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MARCH 2009

Businesses in financial difficulties are increasingly seeking ways of ridding themselves of extra costs and, in many cases, premises let in more promising economic times are viewed as a substantial and avoidable liability, especially for businesses which have expanded too quickly.

One of the more common ways for a business to be structured on a more profitable basis is to arrange to take the profitable parts into a new business entity by doing a ‘pre-pack’ – a procedure whereby the business, or part of it, is transferred to a new entity. Prior to this, the business will be placed into administration, which imposes a moratorium on legal processes, such as the landlord’s right to make the lease forfeit by peaceable re-entry.

The argument for pre-packs is that they maximise the chance of salvaging the business and preserving employment. On the downside, the creditors of the original business are often left nursing losses.

From the landlord’s perspective, a tenant which undertakes a pre-pack may well leave the rented unit behind if it is uneconomic to retain it, thus leaving the landlord facing the prospect of finding a new tenant and a loss of rental income.

If the new business wishes to retain the unit, there may be scope for the landlord to negotiate with the new occupier with regard to arrears of rent as well as adherence to the lease covenants.

The good news for landlords is that in most cases they should be entitled to retain a rent deposit paid by a tenant that goes into administration.



General

Make Your Arguments at the Right Time
In a recent case, a claim was made for summary judgment after an adjudicator made a decision regarding a construction dispute. The defendant tried to resist the judgment by claiming it had received a large amount of new evidence, relating to the claim, which had not been taken into account in the adjudication process and this omission prevented it from being able to defend the claim effectively. It was argued that this constituted a denial of natural justice. The contention was that the claim was not ‘crystallised’ and thus the adjudicator did not have jurisdiction over it.

One of the observations of the Court was that a failure to complain about a breach of natural justice during the course of the adjudication will be persuasive evidence that there has been no breach. Therefore, making that argument to defend against the subsequent enforcement proceedings will be a lost cause.

The moral of the story is to be sure to make your arguments at the right time. Failing to advance early on in the proceedings a line of argument on which your case depends can be an expensive error.

Make Sure Your Bank Knows You!
Under the Proceeds of Crime Act 2002 (POCA), a bank is required to inform the authorities about any transaction that it suspects might be connected with money-laundering or the proceeds of crime. Whilst the bank is awaiting consent from the authorities, the relevant account will be frozen and payments cannot be made.

In a recent case, the referral of a series of transactions to the authorities, under POCA, caused the depositor to suffer substantial losses because its account was frozen for a time. The depositor sued the bank.

In court, it was held that there is no discretion as to whether or not a disclosure should be made of a bank’s suspicions that transactions may be ones involving the proceeds of crime. The bank has no choice in the matter. Suspicion is subjective and the fact that it may be ill-founded or not based on reasonable grounds is not relevant as long as the suspicion is genuinely held. In this case, the bank had acted promptly in making the disclosure and had released the money promptly when payment was authorised. There was no breach of the bank’s contract with its customer, nor had there been a breach of confidence as a result of the disclosure.

The bank was not therefore liable to the depositor for any loss suffered.

Make sure that your bank knows you as well as possible and has full information relating to the transactions you undertake, especially where the transfer of funds is time-sensitive. This is particularly important if there is even the slightest possibility that a transaction could appear unusual and might give grounds for a referral. Normally, the delay involved is just a few days but, unless the bank has acted improperly, any resultant losses will be the account holder’s bad luck.



Property

Service Charges – Wording Critical
Disputes between landlords and tenants over what is and what is not proper to include in the service charges paid by the tenants are commonplace. As in all instances, the wording of the tenancy agreement is crucial, as a recent case illustrates.

It involved leading high street retailer Boots and the charges made by the landlord of Manchester’s Trafford Centre.

The landlord had laid on various entertainments and attractions in the Centre and sought to recoup the cost of these from its tenants. In addition, the landlord provided a ‘Sky Wall’, which gave information about the Centre and on which the tenants could advertise directly for a fee. The advertising revenue from the Sky Wall was set against the service charge levied on the tenants generally.

Boots argued that these expenses constituted ‘promotion’. This was significant because under the service charge agreement, half of the expense of promotion was to be borne by the landlord and the charge for promotion was also limited to 10 per cent of the total service charge.

