Archived News - 2007

Debt Collection – A Basic Guide

If a business cannot recover a debt from a customer after the normal credit control procedures are exhausted then it will need to consider taking further action to recover the sum due. Mediation with the debtor, involving negotiation through a third party, can be used to resolve the position but, if this fails, other measures are available. These may involve using debt collectors or starting court or insolvency proceedings.

Debt collection agencies generally have the time, expertise and resources to chase up the outstanding payment due and can act quickly. However, an agency’s commission will typically be 8-10 per cent of the debt, perhaps more if it is an old debt. If you use a debt collection agency, it is worth checking that it is registered with the Creditor Services Association to ensure its methods and practices are reputable.

Taking formal legal action is generally more cost-effective for larger debts. The ‘small claims track’ can be used for debts under £5,000. This is a relatively simple process and does not normally require legal representation, although professional advice is useful regarding the preparation of evidence in a suitable form. Debts exceeding £5,000 are pursued in court with the procedure used depending on the size of the claim. The court issues a summons to the debtor. If the debtor does not respond, judgment in default can be obtained, which requires the debtor to make payment without the merits of the case being considered. If the debtor contests the claim, a request for summary judgment can be made so the court can decide if the debtor has any legal basis for refusing payment. If the debtor admits the debt, no court hearing is necessary and enforcement action can be taken.

It is also possible to start insolvency proceedings by issuing a statutory demand or, if the debtor is a company and the debt due exceeds £750, a winding-up petition. A winding-up petition is more commonly used where there are several creditors. This is generally more expensive, but faster, than court proceedings. Failure to pay a statutory demand within 21 days is sufficient basis for a petition for the bankruptcy of the debtor to be presented, but statutory demands are normally used to apply pressure on the debtor to pay the debt.

Choosing how to proceed with collecting a debt will depend on factors such as the size of the debt and the cost (financial and time) involved. If you are having difficulty in obtaining payment from a customer, it is best to seek professional advice on how to proceed with your claim, especially if it is contested.

If you are having problems collecting money owed to you, please contact John Lennon for advice.

Back to the top

Financial Fraud – What Not to Do

With recent surveys showing that instances of employee fraud are still on the increase, eliminating poor security practices which make fraud easier is becoming even more important. It is also worth mentioning that some insurance policies do not cover employee fraud, or offer minimal cover.

The following practices are not uncommon and create a significant risk of fraud:

• Leaving signed blank cheques for use when the signatory is away. The risks inherent in this practice are clear. It is preferable to have a second signatory who is required to sign checks when another signatory is absent.
• Rotating signatures. If a number of people can sign cheques, a fraudster can ‘rotate’ the signing of cheques, which makes the exercise of effective supervision very difficult. This is particularly common in frauds involving withdrawals of cash.
• Electronic transfers. The absence of checks at the bank’s end makes the need to have very tight security procedures over electronic transfers all the more important.
• Delegated authority without control. It is essential to have controls in place where certain areas of the business are under the sole control of one person. Check that all payments for services or goods received are correctly made and constitute proper value for money. One of the easiest employee frauds to get away with for year after year is the ‘kickback’ from a complicit supplier. Make sure that purchasing decisions are subject to periodic value for money testing and if the payments made are more than the market rate, find out why.
• Employees who insist that all ‘their’ paperwork is left untouched until their return from holiday. This is a clear warning sign that they do not wish to have their work scrutinised by other people. Find out why.
• Not counting noses. With the large number of people gaining employment temporarily in the UK, it may be a simple matter to continue to pay an employee who has left, who then shares the income with the employee facilitating the fraud. The number of names on the payroll should be the same as the number of people employed. Make sure it is.
• Buying from and selling to the same firm. It may sound like good sense to deal with a customer that is also a supplier on a single account. It normally is – but one danger is the possibility of a fraud where purchases are either fictional or delivered elsewhere. Because there are entries on both sides of the account, they may go unchecked. The cheque written agrees with the total on the ledger account, but is that verified?
• Concentrating on big items only. The essence of the most successful long-term fraud is that it does not attract attention. It is the smallness and regularity of the transaction which establishes it as ‘part of the furniture’ and makes detection less likely. Make sure that ‘small’ accounts are reviewed, at least on a test basis.

If any of the above practices go on in your organisation, it is time to take action to rectify them. Remember, most internal frauds are carried out by highly trusted employees.

The enterprising and corrupt employee has a great advantage over most criminals – a detailed knowledge of the control systems of the organisation which is being defrauded. Make sure you act to protect your business.

A word of warning though: if you think you may have a problem with employee fraud, take care not to rush into action. Making accusations or the improper collection of evidence can have adverse consequences. Take professional advice from the outset.

Back to the top

Group Structure Does Not Compromise Protection

Corporate structures involving groups of companies are very common, with some holding companies having dozens of subsidiaries within their group. Virtually all of the best-known names in the UK High Street are trading subsidiaries of groups.

Employees of a company which is a member of a group are normally contracted only to the company which employs them directly. A recent breach of contract case looked at the question of whether the holding company of a group could make a claim against ex-employees who had a ‘non-competition’ clause in their contracts of employment. The employees in this case worked for the holding company of a financial services group. Their contracts prohibited them from supplying financial services advice to any clients of their employer (the holding company) for a year after they left its employment. They left the company’s employment and solicited business from and supplied financial services advice to clients of the group.

