathy
with the position of a party who asks for particulars of the way in which the case
is to be put, is refused and then comes to the hearing ill- equipped. Had I been the
employment judge, I think I might have granted an adjournment. However, that is
not the test. The decision was a matter of judgment for the employment judge and
neither the EAT nor this court should interfere with it unless he was plainly wrong
in that an adjournment was necessary in the interests of justice.

25. On reflection, I do not think that this court should interfere. The employment
judge was of the view that it should have been obvious to Protectacoat that it
would need Mr Squires to attend the hearing because he was the only person who
had had any dealings with Mr Szilagyi. I see the force of that and his view is
entitled to respect in this court. Mr Foxwell submitted that because the appellant’s
request for particulars had been refused, it was reasonable for it to rely only on the
documentation to be produced by Mrs O’Regan. But, as Sedley LJ pointed out in
argument, the fact that particulars had been refused (and the refusal not appealed)
meant that Protectacoat needed to take the precaution of having Mr Squires
available. It was their choice to rely on Mrs O’Regan alone.

26. Accordingly, I would not interfere with the employment judge’s decision to refuse
an adjournment. An additional reason for reaching that conclusion is that, despite
pursuing this point before both the EAT and this court, Protectacoat has still not
obtained a witness statement from Mr Squires and it is by no means clear to what
extent his evidence would have been capable of discrediting that of Mr Szilagyi.
Mr Foxwell could only say that Mr Squires would dispute Mr Szilagyi’s account.
So, for those reasons, the first ground of appeal fails.

The main substantive ground – were the written agreements a sham?

27. The main point in this appeal is whether the employment judge was right to hold
that the written documents were a sham and that the true relationship was that of
employer and employee.

28. The employment judge listed a number of factors which he had taken into account
in holding that the documents were a sham or a fiction. First, he noted that
Protectacoat claimed publicly and directly to its customers that its installers were
employees not subcontractors; yet its contention to the tribunal was exactly the
opposite. Moreover, men such as Mr Szilagyi were told to tell clients that they
were employees.

29. Second, he said that the document by which the van and tools etc were ‘hired’ to
the partnership was a fiction because no charge was made. The services
agreement required the partnership to provide its own equipment but that did not
happen. Further the company paid for the fuel for the van even though the
agreement said that the partnership was responsible for the ‘travel arrangements’
to the work sites.

30. Third, the judge noted that payment for the work was made (with tax deducted)
direct to the individuals and not to the partnership. It appears that he was of the
view that, if the partnership were genuinely contracting independently with
Protectacoat, one would expect to see an invoice and payment into the partnership
account. But the partnership did not have an account.

31. Another factor which the employment judge mentioned was that Mr Szilagyi had
to attend the yard each morning and had to return to the yard after each job was
completed. He accepted that installers had to work exclusively for Protectacoat.
He accepted that one installer had been dismissed for doing work for someone
else.

32. The judge was of the view that the company dictated not only which jobs Mr
Szilagyi was to do but also how they were to be done. For example, when Mr
Szilagyi wanted to use scaffolding for a particular job and refused to do it from
ladders, he was dismissed. If this had been a genuinely independent partnership, it
would have been for the partnership to decide whether to use scaffolding and it
would be for them to provide it. That was not the case.

33. The judge also mentioned (apparently as one of the factors he was taking into
account when deciding that the agreement for services was a sham) his view that
the paperwork which Mr Szilagyi had signed (at Mr Squires’ request) to say he
had been given health and safety induction training was misleading. Mr Foxwell
submitted that that factor was quite irrelevant to the question of whether Mr
Szilagyi was an employee or an independent contractor. The need to give health
and safety training was entirely consistent with either relationship. I agree and, to
the extent that the judge took that factor into account in deciding that the
agreement for services was a sham, he took an irrelevant matter into account.
 However, as the EAT noted in its judgment, this factor was only one of many.

34. In response to Mr Foxwell’s submission that the judge had been wrong to hold
that the arrangements were a sham, the EAT held that the judge had had adequate
reasons for so holding and had not misdirected himself.

