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AUGUST 2007

The court dismissed claims by Roger Bunney and Jeremiah James Cahill for injunctions requiring defendants Burns Anderson plc and Timothy James and Partners Ltd. to comply with a decision by the Ombudsman that would have resulted in payments exceeding the statutory cap.

The cap of £100,000 is imposed by the dispute resolution section of the Ombudsman scheme rules in the FSA Handbook.

This decision confirms that if you have a claim which you settle through the Ombudsman, then any damages ordered will be limited to £100,000. If you consider your loss to be greater than that sum, the claim for compensation should normally be made through court proceedings.



Property

Meeting Expenses Creates Protection for Tenant
A tenant occupying a property under licence, who keeps the property insured and in good repair, is providing the owner of the property with a valuable benefit. This decision by the court has important implications for landlords, as it confirms that such an arrangement is providing a tenancy for ‘money or money’s worth’. That in turn means the tenant is able to claim the protection afforded by the Protection from Eviction Act 1977.

Infrastructure Project Delays – Government Takes Action
The high-speed rail link between Paris and London was completed on the French side several years ago, but the line in England is still not high-speed throughout its route. This and similar delays in major infrastructure projects (such as those which have dogged Heathrow’s Terminal 5), which are due to the lengthy periods of review and consultation which characterise the planning system here, have led the Government to propose a new planning system designed to speed up the planning process relating to major projects.

It is proposed that responsibility for infrastructure development decisions should be devolved to an ‘Infrastructure Planning Commission’, which will assume many of the powers relating to planning decisions which are currently the responsibility of the local council and Secretary of State. Ominously for some, this proposal comes shortly after the Government indicated that it was once again considering the expansion of the civilian nuclear energy programme.

If the White Paper becomes a Bill, it will constitute what many perceive as a significant attack on local decision-making, making a stormy passage through Parliament inevitable.



Tax

VAT Fraud Measures Create Hidden Traps
In order to combat ‘missing trader’ fraud, which is estimated to have cost the Exchequer hundreds of millions of pounds, HM Revenue and Customs (HMRC) have introduced measures which can, in some circumstances, make a supplier (or customer) responsible for its customer’s (or supplier’s) VAT.

The measures will apply when the goods dealt in are any of a number of electronic goods and where you should have reasonable grounds to suspect that VAT will go unpaid. It is thought that this could lead to businesses being caught out as a result of taking insufficient care, rather than being complicit in VAT fraud.

In order to minimise risk to your business, if you deal in such items you need to take ‘reasonable steps’ to establish the integrity of those with whom you have dealings. To do so, you should consider the following:

• obtaining and checking their VAT registered number and, for a company, verifying its registration with Companies House;

• carrying out credit checks and obtaining third-party references; and

• checking that the business’s trading address exists and is a business premises, not a serviced office or PO box location.

HMRC recommend that extra care is taken when a deal is offered to you which seems to be particularly advantageous.

New Capital Allowances Regime – Time for Planning
The new regime for capital allowances announced in the last Budget has now been passed into law and has created a planning window for businesses. Most of the changes do not commence until April 2008, but the time for considering their effects and acting accordingly is now.

The main issues are as follows:

1. Investment Timing
The ‘first year allowance’ for items qualifying for capital allowances will be 100 per cent on the first £50,000 of qualifying expenditure from April 2008. If you are considering a capital investment of more than £50,000, it may be worth considering incurring the expenditure in the present tax year and deferring a balance of £50,000 until the tax year beginning in April 2008 (1 April 2008 for companies, 6 April 2008 for individuals).

2. Industrial Buildings
The 2008/9 capital allowances regime is in general less ‘friendly’ than the current regime, and this is especially true for items of plant in buildings. Currently, ‘full’ capital allowances are available for these. From 2008, ‘background plant’ (as opposed to ‘trading plant’) will qualify for a much lower (10 per cent) rate of allowance. If you are considering property refurbishments, 2007/8 looks a good year in which to carry them out!