The definition of promotion included the phrase ‘…advertising and other forms of promotion…intended to bring additional custom to the Centre…’. The court ruled that this meant that promotion had to be intended to be a form of promotion for the Centre and in addition had to be intended to bring additional custom to it. Merely being a benefit or service to the Centre was not enough to qualify.

In the court’s view, the attractions were not a promotion of the Centre and therefore their entire cost was properly part of the service charge to tenants. The Sky Wall, however, was in part a form of promotion that was intended to bring additional custom to the Centre. So, to that extent, its use constituted promotion and the cost was in part to be borne by the landlord.

Fitness for Purpose – Knowledge Critical
One of the most important principles of law governing buyers and sellers is that an item sold must be fit for the purpose for which it has been supplied. It is unusual for a ‘fit for purpose’ argument to arise in a building dispute, but cases do crop up from time to time.

In a recent instance, a contractor had engaged a subcontractor to supply a pipe to be used in a tunnel. When it was laid, the pipe was bedded in with foam concrete. Due to the highly alkaline nature of the concrete, the pipe burst four years after it was laid. This caused extensive damage and loss to Thames Water, which owned the tunnel.

The contractor who laid the pipe settled with Thames Water and sought to recover his losses from the subcontractor who supplied the pipe, on the ground that it was not fit for purpose since it was not resistant to the attack. It was argued that the Sale of Goods Act 1979 created the obligation on the supplier to supply a pipe that was reasonably fit for the purpose.

The problem with the contractor’s argument was that the pipe supplied by the subcontractor was specified to be fit for the purpose of carrying water. It could not be shown that any representation had been made that the pipe was fit for use in foam concrete nor, indeed, that the subcontractor knew that it was to be so used. Nor was there any reason why the subcontractor should have known the likely effect of the alkaline environment on the pipe.

Had the contractor specified that the pipe must work in a particular environment, the argument might have succeeded. However, since the pipe was fit for the purpose specified, the claim failed.

This case illustrates the critical importance of making sure your contracts are carefully worded and include any necessary conditions.



Tax

HMRC Guidance on Goodwill Valuation
HM Revenue and Customs (HMRC) have traditionally taken the view that where the nature of a business is such that it must trade from a property (for example, a pub or a care home), where the use of specially adapted premises is concerned, the amount of goodwill in the business which is ‘extra’ is likely to be small. The argument in essence is that much of any superprofit earned by the organisation (on which a payment of goodwill could be justified) is likely to be due to its position or some other physical factor.

This is important because the apportionment of the proceeds of sale between different assets can potentially have implications for Income Tax, Corporation Tax, Capital Gains Tax, Value Added Tax and Stamp Duty Land Tax.

However, a change in approach by HMRC means that they may now consider there to be more ‘free’ goodwill than previously recognised. A new Practice Note acknowledges problems with the apportionment of sales proceeds of ‘trade related property’… (e.g. public houses, hotels, petrol filling stations, cinemas, restaurants, care homes etc.). It advises that in these cases there can be particular difficulties in identifying the sum attributable to goodwill and this is fundamental to the apportionment.

This view is backed up by the sometimes large difference in value between a business sold as a going concern and the disposal of the various assets piecemeal – in which case the goodwill value normally ‘goes with’ the property.

In any purchase or sale of a business, the goodwill valuation affects the price and, even if not considered specifically, the apportionment between assets of different classes can have profound implications.

Guide to IR35
A handy guide to IR35 (the rules that determine whether a person who provides a service through a company is treated as being an employee of that company or the organisation which has retained the company) has been published by Contracteye, the website for IT Contractors. This can be found at http://www.contracteye.co.uk/ir35_compliance_overview.shtml.

If you provide services through a company to a small number of clients, sound knowledge of the IR35 rules is essential.

Pre-Signed Document Invalid
A recent tax case should sound a warning bell for those in the habit of signing documents which may subsequently be amended. HM Revenue and Customs discovered that documents used in a tax avoidance scheme had been pre-signed by a participant. The documentation had taken several months to finalise, so a signature page was signed before the draft documentation was finalised and had subsequently been appended to the new documentation.

The court was unimpressed. In spite of the fact that the second set of documents accomplished the same thing as the drafts, the detailed terms of the agreements had changed. The final version of the documents was not executed by the signatory and therefore the documents were void.