Their former employer sued. The reasonableness of the non-competition clause was not contested. What was contested was whether it was applicable, since the holding company by which they had been employed did not itself supply financial services advice. The holding company merely managed the affairs of the other group companies. The business of the group – the supply of financial services advice – was carried out by subsidiary companies. The argument of the employees was that they had not breached their agreements since the holding company did not supply clients with financial services advice.

The Court of Appeal did not agree with the employees. In the view of the Court, the reality of modern business is that group structures are common. The non-competition clause existed to protect the legitimate business interests of the group and was enforceable. It would be senseless to create such clauses in contracts if there was nothing which could be protected by them.

It is worth noting that the employees were familiar with the group structure and the roles of the companies within the group, having been employed by the holding company for several years. However, it is likely that the employer would have been successful even if this had not been the case.

Says Sue Jones, “An appropriately worded non-competition clause can be an effective safeguard. The main danger is that of creating a clause which is too onerous to be enforced by the courts. We can advise on these and related matters.”

Back to the top

Newsagent Fined for Breach of the Working Time Regulations

An employer who fails to abide by certain requirements of the Working Time Regulations 1998 can face sanctions under criminal law.

Employers must take all reasonable steps to ensure that workers are not required to work more than an average of 48 hours a week, unless they have signed an opt-out agreement. The average weekly working time is normally calculated over 17 weeks. Local authorities are responsible for enforcing these requirements with regard to shops, restaurants and food outlets.

In only the second prosecution of its kind in the UK, newsagent Martin McColl Limited admitted breaching the requirements of the Working Time Regulations concerning maximum working hours. Council officers discovered that an employee at the newsagent, in West Edinburgh, was working on average 51.5 hours a week, on one occasion working a 68-hour week, without receiving payment for the extra hours. The company was fined £600.

The shop workers’ union USDAW has welcomed the prosecution as a reminder to employers that if they ask their staff to work illegal hours they will be penalised.

The Opt-Out

In the UK, individual workers can opt out of the requirement under the Working Time Regulations that the average working week should not exceed 48 hours. This has been the subject of much debate in the past, with the European Commission repeatedly expressing concern over the way the opt-out was being used in the UK. To date, however, proposals to restrict its use have come to nothing. The Minister for Europe has said that the new EU Treaty under negotiation will not affect the UK’s opt-out.

If any of your employees work more than an average of 48 hours a week, you must have a valid opt-out agreement in place. Contact Sue Jones for advice.

Back to the top

Remedies in Contract Law – A Basic Guide

If the terms of a contract are breached by one party, the other may suffer a loss. Where this occurs, there are various remedies which the party suffering from the other’s breach can use.

A breach of contract is caused by a failure to perform a duty specified by the contract. The contract’s terms can be divided into conditions and warranties. These can be expressly stated or implied within the contract. A condition is something fundamental to the contract. Breaching a condition will allow the other party to the contract to terminate it by ‘repudiating’ it and to claim damages. Breaching a warranty will only allow a damages claim and does not bring the contract to an end.

Monetary damages for breach of contract are intended to be compensatory – i.e. to put the injured party in the position he reasonably expected to be in when the contract was created. Sometimes, the sum of damages will be written into the contract by the parties to it. This is termed liquidated damages. However, where the sum specified as liquidated damages is excessive, so that it is a deterrent rather than a genuine pre-estimate of loss, the courts may not uphold such a clause. Unliquidated damages are those damages decided after the breach occurs, either by the parties themselves or by the courts.

To determine the level of damages payable, consideration is given to how damages might arise both out of the contract itself and from the parties’ contemplation when they entered into the contract. Compensation can only be made for losses which are foreseeable at the time the contract was created.

The other remedy used in contract law is for the courts to order ‘specific performance’, which requires the party committing the breach to fulfil its part of the contract. This may involve an injunction to stop a breach of contract. It is not used where it is judged that damages would be an adequate remedy.

If you have suffered a loss because of a breach of contract by another party, you may be able to obtain redress. We can advise you on your available remedies.

Back to the top

Return to Work After Maternity Leave – What is the Same Job?

Under the Maternity and Parental Leave (etc.) Regulations 1999 an employee who takes additional maternity leave is entitled to return to the ‘job in which she was employed before her absence or, if it is not reasonably practicable for the employer to permit her to return to that job, to another job which is both suitable for her and appropriate for her to do in the circumstances’.

In a claim of sex (pregnancy) discrimination (Blundell v St Andrew’s Catholic Primary School), the Employment Appeal Tribunal (EAT) considered for the first time the criteria to be used when determining what counts as the same job under the Regulations.

Mrs Blundell had worked at St Andrew’s since 1992 as one of 18 teachers. The head teacher, Mrs Assid, customarily allocated teachers to a particular responsibility for a period of two years and then changed their roles in order to give them a breadth of experience. During the school year 2002 to 2003, Mrs Blundell taught a reception class. In June 2003, she told Mrs Assid that she was pregnant and subsequently took maternity leave. On her return, Mrs Blundell was offered either the position of year 2 class teacher or she could undertake ‘floating duties’. She claimed that this was a breach of the Regulations, which gave her the right to return to the same job she was doing before her maternity leave.

The Employment Tribunal (ET) found that in Mrs Blundell’s situation ‘the job in which she was employed before her absence’ meant the job of teacher, not the temporary position she had held as a reception class teacher.