3. Cars
The new scheme for capital allowances on cars and changes to the taxation on benefits in kind will further erode the tax-efficiency of the company car.

The 2007 Finance Act has significant implications for businesses of all sizes. Think through the implications now.



Intellectual Property

Employee Loses Out in Patent Claim
It is established law that when employees create intellectual property (IP) in the course of their employment, the IP thus created belongs to their employer, not to them. In such cases, the rights of an employee are limited to making a claim under Section 40 of the Patents Act, which allows them to claim a share of the value created by the exploitation of the IP if it is of ‘outstanding benefit’ to the employer and it would be just to award compensation to the employee. No successful case for compensation under s40 of the Act has thus far been brought.

A recent case tested the breadth of the application of the law. It concerned a Dr Pinkava, who was employed as the general manager of the London International Financial Futures and Options Exchange (LIFFE). Dr Pinkava’s role was a general one and he was requested by LIFFE to create a particular type of futures contract which could then be traded on the exchange.

Instead of producing the requested contract, he devised a system which allowed a completely different type of contract to be traded – a system which had been thought to be impossible. He then left LIFFE and went to the USA, where he applied to patent his invention.

LIFFE claimed the IP rights to the invention, arguing that it was made as a part of, or as a result of, his duties when working as its employee and that his job gave him responsibility to further LIFFE’s interests. Dr Pinkava argued that his invention fell outside of his duties and that therefore the IP belonged to him.

The Court of Appeal concluded that the invention was one that could reasonably have been expected to result from his duties. The IP therefore belonged to LIFFE.

This case adds weight to the employer’s rights in such cases. IP created by employees will generally belong to their employers unless it was not created in the course of their employment. There is no need for a specific clause in the contract of employment for this to be so, although the presence of such a clause is normally preferable. IP created outside work, which does not relate to the employer’s business, will normally belong to the employee and attempts by employers to create ownership by a ‘catch-all’ IP clause in the contract of employment is unlikely to be effective.

Danger of Confusion Blocks Trademark Application
Direct Line Insurance, owner of the well-known ‘telephone on wheels’ image used in its advertising, has blocked an application by online insurance rival esure.com to register as a trade mark a computer mouse on wheels. The mark was a different colour to the red Direct Line telephone, esure’s ‘house colours’ being blue and orange.

Whilst the court held that there was ‘no proven likelihood’ of people confusing the two trade marks, the threshold for such confusion is a low one and, accordingly, agreeing to register esure’s mark could damage Direct Line.

Interestingly, Direct Line also shows a computer mouse on wheels on the front cover of its policy documents.

When considering new trade marks, it is important to do one’s research carefully to ensure that the creative budget is not spent on something which cannot be registered.

Company Law

Companies Act 2006 – Changes Affecting Directors
Company directors are reminded that new provisions under the Companies Act 2006, relating to transactions between companies and their directors, are due to come into force on 1 October 2007. These relate to transactions involving directors and their associates (the definition of which has been expanded) in the areas of:

• contracts of service;

• loans, ‘quasi-loans’ and credit agreements;

• payments for loss of office; and

• substantial property transactions.

In general, these will need to be approved by the shareholders.

There are several exceptions. For example, a director’s contractual entitlement to compensation under his contract of service need not be approved by shareholders. Most transactions involving a director and a non-UK subsidiary also do not require shareholder approval. Shareholders do have the right to request a copy of a director’s service contract on payment of an appropriate fee.

There are also substantial changes to the rules governing proxy rights (the rights of proxies are increased substantially) and amendments to the rules dealing with the calling of general meetings, which have been relaxed.

Group Structure Does Not Compromise Protection
Corporate structures involving groups of companies are very common, with some holding companies having dozens of subsidiaries within their group. Virtually all of the best-known names in the UK High Street are trading subsidiaries of groups.

