STAY INFORMED BY READING OUR LEGAL e-NEWSLETTER FOR THE LATEST LEGAL UPDATES

MAY 2009

With the economy as it is now, all sorts of problems which were not obvious in better times are starting to become evident and in some cases the quality of advice received years earlier is becoming subject to question.

If you are concerned about advice you have been given, make sure you act promptly: the time limits for bringing an action are strict.

A recent case in the commercial court illustrates the point. It dealt with the question of whether or not a claim for negligence was ‘out of time’. The normal time limit for bringing a claim is six years after the loss is suffered. The claimant argued that it had suffered the loss several years after receiving the allegedly negligent advice and that the time limit for making a claim ran from when the loss was crystallised. The defendant firm argued that the time limit must run from the time that the potential for loss was first discovered.

The defendant won – thereby avoiding a £20 million payout in compensation.

The moral of the story is that if you have relied on advice given which was negligent, you should take advice about bringing a claim as soon as you can see that a loss may occur: leaving it until the loss becomes actual, as opposed to latent, may cost you your right to claim.



General

First Custodial Sentence for Insider Dealing
The Financial Services Authority has recently shown its teeth by securing a custodial sentence for an in-house lawyer who used market-sensitive insider knowledge to share in an illicit gain.

The charges arose after the father-in-law of the general counsel of a telecoms company was found to have dealt in its shares, making a profit of nearly £50,000, when the company was the subject of a takeover bid in 2006. The father-in-law subsequently paid the lawyer a cheque for half of the profit.

The trading was noted as suspicious and investigated by the FSA. Both of the men were convicted of insider dealing offences under the Criminal Justice Act and both were sentenced to 8 months’ imprisonment. In the case of the in-house lawyer, this was a custodial sentence. In the case of his father-in-law, the sentence was suspended for a year.

A person commits insider dealing if he or she obtains information which they know is insider information and which, if it were made public, would be likely to have a significant effect on the price of the securities of the company and deals in, or encourages someone else to deal in, the securities of the company or discloses the information to a third party other than in the proper performance of his or her employment, office or profession.

It is often considered that such crimes are ‘victimless’, but the FSA has indicated that it will seek criminal convictions and custodial sentences where such cases warrant them. Under the Proceeds of Crime Act, the profits of criminal activity are subject to confiscation.



Property

Claims from Insolvent Contractors
When contractors have been retained to undertake a project but fail to meet the milestones agreed in the contract, it is normal for there to be a procedure by which the contract can be ‘determined’ (brought to an end).

In a recent case, a council sought to determine the contract of a contractor, which referred the dispute to arbitration to see whether the determination of the contract was lawful. The arbitrator found in favour of the contractor.

The council was concerned that the contractor would seek compensation as a result and that if compensation were paid, it would disappear to the benefit of the contractor’s creditors, the contractor being insolvent on a balance-sheet basis. It therefore counterclaimed against the contractor and disputed the arbitrator’s finding that the determination of the contract was not lawful.

The contractor failed to file a defence to the counterclaim in time, so the council was given judgment. The contractor then applied to have the judgment set aside. The court held that the failure to file a defence in time was an oversight. It also considered that where an insolvent party obtains an adjudication, there is a risk that the court will stay its judgment on the grounds of insolvency and ability to repay. In other words, the insolvent party could win, but not be able to enforce the decision. This is likely to apply unless the financial situation of the insolvent party was similar at the time the contract was made, in which case the risk was already present for the other party, or the insolvency was due in significant part to the non-payment by the other party.

In many cases, therefore, a ‘victory’ by the insolvent party will be a hollow one. However, simply ignoring claims by such companies is unwise. The ability to pursue such a claim by an insolvent company could be attractive to investors who might seek to inject funds into the company for the specific purpose of fighting (and enforcing) the claim.



Tax

New Benchmark Subsistence Rates
Employers are reminded that new rates for the payment of ‘day subsistence’ have been published by HM Revenue and Customs (HMRC) and apply from 6 April 2009.

The new rates are contained in HMRC Brief 24/09. They permit employees who travel on business to be paid subsistence expenses of a daily maximum amount without the need to deduct Income Tax and National Insurance Contributions.

