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NOVEMBER 2006


Failure to Act Costs Tesco

Supermarket giant Tesco’s city centre ‘Metro’ shops are well known throughout the UK and the company had registered the trade mark some years ago. However, in January 2000 a German retailer applied to register ‘Metro’ as a Community trade mark, for use for its own outlets in the EU. Tesco opposed the registration on the basis of its earlier UK trade mark registration, which was set to expire in March 2000.

In June 2000, the Office for Harmonisation in the Internal Market, which controls Community trade marks, requested Tesco to provide proof that it had renewed its trade mark. It subsequently extended the time period allowed to March 2003. Tesco failed to provide proof of renewal, so the trade mark ‘Metro’ has now been given to the German retailer. This will allow it the right of exclusive use of the trade mark in the EU excluding the UK.

It has yet to be seen whether Tesco will appeal the decision. However, it does make the point that where compliance matters are concerned, failure to meet deadlines can have serious consequences.

Businesses relying on trade marks, domain names and the like that are subject to periodic renewal should ensure they have a system in place to make sure that deadlines are not missed. It is simpler and less expensive to get it right first time than to try to correct the situation later.


General

FSA – New Money Laundering Rules
The Financial Services Authority (FSA) has issued new anti-money laundering rules which came into effect on 1 September. The key change to the rules is that firms in the financial services sector now have been granted greater flexibility in how they deal with the assessment and management of money laundering risks. A critical change is that the senior management of FSA regulated entities is expected to be more actively involved in the prevention of money laundering.

New Human Rights Act Guides
The Department for Constitutional Affairs has published two new guides on the operation of the Human Rights Act 1998.The first, entitled ‘Making sense of human rights - a short introduction’ is a short guide for officials in public authorities to assist them in working with the Human Rights Act. It can be downloaded at http://www.dca.gov.uk/peoples-rights/human-rights/pdf/hr-handbook-introduction.pdf.

The second is a more detailed guide, running to 65 pages, and is entitled ‘Human rights: human lives - a handbook for public authorities’. It can be downloaded at http://www.dca.gov.uk/peoples-rights/human-rights/pdf/hr-handbook-public-authorities.pdf.



Property

Careful Drafting Pays Dividends
A landlord who failed to include an appropriate clause for subletting to a social tenant in his lease with a local authority recently had cause to regret the way in which the lease had been drafted. The case involved a flat which was intended to be let for temporary housing and which was eventually let to a sub-tenant of the local authority for several years. The lease, given to Haringey District Council, omitted a clause which prevented the tenant from acquiring full security of tenure. In order to prevent a tenant acquiring security of tenure, the head lease must contain a provision entitling the lessor to take possession of the premises on the expiry of a stated period, or when required by the lessor, so as to comply with the Housing Act 1985.

When the sub-tenant fell into arrears, the Council sought repossession of the property. During the course of those proceedings, it was decided that she had acquired a secure tenancy because the clause in the Housing Act 1985 dealing with such leases specifies that a lease does not create a secure tenancy when ‘the terms on which it has been leased include provision for the lessor to obtain vacant possession … on the expiry of a specified period or when required by the lessor’. The Court of Appeal decided this had to be construed strictly, meaning that the head lease must contain a break clause loosely enough worded to allow the landlord to obtain vacant possession either on the expiry of the lease or when required by him. In this case, the lessor could only require that the property was vacated at the end of the lease and the tenancy therefore qualified as a secure tenancy.

The landlord was therefore left with a sitting tenant – a most unfortunate result as the property was only intended to be used for temporary housing.

This case raises serious issues for landlords wishing to let properties to social housing providers.


Landlords Must Act Fairly and in Reasonable Time
A recent case involving the recovery of service charges has seen the court criticise the way that landlords and their agents often deal with service charges.