Employees of a company which is a member of a group are normally contracted only to the company which employs them directly. A recent breach of contract case looked at the question of whether the holding company of a group could make a claim against ex-employees who had a ‘non-competition’ clause in their contracts of employment. The employees in this case worked for the holding company of a financial services group. Their contracts prohibited them from supplying financial services advice to any clients of their employer (the holding company) for a year after they left its employment. They left the company’s employment and solicited business from and supplied financial services advice to clients of the group.

Their former employer sued. The reasonableness of the non-competition clause was not contested. What was contested was whether it was applicable, since the holding company by which they had been employed did not itself supply financial services advice. The holding company merely managed the affairs of the other group companies. The business of the group – the supply of financial services advice – was carried out by subsidiary companies. The argument of the employees was that they had not breached their agreements since the holding company did not supply financial services advice.

The Court of Appeal did not agree with the employees. In the view of the Court, the reality of modern business is that group structures are common. The non-competition clause existed to protect the legitimate business interests of the group and was enforceable. It would be senseless to create such clauses in contracts if there was nothing which could be protected by them.

It is worth noting that the employees were familiar with the group structure and the roles of the companies within the group, having been employed by the holding company for several years. However, it is likely that the employer would have been successful even if this had not been the case.

An appropriately worded non-competition clause can be an effective safeguard for group companies in many instances. The main danger is that of creating a clause which is too onerous to be enforced by the courts. We can advise on these and related matters.

Contract

Unfair Exclusion Clause Struck Out
The use of exclusion clauses to limit liability in case a contract goes wrong is common in many kinds of contract – especially where the ‘downstream’ effects may be large relative to the value of the contract. Typically, such a clause will limit the damages payable to a particular sum or will exclude certain types of consequential loss. If such a clause is reasonable and lawful, the court will normally uphold it. However, if the clause is not reasonable, it is unenforceable and may be attacked using the Unfair Contract Terms Act 1977 (UCTA).

Recently, the UCTA was used with success by an IT company which wished to claim damages for loss of profits from the provider of serviced offices from which it rented its premises. The offices had defective air-conditioning and became stiflingly hot. This prevented the IT company from holding training courses, which in turn caused it to suffer financial loss. It sued.

The serviced office provider had a ‘catch-all’ term in its contract which attempted to exclude any liability whatsoever for losses suffered by its tenants – even those which amounted, in essence, to a failure to provide habitable offices.

The court considered the exclusion clause to be unreasonable under the UCTA and allowed the tenant’s claim.

The law is constantly changing, and it is worth undertaking periodic reviews of the standard legal documents you use (such as terms of trade), to ensure that they still comply.

Competition Law

INTEL Faces EU Challenge Over Abuse of Market Dominance
The European Commission’s recent commencement of proceedings against computer chip giant INTEL illustrates the type of anti-competitive practices that the EU is seeking to root out.

The specific anti-competitive behaviours which have roused the Commission’s ire are claimed to be:

• payment of rebates to computer manufacturers in exchange for their agreeing to use only or mainly INTEL processors in their machines;

• predatory pricing for major customers in which processors were sold on average for less than cost price; and

• making payments to computer manufacturers to cancel or delay the introduction of models which incorporate processors made by competitors.

If substantiated, INTEL can expect to face a considerable fine for abusing its dominant position in the marketplace and preventing its rival, AMD, from growing its market share. Recently, Microsoft was fined over €450m for abusing its dominant position in the software market.

Insolvency

Wrongful Trading Claim Dismissed
Where the executives of a company genuinely believe that it has the ability to trade its way out of financial difficulties, they will not be held to be guilty of wrongful trading. This was the decision of the court in a recent case in which a liquidator made a claim against the director and company secretary of a company which became insolvent.

The case involved a ‘giveaway’ magazine specialising in the golfing market. The magazine did not generate enough advertising revenue to succeed, and was eventually sold for £20,000. The whole of the purchase price was paid to the company’s bank, to obtain a release of the debenture it had over the company’s assets. The director and company secretary had given personal guarantees to the bank, so the practical effect of the payment was that their liabilities under their guarantees were reduced.