The statement needs to be read with care before payments are made – there are a number of limitations. Where the actual expense is less than the benchmark amount, only the actual expense may be reimbursed.

Assuming the necessary conditions are met and the arrangements are agreed with HMRC, the following may be reimbursed:

• Breakfast £5
• Other Meal £5 if absence from home/work is more than 5 hours (£10 if absence from home/work is more than 10 hours).

For more details, see the HMRC website at http://www.hmrc.gov.uk/briefs/income-tax/brief2409.htm.



Company Law

Directors Who Do Nothing are Liable for Loss
Directors who do nothing to prevent the occurrence of a fraud, even one from which they do not benefit, are in breach of their duties to the company even if they believe that the fraud would still have taken place had they tried to prevent it.

In a recent case, a company sought recompense from two of its directors following a substantial fraud: they argued that although they were aware of the fraud, they were not liable for it because it was committed by a third director, their brother, and benefited them only to a very limited extent. They argued that their liability was limited to the benefit they had obtained as a result of their brother’s fraud. The two directors were, it seems, dominated by the fraudulent director and unwilling to challenge him, in spite of his having past convictions for fraud.

The third director used a variety of subterfuges to misappropriate more then £60 million from the company. The other (non-family) members of the board were unaware of the fraud. His siblings argued that they could not have prevented the fraud, which their brother would have committed anyway. They played no active part in the fraud, but merely failed to prevent it or to bring it to the attention of the other directors or the auditors of the company.

The Court of Appeal was not at all impressed with this line of argument. A director’s duties were held to be ‘inescapable personal responsibilities’.

The message for company directors of all sorts (non-executive as well as executive) is that you will be in the firing line if there are breaches of the law of which you are aware and you fail to act in the appropriate way to prevent them and to bring them to the attention of the appropriate officers and/or authorities. If you are a director or trustee and are concerned about things that are going on in your organisation, contact us for advice.

Intellectual Property

European IP Costs Fall
Proposals to reduce the cost of obtaining intellectual property (IP) protection in Europe will be welcomed by firms seeking protection for their IP across the whole of the European Community.

Under the proposals, the registration fee payable when a mark is granted (currently €850) will be abolished and although the application fee is being increased from €900 (€750 where the application is filed electronically) to €1,050 (€900 where the application is filed electronically), the net result is a considerable saving.

It is expected that the revised charges will be introduded shortly.

Nominet Acts Against Abusive Domain Registration
The domain registration authority, Nominet, has the power to transfer an Internet domain name if the name is being used in an improper way. It has a dispute resolution service, which adjudicates disputes over the use of domains. In a recent instance, the ‘www.fayed.co.uk’ domain was ordered to be transferred to Mohammad Al Fayed after it had been used to post defamatory material about the owner of Harrods. Nominet’s expert ruled that it was an ‘abusive registration’.

Contract

Insurers Likely to Change Tack Following Court Reverse
The doctrine of ‘utmost good faith’ (whereby full and truthful disclosure is required) is applicable in certain types of contract, most particularly contracts for insurance and partnership agreements. The practical effect is that in the event that a party to the contract misleads another party to it, the contract is voidable by the offended party.

In a recent case, an insurer paid out more than £72,000 on a claim, part of which was later found to be fraudulent as the insured had created a misleading invoice in support of alleged repair costs. The fraud consisted of the inclusion of a false claim for VAT in excess of £4,000 which had been included in a claim for building repairs of £42,000. This part of the claim was settled by a separate agreement from the remainder of the claim. The insurer sought to reclaim the whole of its payment on the basis that the policyholder did not show utmost good faith.

The court held that the claim itself was fraudulent to the extent that the misleading document had been presented and therefore the insurer was entitled to recover the £42,000 claimed. However, there was nothing misleading with regard to the rest of the claim. It was the court’s ruling that the remainder of the claim could not be recovered by the insurer.

In practical terms, the case confirms that where any aspect of a claim is fraudulent, the whole claim will be void. However, where parts of a claim are subject to genuinely separate agreements, as in this case, then even if one claim is misleading or fraudulent, it may still be possible to retain the proceeds of the legitimate claim. It would be remarkable if insurers did not amend their negotiating strategies and/or policy wording to take account of the enhanced risk they will see this case as creating for them.

