Litigation can be expensive and there are good reasons in many cases for achieving a resolution by mediation when possible.

Recently, a court case was settled after a prolonged dispute between a landlord and a tenant over liability for the sharing of the cost of works to a building.

The tenant claimed nearly £6 million from the landlord. The landlord offered £400,000. The dispute was eventually settled, after more than a year of legal dispute, by the landlord paying the tenant £750,000.

When the question of which side would carry the legal costs was then considered, both sides claimed the other should pay: the landlord because the settlement was much lower than the sum claimed and the tenant because the settlement was more than the landlord’s original offer.

Although the court effectively ruled that the tenant was the ‘winner’, it only awarded the tenant 50 per cent of the costs it incurred commencing 21 days after the landlord’s offer was received. The judge considered that the original claim was ‘exaggerated’ and said that the tenant’s conduct in failing to respond effectively had driven up the costs unnecessarily. The practical effect of the decision was that the tenant’s irrecoverable legal costs exceeded the settlement awarded.

Insisting on settling disputes by litigating, rather than negotiating the outcome, can be expensive.

Insurance contracts normally include time limits for making claims and these are often expressed in less than precise wording.

In a recent case, a claim for subsidence was made relating to a retail shop. The policy required the insured to advise its insurers immediately if damage was noticed that might give rise to a claim. The retailer had noticed cracks in the walls in August 2003, but failed to advise its insurers until a year later, by which time the cracking had caused damage to the insured’s fixtures and stock. In the interim period, the retailer had obtained an engineer’s report, documented the damage and informed its landlord’s insurers.

The retailer’s insurers rejected the claim on the basis that they were not notified immediately. The insured argued that it only knew that the damage was caused by subsidence shortly before it made its claim, but the court rejected its argument. It should have notified the insurers as soon as it was aware that a claim might result.

The moral of the story is that if you have reason to think you might have to claim on your insurance policy, make sure you are aware of any applicable time limit on making a claim and adhere to it, or you may find the insurer can reject it.

Without Prejudice Challenge Fails
A company that sought to give as evidence in court ‘without prejudice’ comments made by the company with which it was in dispute met with a firm rebuff from the Court of Appeal recently.

Without prejudice material is material which is used in negotiation on the understanding that it will not be referred to in court. The principle allows parties to a dispute to negotiate without having their hands tied by the consideration that everything that passes between them may be given in evidence. Only in rare circumstances is the principle breached.

In this instance, one of the parties to the dispute wanted to disclose the content of discussions ‘as an aid to the proper legal construction of a contract’. However, Longmore LJ considered that it was more important to uphold the principle of without prejudice than to allow its breach so that ‘arguably relevant’ background material was admitted by the court, adding that ‘Very few disputes about interpretation are truly informed by evidence about preceding without prejudice oral discussions’.

Negotiation Proves Expensive for Landlord
Landlords who want to take the ‘easy route’ of negotiation, rather than litigation, when a tenant’s lease comes up for renewal should take advice to ensure that this is the best course of action, as a recent case proves.

The circumstances were that the tenant had breached its obligations to repair the property, so the landlord served a legal notice on the tenant to which the tenant replied. This procedure had the effect that the lease could not then be forfeit and the landlord could only recover damages by obtaining the leave of the court.

All went to plan, however, and the tenant eventually carried out the necessary repairs after lengthy negotiations. The landlord then sought to recover its costs incurred in the negotiations.

The court refused the landlord’s claim, because while the lease stated that the landlord could recover its costs when these were incurred in ‘contemplation of or in relation to …proceedings…’, there were no proceedings contemplated, because the landlord had not served the tenant with a notice that it intended to make a claim.
Trying to negotiate, rather than taking legal action, has proved to be expensive for the landlord in this instance.

Landlords who find themselves in a similar position, should have their leases vetted to ensure they do not end up in a similar position.

