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JULY 2009

Transport Restrictions – No Right of Claim
When foot and mouth disease was allowed to escape from a research facility, farmers in the region were affected in one of two ways. The livestock on farms close to the outbreak was culled. More distant farms, however, were affected by the imposition by the Department for Environment, Food and Rural Affairs (DEFRA) of a ban on the movement of livestock for a considerable period.

DEFRA was responsible for licensing and regulating the research facility and agreed compensation with the farmers whose livestock had to be culled. However, the outbreak of foot and mouth also had a detrimental effect on those farmers whose livestock was subject to the transport ban.

They sued the operator of the research site and DEFRA, arguing that they had suffered economic loss. For example, pig farmers lost money because their pigs fattened beyond their prime for sale.

The farmers were unsuccessful. The court ruled that neither DEFRA nor the research facility owner owed them a duty of care. Their losses were purely economic.

An appeal against the decision is expected.

Guidance on Swine Flu for Businesses
Swine flu is now officially a pandemic. As ‘flu season’ has not yet arrived in Europe, there is plenty of time to plan for the impact of swine flu on your business, as there is every possibility that it will be affected.

The NHS has issued detailed guidance for employers on dealing with the impact of swine flu, which should prove to be a useful tool for deciding what contingency plans you need to make. See http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/
DH_097137?IdcService=GET_FILE&dID=189550&Rendition=Web.

One important thing to bear in mind is that if you have contractual responsibilities which might be affected by illness to you or your staff, you should check the potential impact and try to renegotiate the terms if prudent.

An RSS feed of the latest information on swine flu can also be accessed at
http://www.cabinetoffice.gov.uk/ukresilience/pandemicflu/rssfeeds.aspx.



Property

Subcontractor Fails to Avoid Liability
When a contractor and an employer are in dispute over something which has been done by a subcontractor, it is quite common for the contractor to try to ‘keep the peace’ by settling with the employer and then seeking recompense from the subcontractor.

In a recent case, a defect in the sprinkler system in an office block caused damage which led to a claim for over £5 million against the contractor who had the contract for installation of the system. The sprinklers were installed by a subcontractor. The contractor settled the claim for £2.72 million and claimed that sum from the subcontractor.

The subcontractor disputed the claim, arguing that there were good defences against it and that the settlement reached was unreasonable.

The court rejected the subcontractor’s argument, holding that the defect was the fault of the subcontractor and the contractor had reached a reasonable settlement with the claimant and was therefore entitled to seek restitution from the subcontractor.

Subcontractors who are on notice that their work could give rise to a ‘second-hand’ liability may wish to consider at an early stage their strategy with regard to the proceedings, especially if they have a good defence against any claim and/or they think the contractor will be a weak negotiator.

Guarantee Clause Not Linked to Assignee
With times being tough, unexpected traps in agreements are coming to light with greater regularity. A recent landlord and tenant case shows the sort of thing that can happen if insufficient attention is paid in negotiation to clauses that might seem unimportant at the time.

It is usual for a commercial lease to contain a clause which will bind the tenant
to guarantee the payment of the rent and performance of covenants under the lease should it be assigned. In a recent case, a lease was assigned and the new tenant, which was insolvent, went into liquidation.

The relevant lease agreement bound the original tenant to guarantee performance during the period the assignee was ‘bound by the tenant covenants of the lease’. The liquidators disclaimed the lease, making no payments, and the landlord sued the tenant under the guarantee.

The tenant claimed that it was not liable for the assignee’s rent etc. after the liquidator had disclaimed the lease, the argument being that the assignee was no longer bound by the covenants in the lease and the original tenant could not therefore be bound by them after the lease was disclaimed.

The Court of Appeal did not accept this argument. The original tenant was liable under the guarantee. The liability of the original tenant as guarantor was separate from that of the assignee.
 
Your potential responsibilities under a guarantee if you assign a lease may not be uppermost in your mind when you are negotiating to take on new rented premises. However, attention to detail pays dividends and, in the present environment, landlords may agree to limit or remove guarantee clauses if pressed.

Tax

HMRC Interpretation of Ordinary Residence Rejected by Tax Commissioners
The concept of ordinary residence is an important one in tax law, especially the law relating to Income Tax as it applies to people coming to live in the UK.

The general principles are set out in booklet IR20, published by HM Revenue and Customs (HMRC). Traditionally, HMRC have regarded anyone who intended to reside in the UK for three years as ‘ordinarily resident’ from the date of their arrival. This has affected thousands of people who arrived on secondments etc. that were intended to last more than three years. However, a recent case has moved the goalposts.

