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JUNE 2008


Expense Claim Fiddling 'Rampant'

You might not necessarily connect the budget hotel chain Travelodge with expense claim fiddling, but it has recently published a survey which shows that British employees lead the league when it comes to fraudulent expense claims, with the average claimant overstating claims by £17 per month. This rampant expenses fraud costs British business around £1 billion per year, Travelodge estimates.

The range of items reported to have been fraudulently claimed by those surveyed is astonishing and includes furniture for their homes, dancing lessons and even hiring a detective to spy on a spouse.

The most popular fiddles, not unexpectedly, are:

• overstated taxi claims;
• excessive mileage claims; and
• the replacement of receipts from inexpensive restaurants used to entertain clients with those from more expensive ones used privately.

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New Consumer Protection Laws - A Reminder
Businesses are reminded that the Consumer Protection from Unfair Trading Regulations (CPRs) came into force on 26 May 2008.

The CPRs apply to all businesses that trade directly with consumers and prohibit a wide range of unfair practices. They specifically ban outright 31 types of unfair sales and marketing practices, including bogus 'closing down' sales, prize draw scams, aggressive doorstep selling, falsely claiming membership of a trade organisation, faking goods, using 'advertorial' which is not identified as such and many sharp practices in advertising, such as luring customers with a non-existent product or falsely claiming that a product will only be available for a limited time. They will also, for the first time, establish a catch-all duty not to trade unfairly, closing loopholes that rogue traders have previously been able to exploit. Essentially, for a practice to be prohibited it must be of an unacceptable standard as well as there being an effect (or the likelihood of such) on the economic behaviour of the typical consumer - for example leading the typical consumer to buy a product that they would not otherwise have bought.

The legislation significantly increases the powers available to the authorities to crack down on offenders. Enforcement agency officers will be allowed to enter business premises without having to obtain a warrant and to seize goods and documents. In addition, an authorised officer will have the right to break open containers of any type (e.g. a locked filing cabinet) to examine goods or documents where there is a reasonable suspicion that a breach of the CPRs has been committed.

Breaches of the law can lead to substantial fines and/or imprisonment.

A basic guide to the Regulations is available at http://www.oft.gov.uk/shared_oft/business_leaflets/530162/oft979.pdf.

Be Reasonable - or Pay the Price
Mediation has been introduced as a first step in many commercial disputes in an attempt to resolve them more quickly and at lower cost than using the court process. But, like the tango, it takes two to mediate. The court recently had to consider a case in which mediation was set up and both parties to the dispute agreed to participate, but one party took an unreasonable stance in mediation from which they would not budge.

The case was brought by owners of land near Bournemouth airport. They alleged that the surveyors they had used were negligent with regard to leases the landowners had entered into with the airport for the use of land for car parking.

The surveyors were faced with claims for a total loss on a capital value basis of £87.8 million. When the court ruled, it found the surveyors negligent with regard to the majority of the issues, but assessed the loss to the landowners at a vastly lower figure.

The landowners claimed for their legal costs as 'winners'. As one would expect in a claim of this size, these were very substantial. The surveyors made various arguments as to why the landowners' costs should not be met by them, including that the landowners had exaggerated their claim, which made any proper attempt at mediation doomed to fail, that the surveyors had won on some issues and that they had made offers to settle which had been rejected.

The exchanges in mediation proceedings were made available to the court, which looked at each part of the claim in turn and adjusted the costs to be awarded based on the outcome. The result of this process was that the landowners were unable to claim fifteen per cent of their costs and had to pay the same percentage of the surveyors' costs.

Even though the court took the view that neither side had taken a reasonable stance in mediation, it reduced the clawback of costs because the landowners' claim was clearly unreasonable, the damages awarded being a fraction of the amount they had sought. As a result, the court ordered that the landowners' claim for their costs should be further reduced by substantial amounts.

The case does clearly illustrate that mediation must be approached in an open-minded and fair manner. Merely giving the appearance of participating in the mediation process will not impress the court.



Property

Lords Rule on Limitation Case
There are strict time limits relating to the bringing of claims in tort (where a wrong is committed, the compensation for which is sought in a civil court). These are set out in the Limitation Act of 1980. In general, claims cannot be brought more than three years after the date when the claimant had the right to bring an action and was in possession of the knowledge necessary to do so.

