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JULY 2007

Modern litigation practice aims at settling disputes without going to court whenever possible. To that end, there is a series of ‘pre-action protocols’ covering different types of legal action. The protocols stress the desirability of resolving disputes by mediation when possible. The main point of the protocols is to save costs for the parties in dispute.

Where one party to the dispute fails to follow the protocol, they face carrying extra costs, as was seen in a recent case involving builders Charles Church.

Charles Church made a claim against two other businesses, issuing proceedings at the last minute. They in turn filed a defence and only then did Charles Church suggest that the proceedings should be held in abeyance so that a mediated settlement could be pursued.

One of the defendants contended that Charles Church should bear its costs, arguing that these were incurred because of their failure to follow the pre-action protocol, which led to formal proceedings being commenced. That in turn meant that it had to file a defence, a necessarily more expensive process than mediation.

The Court ruled that Charles Church should pay half of the defendant’s costs as well as its own up to the point at which the proceedings were put on hold when the mediation process commenced.

The message for claimants is clear – the potential defendant should be given time and information enough to investigate a claim before formal proceedings are issued. On the other hand, if a last minute claim is made against you and the reasonable course is to lodge a defence against proceedings rather than to mediate, a tough stance on costs may well be warranted.

General

Without Prejudice – New Decisions
There have been two recent decisions concerning what is and what is not ‘without prejudice’ in communications with the other side in negotiations. In general, written or oral communications made as part of negotiations genuinely aimed at, but not resulting in, settlement of a dispute are not generally admissible in evidence in litigation between the parties in dispute (i.e. are without prejudice). One of the big issues in such cases is how proximate such communications must be to the legal proceedings to be covered by the without prejudice principle.

A very recent decision saw the Court of Appeal rule that discussions which took place several months before the commencement of legal proceedings could be without prejudice. Whilst the Court was mindful that the without prejudice rule should not be extended further than necessary, in the case in point it was obvious that in the event that the negotiations were not successful, litigation would follow. Furthermore, substantial sums were at risk.

Another interesting point made was that if only communications at the end of the negotiation process (i.e. just before the commencement of legal proceedings) are able to be without prejudice, there might be an incentive to accelerate towards litigation rather than working to reach an agreement beforehand. It was considered that this could have an adverse effect on the conduct of the negotiations.

It has also been established that even though a communication is marked ‘without prejudice’ it may not necessarily be so. It is certainly dangerous to assume that just because a written or verbal communication is stated to be on a without prejudice basis, the court will in all cases agree that it is. Another Court of Appeal case has confirmed that where both parties refer to without prejudice communications in forms submitted to the Employment Tribunal, those communications cease to be privileged.

Business Registration Scammers Jailed
The deluge of paperwork that besets businesses of all sizes makes it possible for scammers to flourish. Typical scams involve sending an invoice for an unordered or non-existent service or one pretending to be from an official body.

Three Yorkshire-based scammers were recently jailed for their part in a scam involving the sending of bogus demands for registration under Health and Safety and Data Protection legislation. The scam, which targeted small businesses, raised over £65,000.

If you receive an unexpected demand for payment from an official-sounding body, take care – it may be a scam. If you receive a demand for payment for unordered goods or services, you are not under an obligation to pay. We will be happy to advise you of your rights and responsibilities in such circumstances.

Employers Face Compulsory Pensions Burden
In the face of a spiralling pensions bill, the Government (many of whose employees have the sort of pension arrangements most people in the private sector can only dream about) has taken a predictable approach in its recent Pensions White Paper.

The proposal is that from 2012 employers will have to offer their employees a personal pension savings account and pay 3 per cent of salary (employees will pay 4 per cent) into the account. An upper contribution limit of £3,600 per annum is proposed and the Government will rebate 1 per cent. The contribution limit is based on 2005 earnings and is intended to be uprated annually, based on the average earnings index.