Mrs Blundell appealed to the EAT, which examined the definition of ‘job’ as provided for by the Regulations, which is ‘the nature of the work she is employed to do in accordance with the contract and the capacity and place in which she is so employed’. In its view, the level of specificity with which the terms ‘nature’, ‘capacity’ and ‘place’ are to be addressed is likely to be critical and should be determined as a question of fact by the ET, taking into account the purposes of the legislation and the fact that the Regulations themselves provide for exceptional cases where it is not reasonably practicable for an employer to allow a return to the exact same position. The ET held that the position Mrs Blundell occupied as reception teacher was temporary and ‘it seems plain to us that, where a precise position is variable, a Tribunal is not obliged to freeze time at the precise moment its occupant takes maternity leave, but may have regard to the normal range within which variation has previously occurred’.

In Mrs Blundell’s case, it was clear that the job she was given on her return to work was within the range of variability which she could reasonably have expected.

Says Sue Jones, “To avoid problems of this nature, it makes sense to keep the job descriptions in employment contracts flexible whenever possible.”

Back to the top

Acceptance of Repair Means Acceptance of Goods

The sale of goods by traders is covered by the Sale of Goods Act 1979, which requires that the goods sold must be as described, of satisfactory quality and fit for purpose. If these criteria are not met, the buyer has the right to reject them. However, the trader might offer to replace or repair the goods.

Recently, the House of Lords heard an appeal, from the Scottish Court of Session, which required it to consider the position in which a trader delivered defective goods to the customer, who then agreed that they should be repaired. The question that arose was whether the customer could then reject the repaired goods.

J & H Ritchie Ltd. had purchased a combination seed drill and harrow from Lloyd Ltd. When it was made ready for use by Ritchie, it was immediately obvious that the harrow was not working properly as it had excessive vibration. Ritchie stopped using the harrow and contacted Lloyd, which agreed to repair it. Having collected the machine and diagnosed the problem – two missing bearings – Lloyd ordered the parts and, when these arrived, it repaired the machine and informed Ritchie that it was ready for collection. This process took some weeks. Lloyd did not tell Ritchie the nature of the problem when requested to do so, merely replying that the equipment was repaired and that the repair had made the equipment as good as new.

Unhappy with this response, Ritchie rejected the machine. Lloyd commenced legal proceedings, arguing that Ritchie was bound by law to accept the repaired goods.

Although Lord Brown was critical of Lloyd for its lack of candidness regarding the nature of the problem, in the view of the Lords, where a buyer receives goods which are defective and the defect is clear to buyer and seller, there is an implied duty on the part of the buyer to accept the goods and pay for them once the necessary repairs have been carried out. In the words of Lord Hope, “A buyer who…allows the seller to incur the expense of repair is under an implied obligation to accept and pay for the goods once the repair has been carried out.”

This judgment has clear implications for purchasers of goods who find them to be defective. If they agree to have the goods repaired, the right to reject them will normally be lost.

Contact John Lennon for advice on any contractual matter.

Back to the top

Doing Your Best Isn’t Reasonable

A recent decision of the commercial court confirms that doing your best isn’t reasonable – or, more correctly, that to make reasonable endeavours to do something is not the same as making your best endeavours to do it.

The case concerned a contractual dispute between two companies, one of which was buying a business from the other. The dispute involved the interpretation of the phrase ‘reasonable endeavours’ in relation to a contract, with a third company, which was to be transferred between the two companies following the sale.

The contract was not transferred and the vendor company brought a suit alleging that the purchaser had not met its obligations because it had not used reasonable steps to ensure the contract was transferred.

The court, however, considered that ‘reasonable endeavours’ did not mean that all reasonable courses of action had to be taken. If that were the case, there would be no difference between ‘reasonable endeavours’ and ‘best endeavours’, a term also used in legal agreements in some circumstances. In the court’s view, a ‘reasonable endeavours’ clause must be less stringent than a ‘best endeavours’ clause and such a term will normally be satisfied if a reasonable course is taken. The exception would be if the clause sets out specifically what steps should be taken, in which case compliance will only be achieved if all the specified steps are carried out.

Says Sue Jones, “If something is very important, the phrase to use is ‘best endeavours’, which will require a higher standard of effort on the part of the other party to the contract to ensure that the desired end is achieved.”

We can assist you in negotiating all commercial agreements.

Back to the top

Expired Disciplinary Warnings

A further case has illustrated that employers cannot place reliance on a disciplinary warning that has expired, either in disciplinary proceedings or to justify dismissal.

In Airbus UK Ltd. v Webb, the Employment Appeal Tribunal (EAT) has ruled that a Tribunal is ‘obliged, and not merely entitled, to ignore expired warnings’.

Mr Webb worked for Airbus as an aircraft fitter. In July 2004 he was dismissed for gross misconduct after he was found washing his car when he should have been working. He appealed against the decision to dismiss him and the disciplinary action was reduced to the lesser sanction of a final written warning which would remain on his record for 12 months.

Three weeks after the written warning expired, Mr Webb and four other employees were caught in the locker area, watching television, outside their normal break time. All five were found guilty of gross misconduct. Mr Webb was dismissed but the other four employees received final warnings because they had no prior disciplinary record.

Mr Webb claimed that he had been unfairly dismissed. The Employment Tribunal (ET) took into account the decision of the Scottish Court of Session in Diosynth Ltd. v Thomson in which the Court had ruled that the employee was entitled to assume that a similar warning meant what it said and that it would cease to have any effect after one year. The ET held that as Mr Webb would not have been dismissed had he not been given a previous warning, it followed that his dismissal was unfair.