The court held that the practical effect of the payment to the bank was that no preference in favour of the officers of the company had been created. No matter what the title had been sold for, the bank would have received the payment and retained it.

The judge was critical of the action being brought, commenting that the company’s management had concluded (albeit wrongly) that they could trade their way back into the black and that picking over the bones of a dead company in the courtroom was not always fair in such circumstances.

Licensing

Don’t Be Caught Out by New Licence/New Guidance
A new style of driving licence is now being issued by the Driver and Vehicle Licensing Agency (DVLA) and, until staff become familiar with it, this could be thought to be another example of the fraudulent ID cards that abound these days.

The most evident difference between the new licence and its predecessor is that the new one has a black and white photo rather than one in colour. The hologram (of a steering wheel) on the right hand side of the licence is designed to be very clear. There are other holographic features on the front and back of the licence and the material from which it is made is also slightly different.

The new licence can be seen at
http://www.direct.gov.uk/en/Motoring/DriverLicensing/DG_068315.

New Guidance on Police Powers
The Department for Culture, Media and Sport has issued new guidance on the operation of s182 of the Licensing Act 2003, which deals with police powers of closure to combat disorder or noise nuisance problems on licensed premises etc. The guidance can be found at http://www.culture.gov.uk/Reference_library/Publications/archive_2007/
guidancesection182_licact03june07.htm.

IT and Data Protection

This Information Belongs to…
Many employees keep a combined list of personal and business contacts in their address book on their employer’s computer system. The High Court has ruled (PennWell Publishing (UK) Ltd. v Isles) that a list of contacts, prepared and maintained by an employee on his employer’s computer, belonged to the employer, even though some of the information related to contacts which the employee, a journalist, had made prior to joining the company.

Mr Isles worked for PennWell as a publisher and conference chairman for international conferences for the power industry. The case arose because he and two other employees left to set up a competing business. One point at issue was the legal ownership status of Mr Isles’ list of contacts.

The contact list was maintained on the Microsoft Outlook software provided by PennWell and was backed up by the employer. At some point during his employment with the company, Mr Isles had transferred onto this system a list of the personal contacts he had made throughout his career. After that, he maintained a combined list of journalistic and business contacts. Before he left the company, he downloaded the entire address book onto a memory stick, which he took with him for future use.

PennWell claimed that the information was prepared and maintained on its computers for the purposes of Mr Isles’ employment and as such was commercially valuable and confidential information which was the property of the company. It was, however, willing to let him have any contact information which he could prove pre-dated his employment.

Mr Isles claimed that it was his personal contact list. In common with other journalists, he kept a list of useful contacts that he had built up throughout his career.

The High Court found that the contact list maintained on the Outlook system was a new database to which Mr Isles had added old data. It was created and maintained for the purposes of PennWell’s business, although Mr Isles may also have intended to use it for his own journalistic purposes. In the Court’s view, Mr Isles removed the entire contents of his address book in order to have the widest possible list of contacts who could be useful to the competing company. It therefore ruled that he was not entitled to exclusive or shared use of it.

Interestingly, PennWell did have an email policy to the effect that employees could only use the email system for business use, but the judge found that the policy had not been effectively communicated to Mr Isles. Had it been, it would have been made clear to him that in adding or maintaining contact details on the company’s computer, he was doing so for his employer’s benefit, not his own. Therefore, although ownership of the database rested with PennWell, the concession it had offered – that he be allowed to retain details of contacts made prior to his employment with the company – was allowed to stand.

The judge advised employers to devise and publish clear policies to cover situations such as this. Had Mr Isles been made aware that information stored on the office computer system belonged to his employer, he would have known to maintain a separate list of existing journalistic contacts and the argument over ownership of the database would not have arisen.