The case involved a property in Piccadilly, London, which is tenanted. The basement-level tenant is a casino (Distinctive Clubs Ltd.) and it entered into its lease in 1998. The building was known to have structural problems with its roof, which needed substantial repair, and the lease signed by Distinctive Clubs contained a clause which limited its liability for repair works during the first five years of its lease. The estimated cost of repair in 2002 was £200,000.

In 2004 (after the limitation clause had expired), the landlord carried out roof repairs, which included building a new structure which benefited only the tenant occupying the top floor. The total bill amounted to over £2m and Distinctive Clubs’ contribution to the repairs was assessed at £700,000. In court there were two main questions to address.

Firstly, was the basement tenant liable to pay for the works that benefited only the top floor tenant and which, in any event, were improvements to the property, rather than repairs?

Secondly, was the delay in carrying out the repairs reasonable?

In the view of the court, the repairs to the roof were justifiable repairs under the lease.

However, the improvements which benefited only the rooftop tenant were not, so Distinctive Clubs would not be liable to contribute to those. However, in the view of the court, the landlord could, had it shown reasonable alacrity, have completed the repairs by 2003. Accordingly, Distinctive Clubs was not liable to contribute to any of the cost of the repairs.

The judge criticised the landlord and its agents for including in the landlord’s claim sums which were not properly due and for not informing the tenants of the spiraling cost of the roof repairs. He also criticised the agents for their lack of independence, characterising their approach as seemingly being intent only on recovering as much as possible of the cost from the tenants.

The lesson for landlords and their agents is that attempts to collect ‘full recovery service charges’ in a way which does not properly balance the interests of tenants and landlords is likely to get short shrift in the court. Indeed, tenants are increasingly looking to negotiate caps on such clauses.


Planning Consent Time Bar Strictly Enforced
The Court of Appeal has confirmed that where there is a breach of planning consent through failure to comply with the use specified in the consent, where this relates to use as a single dwelling, the right to enforce the terms of the consent must be taken within four years of the breach.

The case concerned Arun District Council, which had granted permission for an extension to a property on the condition that it was occupied by the dependent relative of the occupier. The extension was later let to students, in breach of the planning consent, and the property was effectively occupied as two dwellings. Eight years later, the Council sought an enforcement order against the homeowner. The Council argued that it could bring the action because there is a statutory ten-year period for the bringing of such actions where there is ‘any other breach of planning control’. However, the section of the Town and Country Planning Act which deals specifically with breaches relating to buildings to be used as a single dwelling specifies a four-year period, from completion of the works, during which any enforcement action must be brought.

The case turned on the fact that there is a specific section in the Act which relates to such breaches, so it was clear that the intention of Parliament was to apply one time limit in such cases and another time limit for other breaches.



Tax

Anonymity of Witnesses Acceptable to VAT Tribunal
There are times when a witness may wish to give evidence, but have their anonymity preserved. A recent case shows the willingness of the VAT Tribunal to hear such witnesses and provide for anonymity when appropriate.

The case involved an escort agency, which charged fees to clients for introducing them to escorts. There was no disagreement that the introductory fees were subject to VAT, but HM Revenue and Customs (HMRC) sought to assess the agency for VAT on the basis that it was providing, as principal, the full range of services that were subsequently provided by the escorts. Those services were separately negotiated between the escorts and their clients. HMRC regarded these as being supplied by the agency and claimed nearly £100,000 in VAT and interest.

The agency produced in evidence a statement by a woman known as ‘Caroline’ or ‘Miss X’, who would not allow her real name and address to be disclosed. HMRC opposed this and asked the Tribunal to give its reasons for agreeing to accept her evidence. The Tribunal concluded that it was ‘self evident to us that the reasons why Miss X wished to remain anonymous had nothing whatever to do with VAT’.

The other interesting feature of this case was that there was a rather complex and inconsistent ‘contract’ between the escorts and the agency, which clearly implied that the agency was supplying the services to the clients as principal. However, the Tribunal looked carefully at the reality underlying the contract and, in particular, who supplied which services to the client, before ruling in favour of the agency.