It concerned an Italian banker, Mr Genovese, who argued that he should not be treated as ordinarily resident in the UK from the date of his arrival because he had not at that time formed the intention of being resident here. HMRC’s approach to ordinary residence as outlined in IR20 is based, in effect, on intention. His argument was that he formed the intention of being ordinarily resident some time after his arrival.

The Special Commissioners of Tax (who decide tax cases depending on the interpretation of legal points) took a different view, applying a ‘common law test’. This was based on the evidence of the man’s habitual actions during the relevant period, not his intentions. They found this test inconsistent with HMRC’s approach under IR20.

In the summary, Commissioner John Clark said, “Comparison of the various factors comprising the common law test with the factors considered relevant under HMRC's practice shows in particular that IR20 is concerned with matters of ‘intention’ and what the individual ‘decides’. The difference appears to stem from a fundamental difference of approach. The common law test is applied retrospectively to determine whether the individual coming to the UK has or has not become ordinarily resident. Booklet IR20 is concerned with a provisional decision whether or not, on the basis of information available at a much earlier stage, the individual appears to have become ordinarily resident. For this purpose, the individual's intentions and decisions need to be taken into account in order to arrive at an appropriate taxation treatment for the initial stages of his period in the UK.

“The differing results of applying the respective tests to the same set of factual circumstances raise concerns for the position of all individuals in a similar position. As already indicated, they will have acted on the assumption that their position is governed by the practice set out in IR20, and in particular will have submitted returns on that basis. An individual who discovers that his or her tax position is not as it had been assumed to be is placed in a difficult position, as nothing can be done after the event to rearrange matters. That individual may well feel at a disadvantage compared with other taxpayers in a similar position whose returns have been accepted without enquiry. Questions of legitimate expectation may arise, although these are outside the present Tribunal’s jurisdiction. The question of the treatment of individuals coming to live and work in the UK in circumstances similar to those of Mr Genovese is of considerable importance and needs to be resolved in some practical way if the flow of workers to and from the UK is not to be distorted by concerns as to the tax considerations.”

HMRC will clearly be hoping that taxpayers who have paid additional tax as a result of being deemed ordinarily resident from the date of arrival will not claim refunds.



Company Law

Want to Sack Your Auditor? Pause for Thought
If you are not seeing eye to eye with your auditor because their view of your financial statements is at variance with yours, and you are thinking of making a change of auditors, you should be aware that Sections 522 to 525 of the Companies Act 2006 set new requirements for auditors and companies to notify the ‘appropriate audit authority’ when an auditor ceases to hold office.

Furthermore, in certain circumstances, the auditor must inform shareholders and creditors of the circumstances under which they are ceasing to act.

The rules governing when a notification has to be made are complex, but guidance which makes useful reading for directors of companies in this position can be found at http://www.frc.org.uk/pob/regulation/notification.cfm. Note that both auditors and companies need to notify the ‘appropriate audit authority’, but there are significant differences in how the requirements affect auditors and companies.

The making of a notification can have unfortunate repercussions.

All Change for Company Forms
Companies House has issued no fewer than 257 new forms, which will all ‘go live’ when the final parts of the Companies Act 2006 come into force on 1 October 2009.

For a full list, see http://www.thecompaniesact.co.uk/cms/document/FormsList.pdf. Some of the forms may be subject to further change over the next few months.

Now may be a good time to run down your stocks of company forms and to make sure that you don’t replenish your supply unless necessary.

Partnership

Are LLP Members Employees?
In many ways a Limited Liability Partnership (LLP) is as much like a company as a partnership. Recently, an LLP member who was excluded from the LLP claimed he had been unfairly dismissed.

The Employment Appeal Tribunal concluded that he was not an employee of the LLP and could not therefore bring the claim. The main reason for rejecting his argument that he was, in effect, an employee was that the Limited Liability Partnerships Act 2000 provides that a member of an LLP is not to be considered as an employee if, had the LLP been a normal partnership, he would have been considered a partner. If he would not, then the common law tests for determining whether he is or is not an employee are to be used.
In this case, applying the common law tests showed clearly that he was a partner.

It is always important in any partnership for the legal relations between partners to be clearly defined. Partnerships can present complex issues.

Intellectual Property

Registering a Trade Mark
Your business has its own unique brand and reputation and it is vital in a competitive marketplace to ensure that these are protected from unscrupulous third parties.