35. In this court Mr Foxwell made three main submissions. First, he submitted that, if
Mr Szilagyi was a partner in a business which contracted with Protectacoat, he
could not be an employee of that company. In Descombes, the ET had found that
the partnership agreements, which were in the same form as in the present case,
gave rise to genuine partnerships. But nonetheless, the ET had held that the men
were employees of Protectacoat. The EAT said that that was wrong. If the men
were in partnership they could not be employees. Speaking for myself, I would
have thought that that was right and that if there is a genuine partnership which
contracts with a company, the members of the partnership could not be
employees. However, one of the questions in this case is whether the partnership
agreements were genuine.

36. Mr Foxwell submitted that Mr Szilagyi signed partnership agreements with three
assistants as well as the services agreement with Protectacoat. There was no
evidence from any of the partner/assistants that they regarded the partnerships as a
sham. Therefore, the judge should have held that the partnership agreements were
genuine and Mr Szilagyi could not be an employee.

37. Mr Foxwell’s second contention was that the judge had applied the wrong test in
considering whether the agreements were shams. He submitted that, where parties
have freely entered into a written agreement, it is not for the court to rewrite it
merely because the subsequent conduct of the parties was not in accordance with
the agreement. That is what the employment judge had done in this case. An
agreement can only be ‘torn up’ or rewritten if it is a sham in the sense explained
by Diplock LJ (as he then was) in Snook v London & West Riding Investments
Limited [1967] 23 QB 786 at page 802 where he said:

“.. it is, I think, necessary to consider what, if any, legal

concept is involved in the use of this popular and pejorative
word. I apprehend that, if it has any meaning in law, it
means acts done or documents executed by the parties to
the ‘sham’ which are intended by them to give to third
parties or to the court the appearance of creating between
the parties legal rights and obligations different from the
actual legal rights and obligations (if any) which the parties
intend to create. But one thing, I think, is clear in legal
principle, morality and the authorities (Yorkshire Railway
Wagon Co v McClure1 and Stoneleigh Finance Ltd v
Phillips2) that for acts or documents to be a ‘sham’ with

1 (1882) 21 Ch.D. 309, C.A.

2 [1965] 2 Q.B. 537.
 whatever legal consequences follow from this, all the
parties thereto must have a common intention that the acts
or documents are not to create the legal rights and
obligations which they give the appearance of creating.”

38. Mr Foxwell submitted that, in the present case, for there to be a valid holding that
the documents were a sham, it had to be shown that all the parties to the impugned
arrangements had a common intention that the documents were not to create the
rights and obligations they purported to create. Here, there was no evidence from
the assistants that they regarded it as such. Nor, he submitted, was there any such
evidence from Mrs O’Regan as to the services agreement. To the contrary, her
evidence was that Protectacoat had a genuine intention to contract with the
partnership. Therefore there was no proper evidential basis for holding that either
the partnership or the services agreements were shams. Mr Foxwell cited
authority from the EAT and Court of Appeal which, he submitted, supported his
contention.

39. Finally, Mr Foxwell submitted that the ET’s reasons had been inadequate.

40. As a litigant in person, Mr Szilagyi was not able to contribute to the debate arising
from Mr Foxwell’s arguments. All he wanted to say was that ET had been right;
the written agreements did not tally with reality. Then he asked a rhetorical
question: ‘If I had been careless while I was working at someone’s house so that
someone was injured, whose insurance would have paid out?’ He said that he did
not carry insurance against his own negligence and it was clear from the contract
that Protectacoat had not required him to do so. Mr Foxwell acknowledged that,
in a contract such as Protectacoat alleged this to be, one would expect to see
Protectacoat place the obligation to insure upon the partnership. This was, in
effect, another factor which might have been taken into account by the judge in
holding that Mr Szilagyi was not an independent contractor. However, it was not
considered because it was not raised at the hearing.

Discussion

41. The main thrust of Mr Foxwell’s first submission was that it was not open to the
judge to hold that the partnership agreement was a sham without hearing from the
partners. I would reject that argument for the same reason as led to its rejection
in the EAT. There cannot be an absolute requirement for the evidence of any
particular person to be heard, provided there is evidence from somewhere which is
sufficient to prove the point.