In this instance, the policyholder, by trying to make a relatively small ‘profit’ on the claim, ended up bearing the large majority of the loss. There is no doubt at all that insurers are prepared for a greater incidence of exaggerated and fraudulent claims and will adopt an even more stringent approach to examining and investigating claims in these straitened times.

International Contracts Need Not be Reasonable
Statutory requirements for commercial contracts to be fair and reasonable do not automatically apply to international supply contracts. So held the Court of Appeal in a recent case concerning an aircraft leasing agreement.

First Flight Couriers Ltd. sought to acquire two aircraft to carry express cargo across India. The aircraft were procured from BAE and a lease agreement was signed in 2004 on behalf of Trident Turboprop (Dublin) Ltd. as the lessor and First Flight as the lessee.

Delivery was accepted in 2006 and both aircraft were put into operation. Shortly afterwards, a third aircraft was acquired under the same lease arrangements. In August 2007, First Flight decided to cease operations with all three aircraft because of alleged shortfalls in specified payload, defects in the aircraft, longer than anticipated flight times and what they described as poor spares support.

The following month, First Flight ceased all rental payments on the aircraft on the grounds that the capabilities of the aircraft were misrepresented. Trident then issued default notices in October 2007 and gave notice of termination of the lease agreements in January 2008. First Flight claimed to have rescinded the agreement prior to Trident’s termination.

At the original trial at the High Court in 2008, Trident sought to recover unpaid rent and damages exceeding US$1 million, plus legal costs of around $40,000. The company relied on a clause in the lease agreements stating that First Flight’s obligation to make rent payments was ‘absolute and unconditional’. First Flight’s defence was that this and other conditions were not reasonable within the meaning of the 1977 Unfair Contract Terms Act (UCTA), given the alleged misrepresentation. The Court found in favour of Trident and First Flight subsequently appealed.

The Appeal Court ruled that the UCTA does not apply to contracts for the supply of goods across international borders. This meant that the statutory requirement for ‘reasonableness’ did not apply in this instance. As such, First Flight was not entitled to withhold rental payments or to rescind the agreement. The appeal was therefore dismissed.

International supply agreements should be read on the assumption that their terms and conditions will be interpreted literally. Cases such as this show that there is little if any scope for either party to claim subsequently that terms and conditions are unreasonable in the light of unforeseen circumstances.

Appeal Judges Slam Agent Over Secret Profit
The law prohibits anyone who acts in a ‘fiduciary capacity’ for another (e.g. an agent) from making a secret profit out of dealing with that person’s affairs. A recent ruling by the Court of Appeal dealing with this principle has cost football agent Mike Berry his entire commission from one client, plus the profit earned under a separate agreement with the client’s employer. Had the second deal been made with his client’s prior knowledge, there would have been no claim against Mr Berry.

The case concerned Trinidad and Tobago’s international goalkeeper Kelvin Jack who, in 2004, wanted to play professionally in the UK. Mr Jack had briefly been on the books of Reading FC and wanted to play for Dundee United FC, with whom he had been in contact. He asked Mr Berry to negotiate a deal with Dundee.

Mr Berry, through his company Imageview Management, negotiated a two-year contract for Mr Jack with Dundee, at an agreed fee of 10 per cent of Mr Jack’s salary. At the same time, without his client’s knowledge, he made a private arrangement with Dundee to obtain the required work permit for Mr Jack at a fee of £3,000.

In court it was ruled that the secret deal was a breach of faith on the part of the agent. The result was that the obligation on Mr Jack to pay the agent’s commission of 10 per cent was cancelled. Imageview Management appealed the decision.

The Court of Appeal stated that an agent could legitimately try to make a profit ‘on the side’ provided that the third party arrangement was not sufficiently connected with the principal/agency relationship. In this case, however, the secret profit was made directly as a consequence of the principal/agency relationship, as Mr Jack needed a work permit to enable him to play for Dundee.

In considering the degree to which the secret deal breached the agent’s fiduciary duty to his client, the Court turned the argument around, asking whether the agent was faced with a realistic possibility of a conflict of interest. In this case, stated the Court, there was a breach of a fiduciary duty because of a real conflict of interest.