Some business owners do not believe there is any point in registering their trading or brand name because they consider their business not large enough to warrant such protection, despite the risk of losing business while others profit from their goodwill. This can be a dangerous view.

Although there is limited redress available to owners of unregistered trade marks in the common law action of ‘passing off’, this can be difficult and extremely costly to prove. If a dispute arises in relation to a registered trade mark, this will be less expensive to resolve. Both the Police and Trading Standards can prosecute those who misuse registered trade marks and infringement can result in a considerable fine or imprisonment.

There are other benefits, too. Although registered trade marks do not entitle the owner to register a domain name as of right, in the event of a dispute it will be the trade mark owner who is more likely to be granted rightful ownership of the domain name. Also, the owner of a registered trade mark can protect it from being used (for example) as a Facebook ‘named profile’ (i.e. www.facebook.com/yourtrademark). Failing to protect your trade mark on social networking sites might allow someone unconnected with your business to use your trading name as part of their profile: the risks are obvious.

What to Do About Copyright Infringement
In the UK, copyright is automatic: there is no need to register it. It is the property of the creator as soon as it is created. However, it is not sufficient to be able to prove that you thought of something before someone else, since copyright does not apply to ideas, but to things created from ideas, such as written material or music. In fact, if you have an idea or concept, the best advice is to record it in detail so as to ensure you have, at least, the copyright of the words expressing the idea. One example is a business idea that, on its own, is not capable of being protected whereas a written record of the business plan would be copyright.

An exception to the rule that the creator owns the copyright is when the creator is an employee. If an employee creates material for you in the course of his or her employment then, as the employer, you will normally be the copyright owner.

If employees or contractors create any form of intellectual property, it is sensible to have a clear agreement covering the ownership rights relating to it: in the case of an employee, this would normally be covered in the contract of employment.

If you discover that someone else is using your copyright material without permission, there are various courses of action you can take.

Depending on the nature and extent of the infringement, you may need to obtain a search order and/or injunction to prevent further use of the copyright material. You may also take various other steps in relation to recovering and destroying the relevant items. In less serious cases, a carefully worded letter that spells out the legal position may suffice.

eBay Not Responsible for L’Oréal Counterfeit Sales
Online auction house eBay has secured an important result in its battle to avoid liability for counterfeit goods sold via its trading website, following a recent ruling by the High Court.

Cosmetics giant L’Oréal failed in its claim to make eBay jointly liable for fake L’Oréal products sold on the eBay site. The beauty company has also lost similar cases in France and Belgium, but won in Germany.

During the hearing, several examples of eBay sellers offering fake L’Oréal products were given. Although the court ruled that eBay could not be held liable in these cases, it was also stated that eBay could do more to prevent such fraud. The judge suggested ten measures that could be adopted, including the publication of sellers’ real names and addresses.

Much of the argument during the case concerned European Directives aimed at harmonising rules relating to trade marks. The judge ruled, however, that Community law on the subject did not extend to ‘accessory liability’ and, as such, was not applicable to this case.

It was therefore left to an interpretation of domestic laws to resolve the dispute. In order to be held liable, stated the judge, a third party such as eBay must have conspired with the seller in the trade mark infringement or have been otherwise consciously involved with the unlawful transaction. On the basis of the facts presented to the court in this case, such involvement did not occur.

Ruling in eBay’s favour, the judge stated that he would refer a number of legal questions to the European Court of Justice for further clarification.

The issue of the degree to which owners of online trading sites can be held liable for infringement of trade marks and other intellectual property rights by their customers is very complex and is not going to go away. It is vital that site owners take every precaution to prevent costly actions brought by well-resourced and litigious multinational companies. Appropriate precautions should start with a proper examination of user terms and conditions.

Competition

One Meeting is One Too Many
A recent competition law case saw a group of Dutch telecom companies fined heavily by the European Court of Justice for anti-competitive behaviour, following a meeting between them in 2005 at which the decision was taken to cut the payments they made to mobile phone dealers.

The decision confirmed that a single meeting between competitors to discuss market strategy was sufficient to constitute anti-competitive collaboration.

Competition law is tough and affects markets on a local as well as national level. Price and tender fixing are dangerous practices and the potential fines are severe. At present, the Office of Fair Trading is conducting a number of investigations into anti-competitive behaviour, including one on bid-rigging in the construction industry.