Contract Re-Think Required?
It has been commonly accepted that where a construction contract gives rise to ‘liquidated and ascertained damages’ (LADs) for breach of the contract terms, the liability for the LADs ends when the contract is terminated. It now appears that that assumption is wrong.

In a recent case, the Technology and Construction Court ruled that LADs could continue to accrue after a contractor’s contract had been terminated and it was replaced by a new contractor – LADs were ruled to accrue up to the end of the completion of the contract by the new contractor.

Whether this will apply or not will depend on the exact wording of the contract.

Right to Connect Cannot Be Denied by Water Authority
The Water Industry Act 1991 gives a property developer an absolute right to connect the property to the public sewerage network, unless the sewer constructed does not meet the reasonable standards of the statutory sewerage provider.

That may seem straightforward, but it took the Supreme Court to decide a dispute on this point between home builder Barratt and the Welsh Water Authority.

Welsh Water refused Barratt permission to connect to its sewerage network at the point at which Barratt wished, on the basis that the network lacked sufficient capacity. It suggested connecting at a different point, which would have required Barratt to obtain the consent of another party.

Barratt took the dispute all the way to the Supreme Court, which rejected Welsh Water’s argument. The Act confers no express right on the sewerage undertaker to select the point of connection or to refuse permission to make the connection on the ground that the point proposed by the developer is open to objection.

The implication of this case is that, in effect, the decision on the location of the connection to the sewerage network becomes a matter for the planning authorities, not the statutory sewerage undertakers, to decide.

Although this case has limited application, it does illustrate the importance of making sure that planning issues are considered fully and negotiations concluded at an early stage in any development.

Tax and Foreign Travel
This month, two issues relating to foreign travel have arisen which are relevant for taxpayers.

Firstly, HM Revenue and Customs (HMRC) have advised that taxpayers who expect to have problems paying tax on time as a result of the volcanic ash cloud should contact them as soon as possible, rather than wait until the payment is overdue.

Secondly, now that the Foreign and Commonwealth Office has stopped publishing guideline expenses rates for accommodation and subsistence in various foreign countries, HMRC have launched a review of the area with a view to publishing new guidance.

The most recent guideline rates, which can be used for expense claims in the absence of receipts, can continue to be used until the end of the current tax year.

Voucher Warning for Firms
Firms that offer vouchers to employees in exchange for salary sacrifices may face a VAT charge, following a recent opinion of the Advocate General of the European Court of Justice.

It involved AstraZeneca, which had given employees vouchers in exchange for salary sacrifices. The VAT element of the vouchers had been recovered as input VAT, but no payment of output VAT was made when the vouchers were supplied to staff.

The Advocate General decided that the vouchers represented a taxable supply (i.e. the payment for them was the sacrificed salary). This meant that AstraZeneca was liable to pay output VAT on the value of the salary foregone.

If the European Court of Justice follows this opinion, the ruling may well be used by VAT inspectors to make claims going back several years.

Firms using vouchers (or other salary-sacrifice arrangements that involve a potentially taxable supply) to reward staff should consider their options.

Ash Cloud Relief for Non-Residents
HM Revenue and Customs have announced that non-UK resident persons who remain in the UK due to disruption of their travel plans (e.g. by the recurring volcanic ash cloud) and who, as a result, spend more than 90 days in the UK at a time, will not be treated as becoming UK resident for income tax purposes as a result.

However, if the effect is to make the person exceed the annual limit of 183 days, UK residence will be established.

Bribery Act Becomes Law
Bribery and corruption are rife in many countries. For example, IKEA recently ceased its expansion in Russia because of difficulties in obtaining permissions to build stores without being willing to engage in corrupt practices. In some countries, ‘sweeteners’ for deals are a necessity or near-necessity.

However, UK businesses that engage in bribery to obtain business now face stiff penalties if they are caught. The Bribery Act 2010 received Royal Assent on 8 April 2010. It is an offence under the Act to bribe another person or to allow oneself to be bribed, and specifically it is an offence to bribe foreign public officials. These offences are punishable by an unlimited fine and/or a prison sentence of up to 10 years. The Act also makes failing to prevent bribery an offence punishable by an unlimited fine.