Many large company pension schemes are more generous than the proposed scheme, but for many businesses the proposals may represent a significant blow to their ability to remain competitive.

The pension reform proposals can be found on the Department for Work and Pensions website at http://www.dwp.gov.uk/pensionsreform/summary/proposals.asp.

Property

Rent Review Not Limited to Fixed Date
The House of Lords, reversing the decision of the Court of Appeal, has confirmed that a rent review need not be carried out on a fixed date.

The case arose because Riverside Housing Association Ltd. created a tenancy agreement which stipulated that the rent review for its tenants would take place at the beginning of June each year. It granted an assured tenancy, to a Mr White, which contained a clause stating that the rent could be increased subject to four weeks’ notice in writing and would be increased annually ‘from the first Monday of June each year’. This procedure was followed for several years until 2000, when the rent was not increased. In February 2001, Riverside informed their tenants that their rent would be increased from April 2001. For subsequent years, rent increase notices were served annually by Riverside in late January or early February.

Mr White went to court, claiming that these notices were invalid on the ground that they were issued long after the rent variation date. The Lords ruled that the increases were valid. Riverside had the right to increase rents annually, that right being stated specifically in the leases. Furthermore, the clause which specified that four weeks’ notice would be given did not specify a particular date by which the notice had to be given. It would be unjust, therefore, to deny Riverside the rent increase sought.

In this instance the lease terms were not as tightly drafted as is normal in such situations, so similar cases are likely to be relatively uncommon. However, when setting up any agreement, it is sensible to consider carefully the wording of the clauses which cover the procedural aspects of the arrangement as well as the purely legal ones.

Tax

HMRC Face Promotion Costs Defeat
It clearly irritates some tax inspectors in HM Revenue and Customs (HMRC) that business promotional expenditure can be in some way connected with an activity which is enjoyed by the management of the business. Such expenditure, when substantial, is frequently queried in tax investigations.

In a recent case, HMRC took a taxpayer who runs a coach business to task over promotional expenditure claimed in his accounts as a business expense. The coach operator had purchased a rally car which was painted in his business livery and which he used in rallying competitions, claiming the cost as a deduction from business profits.

HMRC attacked the deduction claim on the grounds that the expenditure was not ‘wholly and exclusively’ for the purposes of the business. The Special Commissioners, however, found that the purpose of the expenditure was the promotion of the business and the expenditure was therefore allowable.

It remains to be seen whether HMRC will appeal the decision, which on the face of it seems lenient. If not appealed, it represents a slight shifting of the goalposts, with regard to this type of expenditure, in favour of the taxpayer.

IP

Tax Relief to Help IP Protection?
The cost of obtaining protection for intellectual property (IP) is often one of the main reasons why such a valuable asset is left unprotected by smaller businesses. However, the recent increase in the tax allowance for research and development (R&D) costs – from 150 per cent to 175 per cent of expenditure – might be sufficient to provide the extra finance for making sure legal IP protection (i.e. a patent) is obtained if possible.

When making a claim for tax relief for R&D expenditure, it is worth taking time to make sure that appropriate costs are picked up and, of course, that the records needed to justify the claim are retained. Your accountants can help you with that, but when the fruits of your R&D expenditure start to appear, we can help make sure that the IP created by your investment is legally protected.

Company Law

Companies Act – Timetable Changes
The Companies Act 2006 is the biggest Act in British history and has an implementation timetable stretching into 2009.

Recently, a series of changes to the implementation dates for various sections was announced. The introduction of sections of the Act which deal with the right of shareholders and the public to inspect the register of members has been brought forward to 1 October 2007. The provisions requiring an expanded business review in the financial statements of the company also operate for accounting periods commencing on or after that date. From that time, companies will also have to disclose contributions to those seeking election to public office as independent candidates.

However, some sections relating to directors’ duties with regard to the declaration of interests, conflicts of interest and the like are now scheduled to come in on 1 October 2008. For further information, see http://www.dti.gov.uk/bbf/co-act-2006/index.html.