42. However, it seems to me that the real questions in respect of the partnership
agreements are whether the employment judge applied the correct test and
whether there was sufficient evidence from any source to support his conclusion
that those agreements were shams. It is necessary first to define the correct test.
The test for a sham must be sensitive to context. The discussion which follows
 will be in the context of the question whether an agreement which purports to be a
contract for services is a sham and the relationship between the parties is in truth
that of employer and employee. However, in the present case, the test will have to
be applied to the partnership agreements as well as the services agreement.

43. Mr Foxwell submitted that the test of whether a written contract is a sham is found
in Lord Diplock’s definition in Snook set out above. However, that was a hire
purchase case and the issue was not whether the written agreement was a sham (it
clearly was) but whether the rights which the finance company appeared to have
under the (standard form) written agreement were lost because the hirer and a
broker (acting as agent for the finance company) had completed the form with
fictitious information but presented it to the finance company as genuine. Thus,
although it provides a definition, the case of Snook is not of uniform assistance is
determining whether an agreement is in fact a sham.

44. In an employment context, the question of whether a written agreement was a

sham was considered by the Court of Appeal in Consistent Group Ltd v Kalwak
and others [2008] EWCA 430; [2008] IRLR 505. There, a group of Polish work
people (the claimants) had been taken on by an agency (Consistent) and
contracted out to work for a food processing company. The written agreement
signed by Consistent and each claimant stated that the claimant was not
Consistent’s employee. It said that there was no obligation on Consistent to
provide work; nor was any obligation on the claimant to accept any particular
work assignment. Where an assignment had been accepted, the claimant had to
perform the services himself or, if he could not, he had to ensure that the services
were performed by a suitable substitute. A dispute arose and the claimants
commenced proceedings alleging that they were Consistent’s employees.

45. The ET held that the agreement was a sham and the claimants were Consistent’s
employees. On appeal, the EAT (Elias J, President) upheld the decision and also
held that the ET’s findings of fact and reasons were adequate. In the course of his
judgment, Elias J (as he then was) considered Lord Diplock’s definition of a sham
in Snook and also examined Peter Gibson LJ’s judgment in Express & Echo
Publications Ltd v Tanton [1999] IRLR 367.

46. In Tanton there was a dispute as to whether the claimant was an employee or an
independent contractor. It centred upon whether there was an obligation
personally to perform the work. An express term in the written agreement said
that there was not; a substitute could be provided. The ET held that that term was
a sham because, in practice, the employee had always performed the work
personally. The Court of Appeal held that the ET had applied the wrong test.
Peter Gibson LJ said that the ET should have asked itself what were the legal
obligations which bound the parties, rather than focusing on how the contract was
actually performed. He also said:

“Of course, it is important that the industrial tribunal should

be alert in this area of the law to look at the reality of any
 obligations. If the obligation is a sham, it will want to say
so”

47. In Consistent, Elias J interpreted and applied the principle expounded by Peter
Gibson LJ in Tanton by saying:

“…If the reality of the situation is that no one seriously

expects that a worker will seek to provide a substitute or
refuse the work offered, the fact that the contract expressly
provides for these unrealistic possibilities will not alter the
true nature of the relationship. But if these clauses
genuinely reflect what can realistically be expected to
occur, the fact that the rights conferred have not in fact been
exercised will not render the right meaningless.”

48. As I have said, Elias J went on to hold that the ET had not misdirected itself and
upheld the decision that the substitution clause was a sham. In the Court of
Appeal, Rimer LJ scrutinised Elias J’s judgment and was critical of the reasoning
by which he had upheld the ET’s decision. The Court allowed Consistent’s
appeal, on the ground that the ET’s decision was inadequately reasoned and
remitted the case for rehearing. However, it does not appear to me that the Court
was critical of Elias J’s exposition of the test, set out above, which he had derived
from Tanton. Indeed, it seems to me that Rimer LJ approved the test as
enunciated by Elias J as being in compliance with Lord Diplock’s definition of a
sham.

49. Rimer LJ summarised the position in his own words at paragraph 40 saying:

“It is not the function of the court or an employment

tribunal to recast the parties’ bargain. If a term solemnly
agreed in writing is to be rejected in favour of a different
one, that can only be done by a clear finding that the real
agreement was to that different effect and the term in the
contract was included by them so as to present a
misleadingly different impression.