Airbus appealed against the ET’s decision and lost. However, the EAT confessed to having some difficulty in deciding whether or not the ET is obliged to ignore past warnings that have expired, but judged on balance that it is. The EAT went on to suggest that although the ACAS Code of Practice on Disciplinary and Grievance Procedures suggests that final warnings should normally expire after 12 months, this need not always be the case. A longer time limit might be appropriate if the nature of the misconduct justifies it.

It is important to ensure that the time limits for disciplinary warnings fit the particular circumstances and that your policies and procedures allow you to issue an extended warning where this is deemed necessary. Contact Sue Jones for advice.

Back to the top

Inducement to Break Contract Must be Deliberate

Where one person induces another to breach a contract, the other party to that contract may have the right to claim for damages against both the person who has committed the breach of the contract and the person who induced them to do so.

A company called Mainstream recently successfully sued two of its employees for breach of contract after they set up their own joint venture, with a Mr De Winter, and diverted development business away from their employer to the new business. Mr De Winter had supplied the finance for the new business. Mainstream then set about suing Mr De Winter for inducing its employees to breach their contracts with Mainstream.

There was no doubt that the breach of contract could not have occurred had Mr De Winter not supplied the necessary funding. However, the House of Lords found that Mr De Winter was not to blame. Recognising the potential for a conflict of interest between the employees and Mainstream, he had sought and received assurances from the employees that there was no conflict. They had maintained that there was no conflict because Mainstream had been offered the development site but had refused it. That was not the case, but Mr De Winter was unaware of that. It was also relevant that he had supported a similar development by the employees a year earlier to which Mainstream had no objection.

This case is important since it demonstrates that a claim for damages for inducing a breach of contract will only be successful where the breach is deliberate. To prove a case of breach of contract, it is necessary that there is a breach of contract, that the person procuring the breach knows they are procuring it and that the breach is an end in itself or is a means to an end.

In practice, this decision may well make the defence of ‘ignorance of the consequences’ easier to sustain in similar cases.

Back to the top

Is the JCT Valid?

The House of Lords recently had to consider whether the contractual terms in the JCT standard building contract (1998) are compliant with the provisions of the Construction Act. It was the first case of its kind.

A company called Melville Dundas Ltd. was acting as a contractor to construction giant Wimpey and issued demands for stage payments in the normal way. After making one such demand (in relation to which Wimpey did not make a withholding notice), Melville Dundas became insolvent and Wimpey terminated the contract and did not make the payment.

The relevant section of the JCT standard form agreement allows a developer to terminate a contract with a contractor in the event of the contractor’s insolvency and to withhold payments. In effect, it limits the developer’s liability to the contractor to the value of work done and is designed to protect the position of the developer should there be additional costs, with regard to the completion of the work, which would otherwise have to be claimed against the insolvent contractor.

Melville Dundas argued that the relevant section of the JCT agreement was invalid under the Construction Act because it took away its right to receive the payment even though Wimpey had not issued a valid withholding notice.

The Lords, in a 3-2 split decision, agreed with Wimpey’s contention that the payment was validly withheld.

If you are having difficulties with payments in a construction contract, contact us for advice.

Back to the top

Landlocked Land – Lords Confirm No Right of Access

The House of Lords has confirmed the 2006 decision of the Court of Appeal that when a piece of land is landlocked (i.e. has no right of access over adjoining land so cannot be lawfully accessed by its owner), there is no automatic right to have a right of way ‘of necessity’ over adjoining land.

The case involved land which was bounded to the East and to the West by private land. To the North and South it was bounded by a piece of land and a highway respectively. Both of the latter pieces of land had been sold to the predecessor of the local authority which now owned them. The landlocked land had been retained by the original owner and the conveyance of the adjoining land which was sold did not reserve any right of access over it.

When the landlocked land was subsequently sold, the company that bought it sought to obtain a ruling that it should be granted a right of way to its property over the land to the North, which would be necessary for the land to be developed. The local authority had previously indicated that planning permission for access to the highway would not be granted.

In the view of the Court of Appeal, at the time the land was sold there had been no common intention that there should be a right of access across the land to the North. Accordingly a right of way of necessity should not be granted. The Lords confirmed this decision.

“This case illustrates the importance of not making assumptions – especially over things as critical as access to land,” says John Lennon. “You should always make sure that the essentials are in place before signing on the dotted line. Relying on the courts to put things right after the event is a very risky strategy.”

Back to the top

Leases – New Code of Practice

A new code of practice for commercial leases has been issued following a long consultation exercise involving landlords and other interested parties.

The code makes a number of changes to the substance and detail of current practice.
These include:

• a simplified approach to the exercising of break clauses by tenants;
• sub-letting of the whole premises to be normally completed without the requirement for financial guarantees by the existing tenant;
• a more flexible approach to rent reviews, rather than just ‘upward only’ reviews;
• the requirement for landlords to provide best estimates of service charges; and
• the requirement that tenants’ repairing obligations should be appropriate considering the terms of the lease.

The Code for Leasing Business Premises in England and Wales 2007 can be found at:
http://www.leasingbusinesspremises.co.uk/downloads/lbp_booklet.pdf.

Back to the top

Acceptance of payment causes loss of rights

A recent case involving a tenant that became insolvent should sound a warning bell for landlords. In this instance the tenant, which was a company, entered into a company voluntary arrangement (CVA) and the landlord accepted payments of rent after the due dates.