Correct procedure is important when dealing with all legal documentation. ‘Pre-signing’ may also carry a risk of fraud. It is always advisable to make sure you have a contemporaneously created copy of documents you sign.

SDLT – Lest We Forget
Tenants who undertook leases after 1 December 2003, which was when Stamp Duty Land Tax (SDLT) came into effect, are reminded that it may be necessary for them to submit a new SDLT return and the result may be additional SDLT to pay or a refund of SDLT.

Returns will be necessary when the lease has been subject to a rent review within the first five years and/or contained a contingency which makes the rent uncertain – as is the case in leases with an element of turnover rent.

If your lease contains such a clause, the original SDLT return will be an estimated return based on the expected rent. Where that rent has now become certain, a revised return will be required.

IHT and Agricultural Property – Europe Demands Equal Treatment
The European Commission (EC) has requested the UK to cease its discriminatory application of Inheritance Tax relief for agricultural property. What the EC is objecting to is not the relief, but the fact that, under UK law, agricultural property relief is available only in respect of agricultural and forestry property held in the UK, the Channel Islands or the Isle of Man, not in the entirety of the EU.

In the view of the EC, this is not compatible with EU law relating to the free movement of capital.

If the Government is forced into changing the law, this will be good news for owners of agricultural businesses who have bought holdings in other EU countries.



Company Law

Who Can See Your Register?
Under the 1985 Companies Act, the register of shareholders of a company was open to the public, although a small fee could be charged to non-shareholders wishing to inspect it. Instances of ‘direct action’ against shareholders by militants opposed to activities of a company and the misuse of information in shareholders’ registers generally have led to a change in the law under the Companies Act 2006.

The information contained in annual returns made up to any date after 30 September 2008 is no longer generally available. Specifically:

• public companies whose shares are traded on an EU regulated market only have to file the names, addresses and holdings of shareholders who have held 5 per cent or more of any class of shares at any time during the year in question; and
  
• all other public companies and private companies only have to supply shareholder names and holdings, not addresses, in respect of all shareholders.

Good Boardroom Practice
The Institute of Chartered Secretaries and Administrators has published an excellent and highly practical short guide (3 pages) on boardroom good practice, which will be of great interest to company secretaries and directors, especially non-executive directors.

The guide can be downloaded here
http://www.icsa.org.uk/assets/files/pdfs/guidance/080616.pdf.

Intellectual Property

Patent Searches Improved
Checking for existing patents in force will be easier (and free) now that the UK Intellectual Property Office (UKIPO) has made two new patent databases accessible online. The new databases replace the Patents Journal and are designed to make obtaining information sought a quicker process.

The first of the databases contains current UK patents that are open to licensing agreements.

The second database contains patents that are no longer in force.

Using the databases will allow businesses to look for commercial opportunities, such as patents which they may be able to exploit for themselves if they can reach an agreement with the owner of the patent, or patents which have effectively come into ‘free use’ by expiring.

In addition, patent applications that are filed but not yet published will be able to be examined online within a few weeks of filing.

The UKIPO has also launched an anti-counterfeiting and piracy toolkit for businesses. This can be downloaded from http://www.ipo.gov.uk/about/press/press-release/press-release-2009/press-release-20090126.htm.

Contract

Failure to Pay Instalments on Time Means Contract Void
When times are hard, there is always the temptation to delay payments to those owed money and, in many cases, the main disadvantages of this will be a cooling of one’s relationship with the supplier and possibly some deterioration in service received.

However, there are some payments for which ‘time is of the essence’ and, in such cases, failing to make the payment on time may have unfortunate results.

In a recent case, a buyer of a company agreed to purchase the shares in instalments and was taken to court by the vendor after failing to make the agreed payments. The contract did not have a clause which made the date of payment of the essence of the contract. The vendor alleged that the failure to pay the instalments as agreed breached the contract and entitled him to terminate it.

The vendor had the choice of either serving a notice making time ‘of the essence’ and requiring the purchaser to comply with the contract terms within a stated time, in which case failure to comply would terminate the contract, or, alternatively, if he was satisfied that the buyer’s actions demonstrated an intention not to perform its obligations under the contract, the vendor would be entitled to terminate the contract.