The Act is being introduced in stages during the year and represents a serious risk to business people who use corrupt practices.

Contract Clinches Fee for Ex-Advisers
It is not uncommon for a company to switch financial advisers when it is seeking to do a deal, but doing so without a full appreciation of the implications of the contract with the financial advisers who have been shown the door can be an expensive mistake.

In a recent case, financial advisers who had ceased to be engaged in a deal saw the deal progress to completion several months later, without their involvement. Regrettably for their former client, their contract contained a crystal-clear clause which read ‘In the event the engagement pursuant to this letter of engagement is terminated by the Company and an Offer for the Target is declared or becomes wholly unconditional as the result of any offer made by or in association with the Company within a period of 12 months after the effective date of termination the Company shall pay…the Success Fee in full’.

In spite of a spirited attempt to avoid paying the success fee, and despite the clear lack of commerciality of the contract, the court had no hesitation in awarding the advisers their fee. Presumably, the new advisers obtained their success fee also.

Patent Opinion
If you are considering taking an action on a patent infringement matter, you might like to start by obtaining an independent opinion. For £200, the UK Intellectual Property Office offers a service of reviewing the issues under dispute and giving an opinion on infringement or validity of a patent. The service is intended to help you negotiate a settlement or decide whether to commence full legal proceedings.
See http://www.ipo.gov.uk/types/patent/p-dispute/p-opinion.htm for further information.

Copyright Case Highlights Need for Care
Breach of copyright on the Internet is relatively common, but it is still a breach of the law and one for which there is no defence based on ignorance. The issue arises because copyright is an absolute right, which arises automatically. You don’t have to do anything to obtain it: it arises as soon as the material is created. So, anything you read or watch is the copyright of the creator (or someone to whom they have assigned it) and cannot be used without permission.

A recent case shows how easy it is to breach copyright, even if it is unintended. It involved an Internet-based news indexing system, which allowed members to find reports on films (primarily) through a system based on the use of internet discussion groups. Members were easily able to find reports on films and similar items and to download them. The problem was that the system also enabled members to search for copies of particular films and download them by directing members to locations on the Internet where these were available. It also provided the technology by which the files could be downloaded. This breached the copyright of the owners of the films.

The High Court concluded that the system must have given members the impression that the provider had implied authority to allow users to copy films and the provider had therefore ‘procured and engaged in’ a ‘common design’ to infringe the film owners’ copyrights.

If you reproduce without permission material created by others, you could be heading for trouble.

Insolvency – Court Considers Repeated Notices
When a notice that a company intends to appoint an administrator is given, there is a moratorium for ten business days, which gives other interested parties time to consider their positions. After ten days the notice expires.

The relevant section of the Insolvency Act 1986 (para 28(2) of Schedule B1) reads ‘An appointment may not be made…after the period of ten business days beginning with the date on which the notice of intention to appoint is filed…’.

The legislation does not make it clear when the prohibition on appointing an administrator expires. If the directors of a company file such a notice and then fail to appoint an administrator, can they then file a second notice and appoint an administrator afterwards? On the other hand, if directors could simply file a notice every ten days, could they then prevent the appointment of an administrator indefinitely?

A recent case considered these questions. A company had intended to enter into a ‘pre-pack’ administration and filed a notice to appoint an administrator to facilitate that. Unfortunately, the pre-pack did not proceed within the ten-day period, so no administrator was appointed. The directors still wished to put the company into administration and went to court to seek permission to do so. The court accepted that there could be good reasons why the appointment of an administrator could not be concluded within ten business days. It therefore ruled that the company in this case could file a second notice. However, the court stressed that it was not condoning repeated filings where there is no intention of appointing an administrator and noted that it has the power to impose penalties on directors who abuse the procedure.

In this case, the court took a commonsense approach to the problem, which is to be welcomed by all those involved in the tricky business of insolvency.