50. The kernel of all these dicta is that the court or tribunal has to consider whether or
not the words of the written contract represent the true intentions or expectations
of the parties, not only at the inception of the contract but, if appropriate, as time
goes by.

51. With great respect to Rimer LJ, it appears to me that Elias J’s way of putting the
question may be of greater assistance to employment judges when deciding
whether a services agreement is a sham – a question which appears to arise with
increasing frequency. To speak of terms ‘solemnly agreed in writing’ is more
redolent of a commercial agreement reached between two parties of equal
bargaining power than the kind of ‘take it or leave it’ situation which can prevail
 in some agreements in the field of work.

52. Similarly, Rimer LJ speaks of terms being ‘included by the parties so as to give a
misleadingly different impression’. In a commercial agreement, usually both
parties will be in a position to require that the terms should reflect the nature of
the agreement. They may agree on a form of words which does not represent their
true intentions. However, in the field of work, it is sometimes one party and only
one which dictates the terms of the ‘agreement’. The reality may well be that the
principal/employer dictates what the written agreement will say and the
contractor/employee must take it or leave it.

53. Further, although Rimer LJ stressed that there must be a finding that some words
in the contract were included to create a misleadingly different impression from
the true effect of the agreement, he did not say that there had to be an intention to
deceive a third party. In the context of a bipartite agreement of the kind under
consideration here, it is sufficient if the court concludes that the agreement as
written did not reflect the true intention (or expectations) of the parties. I do not
understand Rimer LJ to have said that it is necessary to identify anyone who it
was intended to deceive.

54. I share the view expressed by Elias J in Consistent when he said:

“The concern to which tribunals must be alive is that armies

of lawyers will simply place substitution clauses or clauses
denying any obligation to accept or provide work in
employment contracts, as a matter of form, even where
such terms do not begin to reflect the real relationship.”

55. It seems to me that Peter Gibson LJ, Rimer LJ and Elias J have, between them,
enunciated the principle or test for determining whether a written contract is a
sham. The question is always what the true legal relationship is between the
parties. If there is a contractual document, that is ordinarily where the answer is to
be found. But, if it is asserted by either party, or in some cases by a third party,
that the document does not represent or describe the true relationship, the court or
tribunal has to decide what the true relationship is.

56. Tribunals will be well aware that contracts may be partly written and partly oral
and that they can also be constituted or evidenced by conduct. While a document
which can be shown to be a sham designed to deceive others will be wholly
disregarded in deciding what is the true relationship between the parties, it is not
only in such a case that its contents cease to be definitive. If the evidence
establishes that the true relationship was, and was intended to be, different from
what is described in the document, then it is that relationship and not the
document or the document alone which defines the contract.

57. In a case involving a written contract, the tribunal will ordinarily regard the
 documents as the starting point and will ask itself what legal rights and obligations
the written agreement creates. But it may then have to ask whether the parties
ever realistically intended or envisaged that its terms, particularly the essential
terms, would be carried out as written. By the essential terms, I mean those terms
which are central to the nature of the relationship, namely mutuality of obligation:
see Carmichael v National Power [1999] ICR 1226 and the obligation of personal
performance of the work.

58. Applying the principle to the present case, it seems to me that the employment
judge was entitled to conclude that both the partnership and the services
agreements were shams in that they did not describe or represent the true
intentions and expectations of the parties. It is true that the employment judge
began by doing what Peter Gibson LJ had said was not sufficient. He listed the
factors which demonstrated that the performance of the services contract was
different from that envisaged by the written agreement. But in my view, he went
much further than that. It is necessary to read the judgment as a whole to
understand the judge’s conclusions and the factors underpinning them.

59. It appears to me that the judge was of the view that Protectacoat wanted to enjoy
the advantages of being able to control its installers without the disadvantages of
being an employer. It wanted to tell its customers that its installers were
employees. It would want to do that in order to assure customers that it had full
control over the installation process both as to when it took place and the standard
to which it was performed. Thus Protectacoat’s intention was to have installation
teams that it could rely on for attendance and could control as to the manner in
which the work was done - in other words could control as employees. That is
what Protectacoat and Mr Szialgyi intended and envisaged would happen and it is
what actually happened. But, on Protectacoat’s own evidence, it had taken advice
as to the contractual format it should use to avoid a finding that its installers were
employees. Protectacoat wanted the ha’penny of treating their installers as
employees when it came to attendance and control and also wanted the bun of not
having to give them the rights they would enjoy as employees, such as their rights
under the Employment Rights Act 996.