The strict rules governing agents and their clients exist as a real deterrent to betrayal, said the Court. Kelvin Jack was not liable to pay any more agency fees and was entitled to recover all the fees he had already paid.

This judgment sends a clear message to agents and those acting on behalf of others to beware of any potential conflict of interest. When drawing up an agency agreement, it is important to take account of any such potential conflict and ensure the client is aware when additional revenues may be earned from third parties. We can advise you on any aspect of contract and agency law.

Competition Law

Predatory Pricing – Buying Market Share
A recent decision of the European Court of Justice (ECJ) has important implications for any business which has a dominant market position and is seeking to squeeze its competitors or even to buy additional market share.

In the case, Wanadoo, a subsidiary of France Telecom, was found to be guilty of abuse of a dominant position by the charging of prices for its services which were below the long-term average cost of supply of those services. France Telecom argued that the short-term charging of ‘below cost’ prices for its services did not mean that it could not recoup its losses in the longer term: its pricing, it argued, was above the long-term total cost of the services.

In the view of the ECJ, charging prices below average variable costs is abusive conduct. Charging prices below average long-term total costs (but above average variable costs) is abusive if it can be shown that the prices have been set as part of a strategy to reduce or eliminate competition.

The earlier imposition of a fine in excess of €10 million was confirmed.

The abuse of market position legislation does not just affect national or global suppliers – it can be applied to any business which is in a dominant market position and the penalties can be severe. We can assist you in making sure that you do not fall foul of competition law.

Data Protection

The Knock on the Door – It’s the Information Commissioner!
The ever-growing list of public authorities entitled to enter and search your premises (including your house) includes the Information Commissioner’s Office (ICO), which has the right under Schedule 9 of the Data Protection Act 1998.

To exercise the right, the ICO must obtain a warrant from a circuit judge on the basis that there are reasonable grounds to suspect that a breach of the data protection principles contained in the Act has occurred or is occurring, or that an offence under the Act has been or is being committed.

The ICO is empowered to enter premises and search them, to inspect any data processing equipment on the premises and to seize any documents or other material on the premises that may be evidence of a breach or an offence.

The ICO must, however, give the occupier of premises seven days’ notice that access to the premises is demanded and will be granted a warrant if access has been unreasonably refused. The occupier also has the right to be heard by the judge prior to the issue of the warrant.

This seems as reasonable as one would expect. However, in ‘exceptional circumstances’ (i.e. where delay would defeat the object of the entry) a warrant can be granted without notice. Similarly, the usual rule that the warrant must be executed at a reasonable hour does not apply if the ICO ‘reasonably suspects’ that the evidence it is seeking would not be there at that time. The ICO is entitled to use ‘reasonable force’ to execute its warrant.

When a new Bill currently before Parliament becomes law, it will be a criminal offence to obstruct or fail to assist a person executing a warrant by deliberately or recklessly making false statements in response to requests by the ICO for information.

For further information on the ICO and its powers, see http://www.ico.gov.uk.

Environment

Government Invites Industry Views on EC Proposals to Revise the WEEE and RoHS Directives
On 7 April 2009, the Department for Business, Enterprise and Regulatory Reform published a consultation document on European Commission proposals to recast the Directives on Waste Electrical and Electronic Equipment (WEEE) and the Restriction on the use of certain Hazardous Substances (RoHS) in electrical and electronic equipment. The European Commission's proposed revisions were published on 3 December 2008.

On WEEE, a major proposal is to increase the amounts of electric and electronic waste that are separately collected and recycled, whilst the proposals on RoHS aim for a higher level of environmental protection by revising the scope of the restrictions and the substances covered by the Directive.

If you wish to have your say, there is no time to lose as the closing date for responses to the consultation is 13 May 2009.

The consultation document is available at: http://www.berr.gov.uk/whatwedo/sectors/sustainability/weee/page30269.html.

Managing Hazardous Waste
From 6 April 2009, the qualifying exemption for notifying the Environment Agency when hazardous waste is produced on premises was raised from 200 kilograms to 500 kilograms in any 12 month period.