Environment

Calling Small Businesses with WEEE Obligations
Since 1 July 2007, under the new Waste Electrical and Electronic Equipment (WEEE) Regulations, separately collected WEEE has to be treated and recycled with the producers paying the cost. This means that anyone who produces, brands or imports such goods must be registered with an approved Producer Compliance Scheme (PCS).

Although the major producers have registered, the Environment Agency is aware that there are smaller firms with obligations under the Regulations which have not yet done so. The Agency is therefore mounting a targeted telephone campaign and will be calling some 4,500 companies, which may need to be registered with a PCS, to make them aware of their responsibilities.

For more information, see
http://www.environment-agency.gov.uk/news/1820100.

Employment Law

Newsagent Fined for Breach of the Working Time Regulations
An employer who fails to abide by certain requirements of the Working Time Regulations 1998 can face sanctions under criminal law.

Employers must take all reasonable steps to ensure that workers are not required to work more than an average of 48 hours a week, unless they have signed an opt-out agreement. The average weekly working time is normally calculated over 17 weeks. Local authorities are responsible for enforcing these requirements with regard to shops, restaurants and food outlets.

In only the second prosecution of its kind in the UK, newsagent Martin McColl Limited admitted breaching the requirements of the Working Time Regulations concerning maximum working hours. Council officers discovered that an employee at the newsagent, in West Edinburgh, was working on average 51.5 hours a week, on one occasion working a 68-hour week, without receiving payment for the extra hours. The company was fined £600.

The shop workers’ union USDAW has welcomed the prosecution as a reminder to employers that if they ask their staff to work illegal hours they will be penalised.

The Opt-Out
In the UK, individual workers can opt out of the requirement under the Working Time Regulations that the average working week should not exceed 48 hours. This has been the subject of much debate in the past, with the European Commission repeatedly expressing concern over the way the opt-out was being used in the UK. To date, however, proposals to restrict its use have come to nothing. The Minister for Europe has said that the new EU Treaty being proposed will not affect the UK’s opt-out.

Health and Safety

Corporate Manslaughter and Corporate Homicide Bill Gains Royal Assent
The Corporate Manslaughter and Corporate Homicide Bill received the Royal Assent on 26 July 2007. The Act creates a new offence of corporate manslaughter (corporate homicide in Scotland), which will occur if a death results from a gross breach of a relevant duty of care which is owed to the deceased by the organisation concerned. The Act defines a breach of a duty of care by an organisation as a ‘gross’ breach if the alleged conduct amounts to a breach of that duty and falls far below the standard that can reasonably be expected of the organisation in the circumstances.

Section 8 of the Act specifically requires the jury sitting in these cases to consider whether the evidence shows that the organisation failed to comply with any health and safety legislation that relates to the alleged breach and, if so, how serious that failure was and how much of a risk of death it posed. The jury may also consider the extent to which the evidence shows that there were attitudes, policies, systems or accepted practices within the organisation that were likely to have encouraged any such failure.

There are also provisions which permit convictions to be publicised. There is no maximum penalty for a conviction for corporate manslaughter. The Act can be found at http://www.opsi.gov.uk/acts/acts2007/ukpga_20070019_en.pdf.

It is wise for organisations to keep their procedures under review, especially those with direct health and safety implications. Successful defences to charges of corporate manslaughter will inevitably depend on being able to prove that the organisation takes a responsible attitude to health and safety, with appropriate risk management procedures in place that are enforced rigorously.

Checking Office Electrical Equipment
The Health and Safety Executive (HSE) has published useful guidance on preventing danger from portable electrical equipment in premises where risks are generally low, such as offices or libraries. This is intended to debunk the myth that all office equipment must be tested annually by a qualified electrician.

For most office electrical equipment, visual checks for obvious signs of damage and perhaps simple tests by a competent member of staff are sufficient to comply with the law. Furthermore, the law does not require you to keep a record of these checks, although doing so can provide useful information regarding faults discovered which can be used to determine the appropriate inspection intervals.

The guidance can be found at http://www.hse.gov.uk/pubns/indg236.pdf.


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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