Contract Law

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

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

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

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

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

Competition Law

Dodgy Advertising to be a Crime?
A new consultation document contains draft legislation aimed at ensuring that retailers deal fairly with their customers. The proposals, which aim to implement the EU Unfair Commercial Practices Directive and the Misleading and Comparative Advertising Directive, are expected to lead to legislation, effective from April 2008, in the form of the Consumer Protection from Unfair Trading Regulations (CPRs) 2007 and the Business Protection from Misleading Marketing Regulations (BPRs) 2007.

When enacted, the CPRs will outlaw both unfair treatment of customers and unfair marketing practices and will operate across the whole range of businesses. Current legislation is sector-specific.

In addition, the BPRs will reduce the scope for ‘advertorial’, limit comparative advertising and prohibit ‘fake’ reviews.

Breaches of the CPRs or the BPRs may lead to civil or criminal sanctions.

The consultation closes on 21 August 2007 and can be found at http://www.dti.gov.uk/consultations/page39674.html.

Insolvency

Ring-Fenced Funds in Insolvency – Court Ruling
Where a ‘ring-fenced’ fund for unsecured creditors is created under the Insolvency Act, the requirement to make the fund available to them can be set aside if the costs of so doing are disproportionate to the benefit. An order of the court is required in such cases.

Recently, the court ruled that the cost of agreeing the sums due to 126 unsecured creditors of a company in administration would be disproportionate given that the expected amount available to them after costs would only be in the region of £2,000.

Licensing

Licensing Act Guidance Revised
Revised guidance on the Licensing Act has been issued, following an extensive consultation process.

The revisions include:

• an expanded section on incidental music to help local authorities determine whether or not music falls into this category and is therefore not licensable;
• further guidance on when an application to vary a licence is required;
• clarification on the responsibility of licensees for public order issues outside their premises;
• the recommendation that personal licence holders should provide written authorisation to staff for the sale of alcohol; and
• updated guidance relating to licensing hours.

The revised guidance can be found at http://www.gnn.gov.uk/imagelibrary/downloadMedia.asp?MediaDetailsID=207385.

IT

Data Safety – Tips
Recent cases involving the loss of personal data by large retailers and others have brought home the importance of having robust data security procedures. Proper data security starts with basics – making sure that you have adequate, updated defences against loss of data and, most especially, making sure that staff understand the issues and act responsibly. In particular, make sure that passwords necessary to access important data are:

• kept secure and not made accessible outside the ‘need to know’ group;
• not obvious (first names and dates of birth are common passwords – and very easy to ‘crack’);
• changed regularly; and
• changed immediately if a staff member in possession of the password leaves.

All organisations should think through their data security risks carefully and ensure they have appropriate procedures. In addition, employee service contracts should have appropriate clauses emphasising the importance of adhering to those procedures.

Data Processing – Court Sets Limits
Merely manually selecting and reviewing files is not ‘processing’ under the Data Protection Act (DPA), according to a judgment of the Court of Appeal. The case involved a review of paper and electronic files relating to a doctor about whom a complaint had been made. Data was extracted from the files and subsequently processed by the reviewer.

The doctor claimed that this amounted to unfair processing of personal data. The Court rejected his claim on the ground that the reviewer’s actions did not constitute processing because she had used her own judgment when going through the files, rather than extracting data by automatic means. That being the case, the question as to whether or not the processing was fair was not in point.

The case will be greeted with relief by organisations which hold personal data and select information from it from time to time. This will not be ‘processing’ unless they use a computer or a ‘relevant filing system’ to extract the data.

Decisions of the courts have been somewhat inconsistent regarding exactly what constitutes ‘processing’ for the purposes of the DPA and it is wise to seek legal advice if you are in any doubt.

Environment

Energy Performance Certificates
Builders and developers of commercial properties are reminded that theEnergy Performance of Buildings Directive will apply to commercial buildings from 6 April 2008. The Directive will require Energy Performance Certificates (EPCs) to be prepared for all buildings which are to be subject to sale or rent, if they have a floor area of more than 500 square metres.