The relevant lease contained a clause which allowed the landlord to repossess the property if the tenant became insolvent or fell into arrears of rent. The landlord, therefore, applied for forfeiture of the lease. He failed in the Court of Appeal, which ruled that because the landlord had accepted the late payments of rent, he had waived his right to forfeiture of the lease and that the tenant’s debts for arrears of rent were compromised under the CVA.

“If your tenant falls into arrears of rent and/or service charges, take advice before you take action or even accept a late payment from the tenant,” says Mike Stone. “Hasty actions can have expensive unforeseen consequences.”

Back to the top

Assessment of Damages Based on Rental Value

The Court of Appeal recently heard a case in which the question at issue was the correct basis for calculating the damages payable by a landlord to the tenant of a flat for the landlord’s breach of the repairing covenant under the lease. The tenant occupied the flat as his home under a 99-year lease, paying only ground rent.

In this instance, the landlord had failed to keep the roof of the property in good repair, which resulted in water coming into the flat in substantial quantities. The tenant put up with this for nearly three years but was eventually compelled to vacate the flat for a period of 21 months.

The tenant sued the landlord. The judge awarded the tenant £20,000 by way of damages for his period of occupation and £10,000 for the period when he was forced to move out. The landlord appealed, arguing that the damages suffered were only in the region of £3,300 and that it was unfair for damages to be on a ‘loss of rental value’ basis, assessed on the deemed market rent, when the tenant was paying only a ground rent.

The Court of Appeal concluded that whilst there was no general ‘tariff’ which applied in such cases, the resulting assessment of damages payable to the tenant by the landlord should be made with reference to the reduction in the open-market rental value of the flat and the impact on that of the unrectified roof problem. The fact that the tenant was paying only ground rent was not in point.

The message for landlords is that failing to comply with repairing covenants in leases with tenants can cost more than just the cost of repair, even where the tenant is on a long-term lease paying only a ground rent.

Back to the top

Careful Drafting Pays Dividends

A landlord who failed to include an appropriate clause for subletting to a social tenant in his lease with a local authority recently had cause to regret the way in which the lease had been drafted. The case involved a flat which was intended to be let for temporary housing and which was eventually let to a sub-tenant of the local authority for several years. The lease, given to Haringey District Council, omitted a clause which prevented the tenant from acquiring full security of tenure. In order to prevent a tenant acquiring security of tenure, the head lease must contain a provision entitling the lessor to take possession of the premises on the expiry of a stated period or when required by the lessor, so as to comply with the Housing Act 1985.

When the sub-tenant fell into arrears, the Council sought repossession of the property. During the course of those proceedings, it was decided that she had acquired a secure tenancy because the clause in the Housing Act dealing with such leases specifies that a lease does not create a secure tenancy when the terms on which the property has been leased ‘include provision for the lessor to obtain vacant possession … on the expiry of a specified period or when required by the lessor’. The Court of Appeal decided this had to be construed strictly, meaning that the head lease must contain a break clause worded loosely enough to allow the landlord to obtain vacant possession either on the expiry of the lease or when required by him. In this case, the lessor could only require that the property was vacated at the end of the lease and the tenancy therefore qualified as a secure tenancy.

The landlord was therefore left with a sitting tenant – a most unfortunate result given that the property was only intended to be used for temporary housing.

Says Mike Stone, “This case raises serious issues for landlords wishing to let properties to social housing providers. Contact us for advice.”

Back to the top

Landlords Must Act Fairly and in Reasonable Time

A recent case involving the recovery of service charges has seen the court criticise the way that landlords and their agents often deal with service charges.

The case involved a property in Piccadilly, London, which is tenanted. The basement-level tenant is a casino (Distinctive Clubs Ltd.) and it entered into its lease in 1998. The building was known to have structural problems with its roof, which needed substantial repair, and the lease signed by Distinctive Clubs contained a clause which limited its liability for repair works during the first five years of its lease. The estimated cost of repair in 2002 was £200,000.

In 2004 (after the limitation clause had expired), the landlord carried out roof repairs, which included building a new structure which benefited only the tenant occupying the top floor. The total bill amounted to over £2m and Distinctive Clubs’ contribution to the repairs was assessed at £700,000. In court there were two main questions to address.

Firstly, was the basement tenant liable to pay for the works that benefited only the top floor tenant and which, in any event, were improvements to the property, rather than repairs?

Secondly, was the delay in carrying out the repairs reasonable?

In the view of the court, the repairs to the roof were justifiable repairs under the lease. However, the improvements which benefited only the rooftop tenant were not, so Distinctive Clubs would not be liable to contribute to those. However, in the view of the court, the landlord could, had it shown reasonable alacrity, have completed the repairs by 2003. Accordingly, Distinctive Clubs was not liable to contribute to any of the cost of the repairs.

The judge criticised the landlord and its agents for including in the landlord’s claim sums which were not properly due and for not informing the tenants of the spiralling cost of the roof repairs. He also criticised the agents for their lack of independence, characterising their approach as seemingly being intent only on recovering as much as possible of the cost from the tenants.

The lesson for landlords and their agents is that attempts to collect ‘full recovery service charges’ in a way which does not properly balance the interests of tenants and landlords is likely to get short shrift in the courts.

If you have problems with any aspect of a lease, contact Mike Stone for advice.

Back to the top

Planning Consent Time Bar Strictly Enforced

The Court of Appeal has confirmed that where there is a breach of planning consent through failure to comply with the use specified in the consent, where this relates to use as a single dwelling, the right to enforce the terms of the consent must be exercised within four years of the breach.