In this case, the vendor treated the contract as terminated once the second instalment in payment for the shares was not received. He took possession of the company and managed it for his own benefit.

This action led to a predictable claim by the purchaser and counterclaim by the vendor.

The case originated in the Bahamas but went as far as the Privy Council, where the vendor’s claim was upheld.

The case itself is unremarkable, but is important for two reasons. Firstly, it highlights the importance of careful drafting of contracts, especially those dealing with payments to be made in instalments. Secondly, it illustrates the fact that the courts will prefer to protect the right of the ‘wronged’ party to terminate a contract where payment terms are not met. This is particularly important in contracts of insurance – so make sure your premiums are paid on time. If you are late, you may find that the insurer terminates your cover, especially if you make a claim under the policy.

Be Careful What You Talk About In Taxis (or in an Email)
It is often thought that for a binding contract to be created, you have to ‘sign on the dotted line’, but most contracts do not need to be in writing to be valid.

In a recent case, the claimant argued that he had made a contract with the defendant for the latter to purchase the whole of his shareholding in a company called Premier Resorts Limited. The sum claimed was £346,760. The narrow point at issue was whether a legally enforceable contract had been created by the exchange of unsigned emails and ancillary correspondence and as the result of a conversation in a taxi – but without a formal contract having been created.

The judge found that the contract was validly created and enforceable.

Be careful what you agree ‘informally’.

What You Do Matters
The saying that ‘if it waddles and quacks, it is a duck’ is true in contract law also, because if you behave in accordance with a contract, the court will be inclined to come to the conclusion that the contract is operative, even if it has not been signed.

This was the conclusion of the Technology and Construction Court in a recent case in which a subcontractor was sued for causing delay to a building project and where the (unsigned) contract had a clause requiring that the contractor be compensated should this occur.

The subcontractor argued that there was no contract, because none had been signed, even though there had been copious exchange of correspondence setting out terms etc. The Court concluded, however, that there had been the offer and acceptance necessary to create contractual relations and the fact that the subcontractor had commenced work was further evidence that a contract had come into being.

It can be risky to start to fulfil a contract before you have finalised its terms.

Environment

New Environmental Damage Regulations in Force
It is common practice in many organisations for users of subscription resources to ‘borrow’ other people’s log-in details and, indeed, many licensing agreements are based on ‘average number of user’ or ‘maximum number of user’ agreements to prevent losses to the software supplier from this practice.

However, many subscription agreements are user-specific and, in such a case, lending one’s log-in details is likely to breach the licensing agreement and the software supplier will have a right of action to recover damages. This is actually relatively easy to police, as each different machine that is used to log into the relevant website will have a different ‘digital signature’.

Recently, the Financial Times commenced just such an action, alleging in a US court that a large international asset management group had breached its licensing agreement, accessing thousands of articles improperly over several years. Interestingly, the individual licence cost which is the subject matter of the claim is only $299.

In these straitened times, it is likely that many more suppliers of web-based resources will be looking for evidence of breaches of licensing agreements and will be seeking damages for the breaches and possibly also for breaches of copyright. Taking a lax attitude to adherence to legal agreements can bring significant problems: you should consider reviewing your legal agreements and making sure you comply with them.

Licencing

You Can Borrow My Log-in
It is common practice in many organisations for users of subscription resources to ‘borrow’ other people’s log-in details and, indeed, many licensing agreements are based on ‘average number of user’ or ‘maximum number of user’ agreements to prevent losses to the software supplier from this practice.

However, many subscription agreements are user-specific and, in such a case, lending one’s log-in details is likely to breach the licensing agreement and the software supplier will have a right of action to recover damages. This is actually relatively easy to police, as each different machine that is used to log into the relevant website will have a different ‘digital signature’.

Recently, the Financial Times commenced just such an action, alleging in a US court that a large international asset management group had breached its licensing agreement, accessing thousands of articles improperly over several years. Interestingly, the individual licence cost which is the subject matter of the claim is only $299.

In these straitened times, it is likely that many more suppliers of web-based resources will be looking for evidence of breaches of licensing agreements and will be seeking damages for the breaches and possibly also for breaches of copyright. Taking a lax attitude to adherence to legal agreements can bring significant problems: you should consider reviewing your legal agreements and making sure you comply with them.