New buildings will require an EPC before the certificate of completion will be issued. Where buildings are to be sold or let, the EPC must be made available to prospective purchasers or tenants.

Employment Law

Extra Annual Holidays
The Government has published the Working Time (Amendment) Regulations 2007, which will increase the minimum annual holiday entitlement from 20 days a year to 28 days. This will be accomplished in two stages, being increased to 24 days from October 2007 and to 28 days from April 2009, not October 2008 as was originally planned.

As a transitional measure, payment in lieu of the additional holiday entitlement (the additional 8 days) will be allowed to continue until 1 April 2009. This is a temporary measure intended to help employers to implement the new arrangements.

In order to provide an incentive for early compliance with the Regulations, employers that already meet the full requirements of the Regulations as at 1 October 2007 will be regarded as being outside of the Regulations, as long as they continue to meet those requirements.

It is estimated that the measure will benefit up to 3.5 million women and 2.5 million men. Part-time workers will be entitled to the extra holidays pro-rata.

The Working Time (Amendment) Regulations 2007 can be found at http://www.opsi.gov.uk/si/si2007/draft/20077376.htm.

Immigration - Timetable for Introduction of Points Based System
The Government has announced that its new points based immigration scheme will be phased in from early 2008. 

The new system will consist of a five-tier framework. For each tier, applicants will need sufficient points to obtain entry or leave to remain in the UK. Points will be awarded to reflect aptitude, experience, age and also the level of need in any given market sector, the intention being to allow the UK to respond flexibly to changes in the labour market. All but the most highly skilled immigrants will require a sponsor (normally their employer) who will be responsible for ensuring that a migrant worker complies with the rules of their entry to the UK and returns home at the end of their stay.

The timetable for implementation is as follows:

• Tier 1 of the system, which caters for highly skilled migrants such as scientists and entrepreneurs, will be launched at the beginning of 2008;
• Tier 2, which will cover skilled workers with a job offer, and Tier 5, for youth mobility and temporary workers, will become operational in the third quarter of 2008; and
• Tier 4, for students, will follow at the beginning of 2009.

The system of sponsorship by employers and educational institutions is also being introduced as part of the new system at the beginning of 2008.

The Government intends that low-skilled jobs should be filled by domestic workers from the expanded EU, wherever possible. A new Migration Advisory Committee will give advice on where in the economy there are labour shortages which can sensibly be filled by migration from outside the European Economic Area (EEA). If and when the Government agrees to establish a scheme for low skilled workers from outside the EEA to come to the UK, it will be set up under Tier 3 of the points based system.

Health and Safety

Ex-Miner Awarded £4,500 for Noise-Induced Hearing Loss
A former coal miner has won £4,500 in damages for hearing loss caused by working in a noisy environment.

David Burns, 49, worked for a mining company from 1984 until 2005, when he was made redundant. For many years he was working in an open cast mine, then in 1991 he began working with a drilling team. He did this for three years. Both of these environments were excessively noisy. Some ear protection was provided by Mr Burns’s employers, but this was not always available. He did not realise there was a problem with his hearing until he went for a routine medical check in 2003. He was then told that his hearing had deteriorated and he now struggles to hear normal conversations.

The cash payment is to compensate him for the lasting damage to his hearing.

Stricter rules to protect those at risk of hearing damage came into force in April 2006 with the introduction of the Control of Noise at Work Regulations 2005. However, hearing damage is still a largely underestimated risk in the workplace.

Noise-induced hearing loss has been described as a sleeping epidemic. Employers who fail to assess and explain the risks to employees, who fail to take appropriate steps to reduce workplace noise levels and who do not provide the proper ear protection face a significant litigation risk.

For details of your obligations under the Regulations, see http://www.hse.gov.uk/noise/regulations.htm.


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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