For further information on hazardous waste management, see http://www.environment-agency.gov.uk/business/topics/waste/32180.aspx.

Gypsum Waste
Firms dealing with gypsum waste, such as plasterboard and plaster, should be aware of changes to the law regarding its disposal. The disposal of gypsum waste and other waste with a high sulphate content to landfill together with biodegradable waste has been banned in England and Wales since 2005. However, where construction waste contained small amounts (up to 10 per cent) of gypsum, separate disposal was not required. From 1 April 2009, the 10 per cent rule is abolished and any gypsum waste that cannot be recycled and is sent to landfill must be deposited in a separate cell with non-biodegradable waste. Landfill operators must notify the Environment Agency about any non-compliant load and its producer so that it can take action against those who fail to comply.

For guidance on how to deal with waste gypsum and plasterboard, see
http://www.environment-agency.gov.uk/business/topics/waste/32148.aspx.

Licensing

Cheer for Owners of Tenanted Pubs
It is common for the licence of managed premises to be held in the name of the owner of the premises (such as a brewery) rather than that of the tenant, since it makes it administratively more simple if the tenant changes.
However, where the tenant then breaches the terms of the licence, this can cause problems. In a recent case, a brewery faced charges arising from breaches of the conditions on the premises licence. It was not denied that the offences had occurred, but the brewery denied it was liable for the offences because, whilst it was the licence holder, it did not carry out the licensable activity.

The brewery was convicted of four offences in the Magistrates Court, but the convictions were overturned on appeal to the High Court, where it was held that who was the person responsible for the breaches was a matter of fact and that the mere fact that a person held the premises licence did not mean that they were responsible for the licensable activities that took place on the premises.

Employment

Controlling Shareholder Can Be an Employee
In Secretary of State for Business, Enterprise and Regulatory Reform (BERR) v 1. Richard Neufeld and 2. Keith Howe, the Court of Appeal has confirmed that a shareholder and director of a company can also be an employee under a contract of employment with the company, even where that person has a controlling interest in, or even total control of, the company.

The two cases arose because of the insolvency of companies and hinged on whether or not each claimant had been an employee of the failed company. If so, he was entitled to the protection afforded by Section 182 of the Employment Rights Act 1996 (ERA) to those who are employees at the date when the employer company has become insolvent.

The facts of Mr Neufeld’s case were as follows. He was managing director of A & N Communications in Print Ltd. (A&N) and held 90 per cent of the shares. The company went into insolvent liquidation. He first began working for Neufeld Press Ltd. in 1982 as a member of its sales team. In 1988 he became a shareholder and one of the company’s three directors. In 2001, this undertaking was transferred to A&N. Mr Neufeld continued to work as part of the sales team, managed by the sales director, and worked a 60-hour week carrying out sales as well as management duties. He had loaned money to A&N as well as providing personal guarantees on the company’s behalf. None of the three directors had a written contract of employment.

The Secretary of State had refused to meet Mr Neufeld’s claim for redundancy money, notice money and holiday pay owing at the date of insolvency to be paid from the National Insurance Fund (NIF). His claim amounted to approximately £10,000.

Mr Neufeld brought a claim under Section 188 of the ERA and the Employment Tribunal (ET) dismissed his claim. It held that the fact that he had given personal guarantees on A&N’s behalf, had lent money to the company and had control over it showed that in reality he was not an employee of the company when it became insolvent. In the ET’s view, he was running his own business as a manager and major shareholder.

The Employment Appeal Tribunal (EAT) disagreed. In its view, the correct approach was to focus on the conduct of the parties in carrying out the ‘purported’ contract of employment. Other factors were only relevant in so far as they reflected upon that conduct. The EAT held that the ET judge had erred in law in taking into account irrelevant matters.

The Secretary of State for BERR appealed to the Court of Appeal. The appeal was heard at the same time as the other case because a salient factor in each was that the claimant was a controlling shareholder and a director of the company. The Secretary of State asked the Court of Appeal to clarify the approach to be adopted by the ET in these circumstances.