Employment Law

Disability Discrimination - The Correct Comparator
In Child Support Agency (CSA) v Truman, the Employment Appeal Tribunal (EAT) has ruled that the correct comparator test in cases of disability-related discrimination in an employment law context, under Section 3A of the Disability Discrimination Act 1995 (DDA), is the same as that applied to the housing provisions of the DDA by the House of Lords in June 2008 in London Borough of Lewisham v Malcolm.

In the latter case, Mr Malcolm, who suffered from mental illness, was served notice to quit after he had sublet his flat in breach of the tenancy agreement. In deciding whether he had been treated unfairly, Lord Bingham stated that the correct comparison to be made was with a tenant who did not have a mental disability who had breached the terms of their tenancy by subletting. In such circumstances, a non-disabled tenant would have been equally in breach of the tenancy agreement and would have been treated in the same way. CSA v Truman was heard by the Employment Tribunal (ET) before the decision of the House of Lords in Malcolm.

Two findings of the ET were not challenged on appeal. Firstly, the CSA had failed to make reasonable adjustments with regard to the timely provision of suitable office furniture to enable Mrs Truman, who suffered severe back problems and was unable to work in the office, to work at home. Secondly, it had made no attempt to make reasonable adjustments to enable her to carry on working after the introduction of a restructuring plan, under which her working at home was deemed no longer acceptable.
At issue before the EAT were the following findings of the ET, which were based on the comparator test stated in Clark v Novacold. Firstly, Mrs Truman had suffered disability-related discrimination because she was threatened with disciplinary proceedings after a complaint of bullying and harassment was made against her. Mrs Truman had shouted at another employee in an angry telephone conversation that took place after she had waited all day to take delivery of a specialist desk, which failed to arrive. Secondly, the CSA’s treatment of Mrs Truman with regard to her taking ill-health retirement amounted to disability-related discrimination. She wanted to work, not retire. The ET found that she was less favourably treated than a comparator who could work full-time in an office and the defence of justification was not made out.

The CSA challenged these findings on the ground that in using the test laid down in Novacold, the ET had used the wrong comparator. The comparator test used in Malcolm should apply.

Mrs Truman contended that the decision of the House of Lords in the Malcom case did not apply to employment law, but the EAT rejected this argument. In its view, the narrower comparator favoured by the House of Lords applied equally in an employment law context and the wider comparator used in Novacold should no longer apply. The correct comparator as regards the disciplinary proceedings was a non-disabled employee who had abused another employee over the telephone. The employer would have acted towards the comparator in the same way and so Mrs Truman had not been treated less favourably. The correct comparator as regards the issue of ill-health retirement was a non-disabled employee who was unable to work full-time in an office. However, the result of that finding was not so clear cut and the EAT remitted this aspect of the case to the same ET for further consideration.

HHJ Peter Clark stated that if it was thought necessary that there should be different comparators in different contexts, that was a matter for Parliament.

The proposed Equality Bill offers the Government an opportunity to amend the law should it wish to do so. Meanwhile, it is likely that the comparator question will be revisited by a higher court and we await the outcome with interest.

Health and Safety

Health and Safety – VDU Use
More and more workers are spending a large part of their day looking at a computer screen. The Health and Safety (Display Screen Equipment) Regulations 1992 specifically deal with the health and safety issues associated with working with VDUs.

The Health and Safety Executive has a free leaflet, ‘Working With VDUs’, which gives advice for employers and employees on minimising risks and ensuring compliance with the law. It covers both conventional (cathode ray tube, TV-style) screens and the newer, flat panel displays such as those used in laptop computers. The guidance is available at http://www.hse.gov.uk/pubns/indg36.pdf.

Regulation 5 covers the employer’s responsibility for providing eyesight tests for employees.

Employers have a duty to ensure the provision of appropriate eye and eyesight tests on request to VDU users and to any employees who are to become users.

Accor Services, which runs an eye care voucher scheme for employers to provide to employees for use at most opticians, has published a free information booklet, ‘Developing a Company Eye Care Policy – Your Options and Legal Obligations’.

As well as guidance on developing and writing an eye care policy, the booklet covers the main points of the law, gives advice on ways to minimise the effects of VDU use and contains general information on eye care and, naturally, the Accor Services voucher scheme.

The information booklet is available at http://www.eyecarevouchers.co.uk.



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