New Fuel Advisory Rates
Although fuel prices seem to be falling back down after a period of sustained rises, HM Revenue and Customs have approved new rates for reimbursement of fuel costs where company cars are provided and only the cost of fuel used for business purposes is reimbursed.

The new rates are (pence per business mile):

Business owners are reminded that in order to recover the VAT element of the fuel payment, VAT receipts must be retained for the purchased fuel.

For further information and details of the new percentages applicable to the value of some benefits in kind for cars which will apply from April 2008, see http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm.



Intellectual Property

‘Spam’ is Not ‘spam’
The manufacturer of the well-known tinned luncheon meat ‘Spam’ has lost its bid to claim the use of the word ‘Spam’ as a trademark as regards its application to unsolicited commercial email.

Hormel, the makers of Spam, applied to register the trade mark for various applications, including ‘services to avoid or suppress unsolicited emails’. However, the Office for Harmonisation in the Internal Market accepted the argument that the use of the word ‘spam’ for unwanted email was a commonplace description and could not be considered distinctive enough to warrant registration.



Competition Law

Knocking Copy Gets Thumbs-Up From Europe
‘Knocking Copy’, whereby one firm’s products or prices are compared with those of the advertiser, has never been very popular in the UK (except with supermarket chains) although it is certainly widely seen abroad. However, the use of price comparisons is sometimes seen and is likely to become more popular still with advertisers following a recent decision of the European Court of Justice (ECJ).

The ECJ heard a complaint from the supermarket chain Lidl regarding a Belgian competitor’s advertisement, which indicated that shopping with them rather than with various other chains – including Lidl – could save a family over €100 a year.

The law relating to knocking copy (or ‘comparative advertising’ as it is properly known) allows it to be used when it is not misleading, when it compares goods meeting the same purpose or need and when the statements made are objectively verifiable. The fairness test requires that the comparisons be material, relevant and representative of the product(s) offered.

Crucially, however, the ECJ ruled that the comparison need not be on a ‘product by product list’ basis, but the products which are the subjects of the comparison must be capable of being identified. Furthermore, the advertisement must indicate where the detailed information necessary to verify the claims made can be found.

Where a number of competitors’ prices are being compared, the advertisement must indicate for each competitor the general level of prices charged.

The implications of this decision are that it may well be easier to use comparative advertising without a complaint being justified than was previously thought. Whether or not retailers in the UK take the plunge into comparative advertising remains to be seen.



Company Law

Shareholder Dispute Costs Minority Shareholder
A recent case before the High Court illustrates the wisdom of having a shareholders’ agreement in place in small companies. In the case in question, the majority shareholder had paid himself levels of remuneration which meant that the dividends paid to the minority shareholder were less than she should have received. This resulted in a breakdown of trust and confidence between the shareholders such that the only appropriate resolution of the situation was for the majority shareholder to purchase the shareholding of the minority shareholder.

The minority shareholder applied to the Court for a ruling that her shareholding should be valued pro-rata to the value of the company as a whole, contending that there was a quasi-partnership. Normally, valuations of minority shareholdings are discounted because the rights of minority shareholders are restricted. So, for example, a 49per cent shareholding might be valued at 30 per cent of the total value of the company. However, where a quasi-partnership exists, the minority shareholder would normally receive the undiscounted value of his or her proportionate shareholding in the company.

A quasi-partnership exists where the relationship between the shareholders is personal and based on trust, where the shareholders are all involved in the management of the business and they provide more input to it than merely advancing capital.

However, in this case the Court found that the necessary elements for a quasi-partnership did not exist and the minority interest should not be valued pro-rata.

One of the key points in this case was that had there been a shareholders’ agreement in force that covered the calculation of the price payable on the disposal of shares by one shareholder to the other, the litigation could have been avoided.