60. The contractual format which Protectacoat had devised included an arrangement
whereby members of the installation teams would be required to sign partnership
agreements, so that they could not be regarded as employees. Were the
agreements between Mr Szilagyi and his assistants genuine partnership
agreements? It is well established that the fact that a document describes a
relationship as a partnership is not the test for the existence of a partnership. In
Weiner v Harris [1910] 1KB 285, Cozen Hardy MR said , at page 290:

“Two parties enter into a transaction and say ‘It is hereby

declared there is no partnership between us’. The Court
pays no regard to that. The Court looks at the transaction
and says ‘Is this, in point of law, really a partnership?’ It is
not in the least conclusive that the parties have used a term
or language intended to indicate that that the transaction is
 not that which in law it is.”

61. Street v Mountford [1985] 1AC 809 at 821 C contains dicta to similar effect in the
context of a dispute about whether a contractual document created a licence or a
tenancy. It was said that the parties cannot turn a tenancy into a licence merely by
calling it one. The same must be true of a partnership; one cannot create a
partnership by signing a document which calls itself a partnership agreement. And
the same must also be true of a contract for the performance of work in return for
pay. The court must look at the substance not the label.

62. The term ‘partnership’ is defined in section 1(1) of the Partnership Act 1890. It
provides as follows:

“Partnership is the relation which subsists between persons

carrying on a business in common with a view to profit.”

63. It seems to me clear that there was no real partnership between Mr Szilagyi and
his assistants. They had no business in common. They had no common assets.
They did not have a bank account. Their remuneration was paid directly into their
individual bank accounts. If this had been a genuine partnership, payment would
have been made directly to the partnership business account. It would have been
of no concern to Protectacoat in what proportions any profits were to be shared;
indeed that information would normally be confidential to the partners. In my
view, it is clear on the evidence that these men signed ‘partnership agreements’
not with the intention of creating any business relationship between them but only
for the purpose of satisfying a requirement of Protectacoat before they would be
given any work. The ‘partnership agreements’ were entered into in order to create
an illusion of partnership which would comply with the scheme which
Protectacoat believed would avoid creating an employment relationship. They
were shams.

64. As for the services agreement, it is true to say that, when considering the
contractual relationship between Mr Szilagyi and Protectacoat, the employment
judge did not examine the essential terms of the agreement in as much detail as
one might have wished. Some of the factors he mentioned (such as whether any
hire was charged for the van and who paid for the petrol) were not central to the
nature of the relationship. I am not suggesting that those factors were irrelevant;
they were not in that they were part of the overall picture.

65. It is unfortunate that the judge did not specifically mention clause 5, headed
‘Mutual Obligations’ which was to the effect that the company would be under no
obligation to provide the partnership with work. He made no express finding as to
the parties’ intentions or expectations as to the provision of work. However, he
did mention clause 10, headed ‘Non Exclusivity’ which provided that there was
nothing in the agreement to prevent the partnership from providing services to
others. He accepted that another installer had been ‘dismissed’ for working for
someone else, saying that ‘again all is not as it appears to be on the document’. It
 is apparent that the judge considered that that was the usual position as between
Protectacoat and its installers, including Mr Szilagyi. There are other aspects of
the evidence which clearly show that Protectacoat expected Mr Szilagyi to work
for them exclusively. So it is clear that the important provision in Clause 10 did
not reflect the intentions or expectations of the parties. Although it said that Mr
Szilagyi could work for others while under a retainer with Protectacoat, in fact it
was always the intention and expectation of the parties that Mr Szilagyi would
work for Protectacoat exclusively.

66. I have considered whether the employment judge’s decision is fatally undermined
by his failure to mention clause 5 and expressly to consider the real intentions of
the parties as to the provision of work by Protectacoat. I have come to the
conclusion that it is not. I quote three extracts from the judge’s account of Mr
Szilagyi’s evidence.

“4.19 …The claimant worked every day. On finishing one

job the claimant would return to the yard to be given a job
the next day. The requirement was that the claimant would
report to the yard every morning. The company insisted on
this and would never allow the claimant to go straight to a
job.