Being in possession of the necessary knowledge is taken to include situations in which the person should have been in possession of the knowledge but failed to acquire it when he could reasonably be expected to have done so from the facts available. This is particularly important in cases in which the damage is latent and not discovered for some time. The idea here is to exclude claims from claimants who could have acted with reasonable celerity to ascertain the position, but failed to do so. Needless to say, it is an often argued-over area of law.

The issue normally concerns what constitutes 'knowledge' for starting the clock running in terms of the time limits for bringing a claim. The House of Lords recently dealt with a case which provides useful guidance in this area.

It involved a company which built an extension to its premises. The foundations of the extension proved to have defects. In 1995, an expansion joint was noted to have widened, but it was not regarded as significant. It was monitored for a period and in the absence of any other signs of problems or further significant movement, it was decided not to undertake further investigation, although correspondence continued over the matter for some time. One significant feature was that the defendant structural engineer had sent a letter suggesting only that a mastic sealer on the ground slab of the building should be replaced to indicate whether the movement was continuing. The judge hearing the case in the Technology and Construction Court took this to indicate that the structural engineer did not at that time (it was then 1996) consider the problem to be significant.

Over the years, cracking was noted and the defendant attended the premises, but at no time did he indicate that he considered the movement of the building was significant, although he did say that cracking of the concrete floor slab would be significant. This duly occurred in 2003. Proceedings were commenced in July 2006. These would be statute barred if prior to three years before that date the claimant had the knowledge required, or should have had the knowledge required, to bring an action for damages in respect of the relevant damage . The defendant structural engineer argued that the proceedings were 'out of time' and could not be brought.

The ruling of the Court was that the defendant had taken insufficient steps to put the claimant 'on knowledge' that there might be a problem with the foundations of the building. Accordingly, the claimant only had sufficient knowledge in 2003 and so the claim was not out of time and could proceed.

When is a Lease Created ?
Tenants have significant rights compared with occupiers of premises whose occupation is by virtue of a licence, so it is sometimes important to be sure of the basis of occupation and to be aware of the fact that tenants' rights can be created in some circumstances when a formal lease has not been signed.

This is because the Law of Property Act 1954 (S54) provides that a lease can come into being without the need for the preparation of a written lease. There are certain conditions which apply in such circumstances, which are, in simplified terms, that:

• the lease cannot exceed three years;
• the term starts when the lease is put into effect (i.e. not later); and
• the rent is the market rent for the premises.

Recently, an appeal was heard from tenants who were occupying premises paying a rent of approximately 1/3 rd of the market rate under a one-page agreement which was not properly executed as a lease, but which they claimed constituted a lease sufficient to comply with S54. They claimed that as a result they had security of tenure when a new purchaser of the freehold of the unit they let sought to evict them from the premises.

The case went to the Court of Appeal, which concluded that the tenants did not have a lease under S54 as the requirement that the rent payable was equivalent to a market rent was not met. Accordingly, the arrangement could be terminated on demand.

Tax

P11D Reminder
As the 6 July deadline for filing forms P11D (benefits in kind for directors and higher-paid employees) approaches, a few reminders might be in order.

The following do not give rise to taxable benefits in kind:

• Mobile phones provided to employees which they are allowed to use for making private calls. However, only one such phone per employee may be provided and the phone must be in the company's name, not that of the employee; and

• Computers provided for work (including laptops and PDAs), provided that the device is necessary for the employee to perform his or her duties. Broadband internet access supplied in the employer's name for the employee to work at home also does not normally create a benefit in kind.

Company Cars
The most highly taxed benefit in kind is also the one requiring the most thought and one of the most effective planning tools is for employees to reimburse the employer for private use of the car or for the employer not to supply fuel and the employee to claim for fuel for business mileage only.

Provision of Assistance for Purchase of Shares - Points to Ponder
The provision of assistance by a company for the purchase of its shares has long been a difficult area of law. The practice was prohibited until the 1981 Companies Act came into force, when a 'whitewash' procedure was introduced which allowed private companies to give financial assistance for the purchase of their shares provided that a number of requirements were met.