Insolvency

Company Director Convicted for Using Prohibited Name
In a recent case a company director, Paul Edward Raine, was prosecuted for committing what the courts deemed a serious and deliberate breach of section 216 of the Insolvency Act 1986. This states that it is an offence for someone to become a director of another company under or known by a prohibited name within a period of five years if they were a director of the insolvent company at any time during the year before it went into liquidation. A prohibited name is any name by which the liquidated company was known at any point in the twelve months prior to the liquidation, or any name similar enough so as to suggest an association with that company.

Mr Raine was a director of a bed company called Furntex Ltd., which used the trading name Dreamsleeper. The company had entered into voluntary liquidation, owing more than £500,000 to creditors. Shortly before the insolvency took place, Mr Raine incorporated a ‘new’ company called Dreamsleeper Ltd., which was also a bed company, breaching Section 216. This company also failed and was placed into liquidation, costing creditors nearly £200,000.

The Department for Business, Enterprise and Regulatory Reform as was (now the Department for Business, Innovation and Skills) sought a conviction due to Mr Raine’s contravention of Section 216. He pleaded guilty and was sentenced to a twelve week suspended prison sentence and 150 hours of community service. In addition, he was ordered to pay costs of £591 and was handed a three year blanket ban from serving as a director.

Licencing

Consultation Proposes Changes for Publicans
Licensees should be aware that a consultation document proposing a new code of practice for alcohol retailers – called ‘Safe. Sensible. Social - Selling Alcohol Responsibly’ – has been published by the Home Office.

Former Home Secretary Jacqui Smith’s introduction to the 83-page document describes it as ‘the next step in our programme to continue to tackle alcohol-related crime and disorder’.
Six licensing conditions are proposed, including three of particular importance to publicans:

• a ban on ‘all you can drink’ and similar promotions;
• a requirement to provide free tap water to customers; and
• a requirement to make smaller measures available, so that, for example, measures of spirits smaller than ‘doubles’, or standard as opposed to large glasses of wine, can be bought.

Data Protection

New Privacy Notice Guidance
The Information Commissioner’s Office (ICO) has issued a new code of practice giving guidance to businesses and other organisations that collect personal information, to enable them to comply with best practice when issuing notices to their customers and users on their use of private information under the Data Protection Act.

The core principle of the code of practice is that individuals should be given as much control as is possible over how their personal information is used and disclosed. This means providing them with clear information on how their personal data is used and seeking their consent where appropriate.

The code of practice stresses that customers should be given a clear opportunity to opt in or out of receiving marketing material and should be made aware in clear language of their rights in regard to the use of their personal data.

The code of practice can be accessed on the ICO’s website at http://www.ico.gov.uk/Home/for_organisations/topic_specific_guides/privacy_notices.aspx.

Employment

Workers on Long-Term Sick Leave – Non-Payment of Holiday Pay
The judgment of the House of Lords in the long-running case of Stringer and others v HM Revenue and Customs (HMRC) will be a blow to many businesses struggling to survive in the current economic climate. The Law Lords have overturned the decision of the Court of Appeal and found in favour of the employees.

The case concerned HMRC employees who had been off work for substantial periods without pay but who remained employees, for example on account of long-term sickness.

The key issues to be decided were whether a worker who is off work for a long period without pay is entitled to claim statutory paid holiday under the Working Time Regulations 1998 (WTR) even if he or she has not attended work during the relevant period and, also, whether the rules on unlawful deduction from wages are relevant in that situation. Under the WTR, there is a three month time limit for such claims. If, however, claims can be brought under the Employment Rights Act 1996 (ERA) and it can be shown that the claim is part of a series of unlawful deductions then, provided a claim is brought within three months of the last deduction, there is no time limit on how far back the claim can go.

In January 2009, the European Court of Justice (ECJ) dealt with the first issue, ruling that employees who have been on sick leave for a long period should be allowed to take accrued holiday on their return to work or be paid in lieu at their normal rate of pay if the employment relationship ends without them returning to work.

Further to this finding, the House of Lords has unanimously agreed that holiday pay does count as wages and, where it has not been paid, a claim can be brought for unlawful deduction from wages under the ERA.

Whilst this decision brings clarification regarding some aspects of this issue, questions still remain. Although the ECJ held that the right to take holiday is not extinguished if an employee is on long-term sick leave, it is up to the national courts to decide whether paid leave can be taken during a period of sickness or whether it should be carried over to another year. As things stand, the WTR in the UK state that workers must take a minimum of four weeks’ holiday in each leave year and payment in lieu of untaken minimum leave is not permitted except on termination. It will therefore require further case law or a change in the legislation to resolve the remaining problems.