The case concerned Arun District Council, which had granted permission for an extension to a property on the condition that it was occupied by the dependent relative of the occupier. The extension was later let to students, in breach of the planning consent, and the property was effectively occupied as two dwellings. Eight years later, the Council sought an enforcement order against the homeowner. The Council argued that it could bring the action because there is a statutory ten-year period for the bringing of such actions where there is ‘any other breach of planning control’. However, the section of the Town and Country Planning Act which deals specifically with breaches relating to buildings to be used as a single dwelling specifies a four-year period, from completion of the works, during which any enforcement action must be brought.

The case turned on the fact that there is a specific section in the Act which relates to such breaches, so it was clear that the intention of Parliament was to apply one time limit in such cases and another time limit for other breaches.

Contact Mike Stone for advice on any commercial property or planning matter.

Back to the top

Restraint of Trade Clauses – Care Needed

In a society that promotes freedom of trade, it is no wonder that the law as regards restraint of trade agreements provides only limited protection. Such agreements are relatively common within agency agreements. Coming into effect when the agency ends, they are normally used to prevent the agent from soliciting former customers for a period of time.

The courts will only enforce such an agreement to the extent that it is reasonably necessary to do so to protect a legitimate business interest. To be enforceable, the agreement must be reasonable both in terms of time and geographic coverage.

In a recent case the agency agreement specified that after its termination the agent was not allowed, for a period of two years, to solicit ‘any person, firm or company’ who had been a customer of the principal within the year prior to termination of the agency agreement. This group included customers who had had no dealings with the agent.

Although the two-year restriction was not thought to be objectionable by the court, it found the clause to be too broad to be enforceable, especially as there would be customers who had dealt directly with the principal who the agent would not know were customers.

“The message for businesses seeking to rely on such clauses is to take care that the wording is not too broad, or the court will render the agreement unenforceable,” says Sue Jones. “We can assist in the negotiation and implementation of all types of commercial agreement.”

Back to the top

Shareholder Dispute Costs Minority Shareholder

A recent case before the High Court illustrates the wisdom of having a shareholders’ agreement in place in small companies. In the case in question, the majority shareholder had paid himself levels of remuneration which meant that the dividends paid to the minority shareholder were less than she felt she should have received. This resulted in a breakdown of trust and confidence between the shareholders such that the only appropriate resolution of the situation was for the majority shareholder to purchase the shareholding of the minority shareholder.

The minority shareholder applied to the Court for a ruling that her shareholding should be valued pro-rata to the value of the company as a whole, contending that there was a quasi-partnership. Normally, valuations of minority shareholdings are discounted because the rights of minority shareholders are restricted. So, for example, a 49 per cent shareholding might be valued at 30 per cent of the total value of the company. However, where a quasi-partnership exists, the minority shareholder would normally receive the undiscounted value of his or her proportionate shareholding in the company.

A quasi-partnership exists where the relationship between the shareholders is personal and based on trust, where the shareholders are all involved in the management of the business and where they provide more input to it than merely advancing capital.

However, in this case the Court found that the necessary elements for a quasi-partnership did not exist and the minority interest should not be valued pro-rata.

One of the key points in this case was that had there been a shareholders’ agreement in force that covered the calculation of the price payable on the disposal of shares by one shareholder to the other, the litigation could have been avoided. If your company does not have a shareholders’ agreement or your partnership does not have a partnership agreement, contact Sue Jones for advice.

Back to the top

Too Lenient Sentence for Director Successfully Appealed

A recent case illustrates the dangers for directors who adopt a cavalier attitude to the safety of their employees.

Michael Shaw was a director of a company which made kitchen work surfaces and bathroom fittings. A stone-cutting machine used by the company had been examined by an inspector from the Health and Safety Executive and was found to have three safety devices disabled. They had, apparently, been disabled when the machine was installed. Mr Shaw was informed of this and was ordered to have the devices reinstated immediately. This he failed to do. It was later argued in Mr Shaw’s defence that leaving the devices disabled was commonplace as it allowed much more economical use of the machine because they regularly caused interruptions to production.

The company of which Mr Shaw was a director also provided minimal safety training for its employees.

Tragically, an employee was killed whilst using the stone-cutting machine. Mr Shaw pleaded guilty to manslaughter on the basis of gross negligence. The judge, mindful of his guilty plea and the effect on the business of imposing a custodial sentence on him, gave Mr Shaw a suspended sentence of two years’ imprisonment.

The Attorney General appealed against the sentence, arguing that it failed to provide a sufficient deterrent or properly to reflect the severity of the offence.

The Criminal Division of the Court of Appeal accepted the Attorney General’s argument. The fact that the safety devices were commonly disabled was no defence and the sentence was too lenient. Mr Shaw was given a custodial sentence of fifteen months.

Ignoring health and safety responsibilities is likely to lead to a heavy penalty in cases such as this. If your health and safety procedures are lax, we advise that you review them immediately and introduce measures to train and protect your workers.

Back to the top

Understand the Contract Before You Sign!

A recent case involving a contractual dispute between a franchisor and franchisee (a fairly common situation) highlights the need both to consider contractual terms carefully and to take advice before acting when a dispute arises.

The nub of the issue was that the franchisor was considered by the franchisee to be trying to impose unreasonable terms. The franchisor ran a business (eTyres) which took orders over the Internet for tyre fitting which it then referred to its franchisees, making a deduction from the payments received for so doing. The franchisee was a tyre fitter who had a substantial business outside the eTyres fitting business.