The problem with the provision by a company of financial assistance (e.g. a loan) for the purchase of its shares has rested in the possibility that this can, when used without sufficient scruples, undermine the interests of other shareholders and even creditors of the company.

The downside of the equation is that the prevention of such assistance sometimes makes it difficult for shares to be issued and this could be to the detriment of the company. For example, it might be considered to be in the company's interests to offer shares to an executive as an incentive, but the person concerned might be unable to raise the money to buy them. Without setting up a rather complex (and sometimes expensive and/or inappropriate) mechanism, the company's wish to have the executive obtain an interest in its shares might be frustrated.

Relief is now to hand in the form of the Companies Act 2006 which, from October 2008, will allow a private company to provide financial assistance for the purchase of its shares. Public companies are still prohibited from so doing.

The right is not unlimited, however. Protection for shareholders and creditors also now depends on the requirement that the company's directors consider whether the proposed share transaction is consistent with their duty to promote the success of the company for the benefit of the shareholders as a whole. If the proposed share transaction does not achieve that end, the directors cannot authorise it. Their duty also extends to the protection of the creditors - for example, where financial assistance is given for the acquisition of shares in a company which is insolvent, the directors could be found personally liable for any losses to creditors which may result.

The relaxation of the rules does give private companies increased flexibility in dealing with their shares. However, it places the ultimate responsibility for any decision to give assistance for the acquisition of shares in the company on the directors who authorised the transaction. It is a burden which should not be discharged lightly and professional advice is recommended before such transactions are carried out. It is also likely that in cases where there is significant bank borrowing, the bank may require extra comfort to ensure its position is protected.

Court Warning for NEDs
A Scottish court has spelled out a warning for non-executive directors (NEDs) who are of the view that they are in some way different from 'normal' directors in the eyes of the law.

In the case in point, a NED was held to be in breach of his fiduciary duty to the company that employed him when he gave the benefit of an agreement to another company of which he was also a director by, in effect, diverting the company from entering into a potentially profitable memorandum of understanding with another company. His argument - that his non-executive directorship was undertaken for tax purposes only and that he would not be expected as a NED to identify business opportunities for the company - was rejected by the court.

A director is a director. A NED owes exactly the same responsibilities to the company as a full-time working director.

Simpler Execution of Deeds for Companies
Companies can now execute documents under deed without having to have the document signed by two officers (directors or the company secretary) or affixing the company's seal.

Now, provided it is allowed under the company's articles of association, all that is required is the signature of a single director, provided the signature is properly witnessed.

Intellectual Property

Three Stripes and You're Out (or Two or Four)
Sportswear brand leader Adidas has gained a victory in the USA over its trade mark 'three stripes' - hard on the heels of a similar victory in Holland.

The company successfully argued in a Kansas court that Collective Brands had infringed its trade mark by selling training shoes with stripes on their sides - in this case the shoes had two or four stripes, not three. Collective Brands had argued that the Adidas trade mark was not infringed because their products did not have the distinctive 'three stripe' trade mark. Collective Brands was ordered to pay over $300 million in damages. Collective Brands has already announced its intention to appeal against the decision.

The defence against Adidas in the Dutch case was based on the assertion that stripes are a generic motif in footwear and not distinctive enough to merit trade mark protection. However, the European Court of Justice considered that the test was one of whether consumers would be confused into thinking that the item was an Adidas product and that the national courts in each country must determine whether this was the case.

Contract

Exclusions Exclude, Rules Court
Two recent cases reaffirm the wisdom of giving careful consideration to the effects of exclusion clauses in insurance policies.

One involved a fire protection system that was ineffective when a fire broke out, causing loss to the owners of the building in which it was installed. They sued the engineer who installed the system, who settled their claim and claimed on his insurance policy. The insurers refused the claim because the policy contained an exclusion clause which excluded a claim which arose as a result of the failure of 'any fire or intruder alarm...to perform its intended function'. The engineer went to court to force them to pay.