This decision opens the way for backdated claims by employees on sick leave who have been denied their entitlement to paid holiday. Employers are advised to seek advice when dealing with this complex issue.

Health and Safety

Duty of Care to Employees – Obvious Risks
Every employer owes a duty of care to its employees, but deciding who is responsible for an accident can be very difficult when the issue is whether warnings against risks should have been given or, if given, were adequate.

Employers often argue that employees are responsible for their own actions, but employers have a duty to warn employees of potential risks in the workplace, even if these are obvious. A recent case has confirmed that some risks are so obvious that warnings need not be given, for example where to argue a lack of awareness of the risk would be absurd. However, it is hard to distinguish between what would be deemed to be that obvious and what would not.

In the case in point, an employee turned a box upside down in order to reach material on a top shelf. The box slipped from underneath him, causing him to fall and sustain injury. The employee’s case failed both in the lower court and on appeal because the employer had specifically warned all employees that the use of boxes for this purpose was unsafe and had provided a safe alternative for reaching high items.

The Court of Appeal said that an employer is responsible for devising safe working methods and practices and, where they have issued a warning against a specific risk, they should not be held liable for an injury to an employee who ignored the warning. The judge commented that ‘some dangers are so obvious that no instruction is required’ but this would not have been the case in this instance had the risk not been pointed out to the employee. Had the employer not warned of the potential risks attached to using the box for this task, the argument that the employee was capable of appreciating the risk for himself would have been rejected.

What constitutes a sufficient warning is a grey area and is an issue of fact, not law, so previous case rulings provide little assistance as each case is judged on its own facts. In an unreported case, an employer was held to be liable for an injury sustained by an employee who had mopped a floor and then slipped on the wet surface she created. The employer argued that it was obvious that the floor would be wet immediately after mopping and that it needed to be dry mopped to be safe. This argument was rejected by the court, however.

It has been suggested that an employer is only under an obligation to warn employees of risks that fit within the broad remit of the employee’s job description. For example, if an employee were to put his fingers into an electrical socket, the employer would not be liable for the resulting injury as this was not a part of their ‘system of work’. In contrast, an employee who has been asked to rectify a paper jam in a photocopier should be warned of the risks. In some circumstances, an employer may decide to let experienced employees devise their own safe working practices in relation to certain tasks but, ultimately, it is the employer’s responsibility to assess and warn against workplace risks.

The best way to safeguard against potential claims is to warn against all potential risks, however obvious. Ensuring a full risk assessment of tasks is carried out and that all staff are trained properly is paramount.

Past Exposure to Noise Warrants Compensation
It has long been known that exposure to noise can cause hearing loss and the UK now has strict standards for noise exposure, which were tightened up as recently as 2005.

It can take a long time to realise that damage to one’s hearing has occurred and a recent case has opened the door for claims concerning hearing loss caused by exposure to noise many years ago to be brought to court.

It involved a number of textile companies in the East Midlands, which were sued by an employee who had developed noise-induced hearing loss (NIHL) after working in garment factories between 1971 and 1989. At issue was the fact that the exposure which caused the loss must have occurred many years before the loss became noticeable.

In this case, the argument was made successfully that where there was a risk that the employee could be adversely affected and this should have been ascertained and acted on by the employer at the time, the claim could be brought under the Factories Act 1961, regardless of the specific regulations relating to noise, which came into force several years later. The 1961 Act provided that an employer had a duty to safeguard employees by providing, as far as reasonably practicable, a safe working environment.

The Court of Appeal accepted that the NIHL would have been latent for a period of years and that the claimant could claim compensation for damage to her hearing sustained from 1978. She was awarded more than £3,000.

With mild hearing loss, it is common for the symptoms to go unnoticed until middle age, when it is normal for there to be a loss of acuity in hearing in any event. When that occurs, the superposition of a NIHL can be very noticeable and can cause significant problems.
One of the issues with NIHL is that the loss of hearing ability is ‘focused’ around those frequencies of sound most important for understanding speech, which means that whilst (say) a sufferer can hear someone speaking, they may find it difficult to understand them. This makes following a conversation, especially where there is background noise, particularly difficult. Another problem is that the difference between the quietest sound which can be heard and the loudest which can be tolerated may become much less than is normal, which presents problems when watching television and so on.

The Health and Safety Executive has useful guidance on the control of exposure to noise at work at http://www.hse.gov.uk/noise/.



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