The franchisor sought to require the franchisee to change the livery of its vehicles and, in effect, to make eTyres the franchisee’s trading style, which the franchisee felt would have been to the detriment of its business generally.

The franchisee alleged that the franchisor had made deductions from the sales receipts which were greater than was allowed under the franchise agreement.

Because of these factors, the franchisee determined to set up in competition with eTyres. When the franchisor found out about this, it terminated the franchise agreement and sought an injunction against the franchisee.

The questions before the court were whether the franchisor had made excessive deductions (which involved more than one issue) and whether the franchise agreement would allow the franchisor to require the franchisee to change its trading style.

The court took the view that the basis of calculation adopted by the franchisor was justifiable, but making deductions in excess of the percentage stated in the franchise agreement was not. The franchisor could not compel the franchisee to change its trading style for its whole business. The actions of the franchisor amounted to a repudiation of the original agreement and the franchisee was therefore entitled to have the injunction discharged and to have its counterclaim allowed.

Says Sue Jones, “This is a case which clearly arose because each party had different ideas about what the franchise agreement meant and these were not resolved. Franchise agreements are often the cause of difficulty and it makes sense to ensure that legal advice is taken and any areas of possible disagreement are ironed out before you commit yourself.”

Back to the top

TUPE Regulations 2006

On 6 April, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) come into force. These apply to any size of business and protect the employment rights of employees when their employer changes as a result of the relevant transfer of a business or a part of one. They implement the EC Acquired Rights Directive. The main changes are:

• a widening of the scope of the Regulations to cover situations where services are contracted out, contracted in or where a contract is assigned to a new contractor on subsequent re-tendering. These are described as ‘service provision changes’. The Regulations will not apply, however, where the service provision is a single specific event or task of short-term duration;
• a new duty on the transferor to supply specific information about the transferring employees to the new employer by providing what is termed ‘employee liability information’. This must be given at least two weeks before the completion of the transfer unless this is not reasonably practicable. The transferee will be able to claim for compensation in the Employment Tribunal if the transferor fails to provide the required information and will be entitled to not less than £500 from the transferor for each employee for whom information was not provided;
• • special provisions making it easier for insolvent businesses to be transferred to new employers – for example, allowing the parties in such situations to agree to vary contracts of employment in an attempt to assist the economic recovery of the business;
• provisions which clarify the ability of employers and employees to agree to vary contracts of employment if, for example, the reason for doing so is an ‘economic, technical or organisational reason’ entailing changes in the workforce; and
• provisions which clarify the circumstances under which it is unfair for employers to dismiss employees for reasons connected with a relevant transfer.

The Regulations place a duty on both the transferor and the transferee employers to inform and consult representatives of their employees who may be affected by the transfer with a view to seeking their agreement to the measures. There will be joint and several liability on the transferor and transferee for a failure to inform and consult, thus ensuring that each has a clear incentive to comply with the requirement.

The Department of Trade and Industry had considered excluding professional business services from the scope of the new TUPE Regulations but no such exemption has been included.

The new Regulations apply to transfers that take place on or after 6 April 2006 with the new employee liability information applying to relevant transfers that take place on or after 20 April. Guidance on the Regulations. Says Sue Jones, “Failure to comply with the TUPE provisions can be very expensive for businesses, and it is important to take advice at the beginning of the process.”

Back to the top

Law Not to be Used to Prevent Landlord’s Exit Strategy

The House of Lords has confirmed that the Landlord and Tenant (Covenants) Act 1995 is not intended to be used to prevent a landlord from exercising an exit strategy as regards a lease.

A company called Avonridge was the head tenant of a number of shops under a lease due to expire in 2067. It granted subleases, to six tenants, which included a covenant by Avonridge to pay the rent due under the head lease, but only until such time as it had disposed of its interest in the property.

Once the subleases had been granted, Avonridge sold the head lease on to another company, thus ending its interest in the property. The new owner subsequently disappeared, leaving the rent under the head lease unpaid.

The tenants were then faced with a bill for the rent unpaid under the head lease and sued Avonridge, claiming that the relevant clause was prohibited under the 1995 Act. The Act contains provisions which will allow the owner of a head lease to accomplish what Avonridge sought to do, but only by the service of specific notices, which did not occur in this case. It also contains anti-avoidance provisions to make void any wording in a tenancy agreement which would frustrate any other section of the Act.

The House of Lords decided that the purpose of the Act is to give both landlords and tenants an exit strategy from their lease commitments when they enter into legal assignments of their interests. It can not be used to prevent a landlord having an exit strategy which has been agreed with a tenant. The failure to follow the procedure as set out in the Act did not, in this case, invalidate the agreed terms.

Tenants with sub-tenants should consider making sure their under leases do contain clauses limiting their liability by the provision of automatic releases from their obligations if they dispose of their interest in a property. If such clauses are not present, they should follow the notice procedure laid down in the Act.

Please contact Mike Stone for advice on commercial property matters.

Back to the top

Director’s Guarantee Not Unfair

An entrepreneur who challenged the Royal Bank of Scotland’s (RBS) attempt to enforce the director’s guarantee he had given was unsuccessful in persuading the court that the guarantee contained unfair contract terms.

Mr Singh’s company provided small businesses with secretarial and administrative assistance. It had incurred an overdraft of £900,000 with the bank when the company failed.