4.21 … the claimant was told “if you don’t fucking get
down here to do the work you wont get any more work”
and Mr Squires further informed the claimant that if he did
not do the job he was fired.

4.22 …the agreement purports to say that the claimant

could work only if he wished to Mr Squires informed the
claimant that the claimant had to work until 24 December
2006. ”

67. While it may be said that those passages primarily support the conclusion that the
parties intended that Mr Szilagyi would devote the whole of his time to his work
for Protectacoat, they do also imply a mutuality of obligation. The agreement was
described as a retainer which suggests that both parties intended that it would be a
continuing relationship. If under that retainer, the ‘worker’ was expected (by both
sides) to devote his full attention to the work provider and not to work for anyone
else, it is hard to imagine that the parties intended that it would be open to the
employer to decide not to give the worker work if any was available. The
situation that work might not always be available and, if it was not, there would be
no pay is not inconsistent with the relationship of employer and employee. In my
judgment, although on its face clause 5 excused Protectacoat from providing
work, the expectation and intention of the parties was that, if work was available,
Mr Szilagyi would be given some.

68. In my judgment, although the employment judge did not articulate his reasoning
as clearly as one might wish, he did make the necessary findings of fact to support
 the conclusion that neither the partnership agreements nor the services agreement
represented the true intentions or expectations of the parties.

69. The employment judge also considered aspects of the control exercised by
Protectacoat and, in my judgment, the degree of control exercised was entirely
consistent with the relationship of employer and employee. I did not understand
Mr Foxwell to argue to the contrary. Thus, I would uphold the employment
judge’s conclusion by holding that, when the true intentions of the parties were
understood, it was clear that Mr Szilagyi was an employee of Protectacoat.

70. Accordingly, I would dismiss this appeal.

Lord Justice Keene : I agree.

Lord Justice Sedley

71. For the reasons given by Lady Justice Smith I too agree that this appeal fails.

72. So far as concerns the refusal of an adjournment by the employment judge, it has
not been shown by Mr Foxwell that an adjournment ought in fairness to have been
granted. I put it this way because, like Smith LJ, I do not consider that the correct
appellate approach to the grant or refusal of an adjournment is to regard it as a
matter of discretion, able to be impugned only on classic review grounds. As the
Divisional Court held in R. v. South West London Supplementary Benefits Appeal
Tribunal, ex p Bullen. (May 7, 1976), per Lord Widgery CJ: “I do not think it
necessary strictly to show that no equivalent tribunal properly instructed would
have reached this decision. I think it suffices if this Court can say with perfect
confidence and conviction that this decision not to adjourn was wrong.” I find it
impossible to say that the chairman, in the situation before him, was wrong not to
adjourn the hearing.

73. So far as concerns the substantive issue, it seems to me that, in the field of
employment at least, it is more helpful and relevant, in the light of the principles
which Smith LJ has derived from the decided cases, to ask in a case like this not
whether the written agreement is a sham but simply what the true legal
relationship is. Although there will be in many cases (as there was in this one) an
intention to conceal or misrepresent the actual relationship, there is no logical
reason why this should be a universal requirement. The courts not uncommonly
have to decide whether the entirety of a contractual relationship is constituted or
evidenced by a document which one party says is definitive, without any need to
decide whether that party has studied to deceive or is simply mistaken. I would
wish to keep this question open for other cases in which the facts found are not as
sharp as those found here.

74. The other question I would wish to keep open is whether the genuineness of the
partnership agreement matters. Here it has been found, tenably, to have been a
mere device to give colour to the purported contract for services and so to be part
of a sham. But I have some difficulty in seeing why it should have made a
difference if, for example, Mr Szilagyi and his mate had chosen to form a
partnership before being taken on by Protectacoat. Protectacoat would still, in law,
have been taking on two men, not a corporate entity, on terms and in
circumstances which amounted, for exactly the same reasons as we have upheld in
relation to Mr Szilagyi, to contracts of employment. The fact that in the present
case the partnership was an instrument devised by Protectacoat for its own
purposes, while it does nothing to help Protectacoat, does not seem to me to be a
necessary element of Mr Szilagyi’s case.