The court rejected the engineer's claim, holding that the words were clear in their meaning. Applying normal principles, the purpose of an exclusion clause is to exclude the stated perils. In this case, the loss was not due to the equipment being defective (in which case the policy would have covered the claim) but because it failed to perform its intended function of putting out the fire, an exclusion clearly included in the policy by the insurer for good commercial reasons.

In the second case, a clause in an insurance policy which included the requirement that the premises were attended by at least one responsible person when not protected by the intruder alarm system was sufficient to exclude a claim for losses due to theft when the responsible person (the managing director of the claimant company) left the premises because he felt unsafe. Although the policy would have covered the loss had he been under the actual threat of violence, in the absence of a specific threat the exclusion clause applied.

Exclusion clauses are put into policies by the insurer with the specific intention of reducing the insurer's risk under the policy. Such clauses can have a much wider effect than one might think.

Insolvency

Liquidations on the Up
The Insolvency Service's statistics on company liquidations for the first quarter of 2008 may at first glance seem comforting - with company liquidations up by only 2 per cent over the previous quarter and 4 per cent over the same period in 2007 - but they do contain evidence of a worsening economic situation.

Creditors voluntary liquidations have risen to 2,125, an increase of 7 per cent on the previous quarter and more than 25 per cent up on the corresponding quarter of the previous year.

The message for traders is clear. Make sure effective credit control procedures are in place and operating correctly. A downturn in the economy is hard enough to negotiate successfully even without lax credit control.

Data Protection

New Powers for ICO for Data Breaches
The Information Commissioner's Office (ICO) has been given the power to impose substantial fines on organisations that deliberately or recklessly commit serious breaches of the Data Protection Act (DPA).

Hitherto, the ICO could only issue an enforcement notice against an organisation that was in breach of the DPA. The new power is granted under the Criminal Justice and Immigration Act, which has now received Royal Assent.

David Smith, the Deputy Information Commissioner said, "This change in the law sends a very clear signal that data protection must be a priority and that it is completely unacceptable to be cavalier with people's personal information. The prospect of substantial fines for deliberate or reckless breaches of the Data Protection Principles will act as a strong deterrent and help ensure that organisations take their data protection obligations more seriously."

There are eight Data Protection Principles with which anyone who processes personal information must comply. The data must be:

1. Processed fairly and lawfully;
2. Processed for limited purposes;
3. Adequate, relevant and not excessive;
4. Accurate and up to date;
5. Not kept for longer than is necessary;
6. Processed in line with the individual's rights;
7. Secure; and
8. Not transferred to other countries without adequate protection.

Environment

Environmental Damage - New Duty to Notify
The Environmental Damage (Prevention and Remediation) Regulations, which will transpose the provisions of the EU Environmental Liability Directive into law in England and Wales, are expected to come into force in December 2008.

The Regulations will supplement existing environmental protection legislation and impose obligations on operators of commercial activities which cause or threaten to cause environmental damage.

The environmental damage covered by the Regulations is defined as:

• damage to protected species and natural habitats or in a site of special scientific interest;
• damage to surface water or ground water; and
• land damage.

The Regulations seek to ensure that action is taken to put damage right and are based on the 'polluter pays' principle, requiring those responsible to meet the cost of preventive and remedial measures. When there is an imminent threat of environmental damage or actual environmental damage, operators will be required to take immediate steps to prevent damage or further damage and to notify the enforcing authority.

Consultation has taken place on the draft Environmental Damage (Prevention and Remediation) Regulations. These and draft guidance can be found at http://www.defra.gov.uk/corporate/consult/env-liability-regs/
env-damage-guide.pdf.

Licensing

Victory for Licensee in 'Speculation' Case
Blackburn-based brewery Thwaites, which owns 400 pubs, has won a victory which will bring cheer to licensees, after the Court ruled that a decision by magistrates to cut the hours of its Saughall Hotel in Saughall Massie on Merseyside was not based on evidence.