The Court of Appeal dismissed both appeals. In giving its judgment, Rimer LJ analysed the previous case law and authorities governing this question. In the Court’s view, the correct approach is to first determine whether the putative contract is genuine or a ‘sham’. If it is genuine, is it a contract of employment rather than, for example, a contract for services? As the critical question in such cases is whether or not the putative employee was an employee at the time of the company’s insolvency, it may be necessary to examine what has been done under the claimed contract, particularly where this is not in writing. The fact of a person’s control over the company will form a ‘backdrop’ against which the assessment of the conduct under the contract will be made, but will not ordinarily be of any special relevance in deciding whether or not that person has a valid contract of employment. Nor will the fact that they have share capital invested in the company or have made loans to it or given personal guarantees on its behalf. Such considerations will ordinarily be irrelevant in determining whether or not a valid contract has been created. They show an owner acting as an owner. They do not show that the owner cannot also be an employee.

This is an important case as there were 12,000 claims on the NIF by directors in 2008 and, given the current economic situation, the number in 2009 is expected to far exceed this total. Contact us if you would like advice on any of the issues raised.

Health and Safety

The Importance of Safety Standards
A recent case highlights the importance for those working in the building industry of ensuring that they carry out work in accordance with the applicable health and safety requirements. In May last year, qualified scaffolders working for Sky Scaffolding (Midlands) Ltd. were erecting scaffolding on the pavement in Coventry City Centre.

The scaffolders began work early in an attempt to avoid working when the streets would be busy, but they were still working at 9.20 am, a very busy period. A steel pole fell from a height of five metres onto a member of the public, gashing her leg. The woman was immobilised for several weeks and still suffers from anxiety attacks as a result of the accident. At the time, the scaffolders were securing the site on account of the streets being busy but, according to the Health and Safety Executive (HSE) press release, they had ‘failed to take more-robust [sic] steps to ensure that the system of work was effective to protect the public from simple human error such as dropped materials or tools during scaffolding erection’.

Use of the pavement had not been restricted, nor was it closed to pedestrians although, to prevent such accidents occurring, a workman had been given the task of asking pedestrians to wait when he was passing materials and poles up to his colleagues or while materials were being handled overhead. However, this job was too great a task for one individual as pedestrians were coming along the pavement in both directions. The workman failed to see the woman approaching and so did not ask her to wait.

The company was charged with not taking sufficient and suitable steps to prevent injury to passers by and with not conducting a sufficient and suitable risk assessment. It pleaded guilty in the Magistrates Court to breaching Regulation 3[1](b) of the Management of Health and Safety at Work Regulations 1999 and Regulation 10(2) of the Work at Height Regulations 2005 and was ordered to pay a fine of £4,000 and costs of £1,761. As of 16 January 2009, the maximum penalty the Magistrates can award for a single breach of either regulation is a fine of up to £20,000 or up to a year’s imprisonment.

The HSE has stressed the importance of scaffolders segregating themselves from the public whilst conducting dangerous overhead activities.

Information on construction safety and working at height can be found on the HSE website at www.hse.gov.uk/construction/index.htm and www.hse.gov.uk/falls/guidance.htm.

Too Lenient Fine Appealed
In a recent Scottish case, a haulage company’s fine for breaches of health and safety law was increased from £3,750 to £30,000, after an appeal by HM Advocate.

The fine arose after a heavy wheeled loader, which was being transported on one of the haulage firm’s lorries, broke loose when the lorry was going up an incline. The loader rolled off the lorry, crushing a following car and killing one of the occupants.

The brakes of the wheeled loader were found to be defective and this was a factor in its breaking free of the securing chains. The chains used, however, failed to comply with guidance for such applications as contained in the Department for Transport Code of Practice for Safety of Loads on Vehicles. 

In such cases, the following factors will normally be considered in mitigation:

• a prompt admission of responsibility and a timely plea of guilty;
• the actions taken to remedy deficiencies drawn to a defendant’s attention; and
• a good prior safety record.

In court, the judge had placed a considerable degree of weight on the company’s financial position and its ability to pay when settling the fine. The Advocate considered the sentence too lenient and on appeal the sentence was increased.

The eventual fine was twice the annual profit of the company for the prior year and clearly represents a determination by the court to emphasise the deterrent aspect of fines for health and safety breaches. Cutting corners on health and safety can be a very risky policy.



PREVIOUS NEWSLETTERS