Mr Singh argued that RBS could not enforce the guarantee since he believed that he had a partnership with the bank. He considered there was an agreement whereby RBS was going to market his company’s services and that his company was induced to borrow the funds on the understanding that such a partnership existed. He argued that when the bank failed to market his business services it was in breach of the partnership agreement and caused the failure of his company. He also argued that he would not have agreed to give a director’s guarantee had the bank not agreed to market his company’s services.

This first line of argument failed to impress the court as there was no evidence of a partnership agreement since nothing was done or said which could have been interpreted as an offer of a partnership or joint venture. Furthermore, it was not reasonable for Mr Singh to believe that the bank official with whom he was dealing could commit RBS to such an agreement.

Mr Singh then sought to have the bank’s guarantee arrangement ruled unfair because it had a ‘no set-off’ clause, which he felt was unreasonable under the Unfair Contract Terms Act 1977 (UCTA). Such clauses are standard in guarantees and act to prevent a bank’s right to recovery under the guarantee being frustrated by claims against it. In other words, whatever Mr Singh’s claims against RBS might be, he had to repay the amount he had guaranteed and pursue his claims separately.

The judge could not agree with Mr Singh. The UCTA regulates contracts between sellers and consumers and is designed to protect consumers in circumstances in which there is a large preponderance of power in the hands of the seller. In this instance, RBS was selling a service to the company. Mr Singh would only have a liability under the guarantee if his company failed to repay its borrowings. The UCTA was not applicable in such circumstances. However, the court also considered what the position would be if UCTA did apply and concluded that even if it did, the ‘no set-off’ clause could not be unfair – it was not unfair for RBS to protect itself by taking additional security.

Says Sue Jones, “The serious implication of this case for directors is that if asked to sign a guarantee for the borrowing of the company, a director is unlikely to get any protection from the courts if the guarantee is one-sided. We can assist you in negotiating commercial finance of all types and advise on the wording of agreements.”

Back to the top

Directors – Danger in Funding Litigation

It is not uncommon for a smaller company that wishes to undertake litigation to lack sufficient funds to do so. When this occurs, a director or directors will sometimes put the company in funds to pay the legal bills.

In such circumstances, it has been usual for directors to be protected from having to pay the other side’s costs (by a ‘non-party costs order’) if the company loses its case, unless they have acted improperly or in bad faith. The courts in such instances have traditionally looked to see if the action is bona fide and whether the actions of the directors were otherwise so exceptional as to justify making a costs order against them.

More recently, however, judicial opinion has changed. Now, the prevailing view is that if a director funds a company’s costs in an unsuccessful action, he should pay the successful party’s costs if:

• he substantially controls the proceedings or will benefit from the action; or
• he funds proceedings by an insolvent company either solely or substantially for his own benefit.

The decision by the court as to whether it will look to the director who has funded corporate litigation to pay the costs will depend on who is the ‘real’ litigant. If the director funding the action is in essence controlling it and it is carried out essentially for his own benefit, then he can be held liable for the other side’s costs if the case is lost.

It is no longer necessary for there to be impropriety in order for a director who funds litigation on behalf of a company to be caught for the costs of a lost case.

It is essential to take care when considering litigation, especially if you are funding all or part of the costs from your own pocket. Our litigation specialist, John Lennon, can advise you on all corporate and litigation matters.

Back to the top

Business Property Relief – More Traps for the Unwary

Most business people know that for family businesses there are generous Inheritance Tax (IHT) reliefs, which generally operate to make assets used in the business exempt or partially exempt from IHT. The reliefs take various forms, but are collectively known as business property relief (BPR).

Consider, however, the common situation whereby a business is owned by a small number of people and, in order to preserve the business in the event of the death of a shareholder before retirement, an agreement is made whereby on death the deceased’s personal representatives are required to sell their shareholding to the remaining shareholders, who are required to buy it. Such arrangements are normally funded by writing life assurance policies to cover the purchase.

Regrettably, such an arrangement will prevent the operation of BPR. This is because HM Revenue and Customs (HMRC) regard such an arrangement as a binding contract for sale on death and where such a binding contract exists, BPR is not given. This problem can be avoided by granting each side the appropriate option, rather than making the requirement to buy the shares contractual.

BPR is also not given on family company shares if the company is wholly or mainly engaged in dealing in shares or securities, dealing in land or buildings or making or holding investments. The normal practice of HMRC is to define ‘mainly’ as being ‘more than fifty per cent’. The fifty per cent test is applied to all of: • the capital employed;

• employee time spent on each activity;
• turnover;
• profits; and
• the overall context of the business.

In other words, a ‘whole business’ view has to be taken. Needless to say, this has led to much dispute over the years.

Lastly, a business which is too ‘cash rich’ can also face a denial of BPR insofar as it applies to the cash on the balance sheet at the date of death if this is in excess of the amount required for the purposes of the company’s business. Cash in excess of that required for the company’s future business is ‘excepted’ from eligibility for BPR. In a fairly recent case, a company which had £450,000 in its balance sheet, but which was reckoned by the tax inspector to need only £150,000, faced an IHT charge on the ‘excess’ of £300,000. One way which this type of charge may be avoided is to hold board meetings and minute the need for cash balances to be held on the balance sheet in order to finance future (stated) investment and/or trading needs.

“BPR is laden with traps for the unwary,” says Michael Cutler. “If your estate includes shares in a business, take advice to make sure you maximise your tax relief. Simply assuming that BPR will apply is a dangerous strategy.”

Back to the top