The pub had initially been granted a licence by Wirral Council to open until 1 am on Friday and Saturday and until midnight during the rest of the week. The Saughall Massie Village Conservation Society appealed to the local Magistrates' Court against the decision on the ground that the extended hours would lead to excessive noise and disorder. The magistrates agreed and reduced the hours. Thwaites appealed to the High Court, arguing that the objection was based on speculation rather than evidence, as there had not been any complaints of noise nuisance, and also that the decision of the magistrates was contrary to the philosophy of the Licensing Act and the restrictions placed on Thwaites were unnecessary to promote the licensing objectives. The judge agreed, reinstating the original decision of the Council.

ACAS Consults on Draft Code of Practice on Discipline and Grievance
The Employment Act 2002 (Dispute Resolution) Regulations 2004, which require employers and employees to operate statutory minimum disciplinary, dismissal and grievance procedures, were intended to give those involved the chance to settle complaints without recourse to litigation. However, since they were introduced the procedures have been widely criticised for being poorly drafted and overly complex. An independent review of the options for simplifying and improving all aspects of employment dispute resolution recommended that the statutory dispute resolution procedures be repealed and replaced with non-prescriptive guidelines on grievances, discipline and dismissal.

To this end, the Advisory, Conciliation and Arbitration Service (ACAS) has published for consultation a revised Code of Practice providing practical guidance for employers, employees and their representatives. This sets out basic principles for handling disciplinary and grievance situations in the workplace. Failing to follow the Code will not, in itself, make a person or organisation liable to proceedings but employment tribunals will have the power to adjust by up to 25 per cent any awards made in relevant cases for unreasonable failure to comply with the Code.

The Government plans to introduce the changes in workplace dispute resolution procedures in April 2009 and it is intended that the revised ACAS Code will come into effect at the same time.

Health and Safety

Employer Responsible for Work-Related Suicide
Employees, or their dependants, are entitled to claim damages for injury caused by a workplace accident if:

• there was a duty of care owed to the injured person;
• that duty was not performed; and
• it was reasonably foreseeable that harm would result from a failure to discharge the duty of care.

In Corr v IBC Vehicles , the House of Lords has ruled that the widow of a man who committed suicide six years after he suffered severe head injuries in a workplace accident should be compensated by his former employer.

Thomas Corr had no history of psychiatric illness prior to the accident in 1996, after which he underwent lengthy and painful reconstructive surgery. He began to suffer post-traumatic stress disorder and subsequently became severely depressed. In May 2002, he killed himself by jumping from a multi-storey car park.

Mr Corr's widow sued IBC Vehicles for pain, suffering and loss caused by the accident and by her husband's suicide. IBC Vehicles admitted liability for the accident but denied liability under the Fatal Accidents Act 1976 for the suicide. The High Court awarded Ms Corr damages of £82,520 but dismissed the Fatal Accidents claim. In the Court's view, the employer's duty of care to the deceased did not extend to preventing his suicide and his suicide was not reasonably foreseeable.

The Court of Appeal overturned this decision. It held that the key factor was not whether the particular outcome was foreseeable but whether the type of harm for which damages were sought was foreseeable. In this case, the foreseeable harm was depression and this was the cause of Mr Corr's suicide, therefore there was no break in the chain of causation.

IBC Vehicles appealed. It submitted that whilst depression had been a foreseeable consequence of its breach of duty, Mr Corr's suicide was not. It was an unreasonable, voluntary act that had broken the chain of causation. The House of Lords dismissed the appeal and held that the employer was liable under the Fatal Accidents Act, even though Mr Corr's death was self-inflicted.

The Lords held that to establish liability it was not necessary to be able to foresee the precise form that damage resulting from a breach of the duty of care might take and suicide could not be regarded as so unusual and unpredictable as to be outside what was reasonably foreseeable. Mr Corr's suicide was the action of a man suffering from a severe depressive illness that impaired his ability to make reasoned and informed judgments about his future and the illness, as had been acknowledged, was a consequence of the employer's actions. Lord Bingham said, "It is in no way unfair to hold the employer responsible for this dire consequence of its breach of duty although it could well be thought unfair to the victim not to do so."

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PRESTON-ROUSE COMPANY
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DX 65 London/Chancery Lane
email judith@preston-rouse.com & michael@preston-rouse.com

For more information please contact:
Judith Preston-Rouse or Nicola Manning or Michael Vann
telephone 020 7404 9725 facsimile 020 7404 9731