Contract Law

Understand the Contract Before You Sign!
A recent case involving a contractual dispute between a franchisor and franchisee (a fairly common situation) highlights the need both to consider contractual terms carefully and to take advice before acting when a dispute arises.

The nub of the issue was that the franchisor was considered by the franchisee to be trying to impose unreasonable terms. The franchisor ran a business (eTyres) which took orders over the Internet for tyre fitting which it then referred to its franchisees, making a reduction from the payments received for so doing. The franchisee was a tyre fitter who had a substantial business outside the eTyres fitting business.

The franchisor sought to require the franchisee to change the livery of its vehicles and, in effect, to make eTyres the franchisee’s trading style, which the franchisee felt would have been to the detriment of its business generally.

It was alleged that the franchisor also made deductions from the sales receipts which were greater than was allowed under the franchise agreement.

Because of these factors, the franchisee determined to set up in competition with eTyres. When the franchisor found out about this, it terminated the franchise agreement and sought an injunction against the franchisee.

The questions before the court were whether the franchisor had made excessive deductions (which involved more than one issue) and whether the franchise agreement would allow the franchisor to require the franchisee to change its trading style.

The court took the view that the basis of calculation adopted by the franchisor was justifiable, but making deductions in excess of the percentage stated in the franchise agreement was not. The franchisor could not compel the franchisee to change its trading style for its whole business. The actions of the franchisor amounted to a repudiation of the original agreement and the franchisee was therefore entitled to have the injunction discharged and to have its counterclaim allowed.

This is a case which clearly arose because each party had different ideas about what the franchise agreement meant which were unresolved before it was agreed. Franchise agreements are often the cause of difficulty and it makes sense to take advice to ensure that any areas of possible disagreement are ironed out before committing yourself.



Insolvency

Bank’s Responsibility Clarified
A recent case has clarified the extent to which a bank can avoid liability for negotiating cheques to which the customer has no legal title.

The case involved a businessman who, faced with his company bank accounts being under investigation on suspicion of fraud and being therefore frozen, sought to negotiate cheques payable to that company through his UK company bank account, which was in the name of a different company.

The businessman sold forward wine contracts through a Cayman Islands company called AWCI. When it was no longer possible to use that company’s accounts, he paid various cheques into the US Dollar account of his company AWUK Ltd. The bank accepted the cheques despite the fact that they were made payable to AWCI and in some cases identified the recipient as being in the Cayman Islands.The bank sought to avoid liability for its resultant losses, arguing that it had acted in good faith and without negligence. The questions the court faced were:

1. Did the businessman have the authority validly to redirect the cheques into the AWUK
account?

2. Did the bank act in good faith in crediting the AWCI cheques into the AWUK account? and

3. Did the bank act negligently in crediting the cheques?

In the court’s view, the answer to questions one and two was ‘yes’. As regards the third question, regrettably for the bank, the standards it applied were clearly negligent.

The court suggested various means by which banks can ensure their cheque handling is not negligent, chief of which is that the details of the payee on the cheque should be checked against the account details.

In this case, one of the problems the bank faced was that the system for checking and approving payment of foreign cheques was split between the receiving branch and the negotiations department. The bank was therefore unable to show that anyone had compared the cheques with the account details. As a result, no one was put on notice by the unusual transactions. This makes it clear that having effective risk-management procedures is essential.



IT

Catering for Disabled Visitors to Your Website
Under the Disability Discrimination Act 1995 (DDA), service providers have a duty to make ‘reasonable’ adjustments to their policies, practices and procedures in order to ensure that their services are available to disabled users. Both access to and use of means of communications, as well as goods and services, must be available to people with a disability. Failing to make a website accessible to disabled users therefore exposes companies to the risk of legal action under the DDA.

A study carried out by the Disability Rights Commission (DRC) found that 81 per cent of websites in Britain fail to meet even the most basic accessibility requirements for disabled people.

In addition, businesses that do not offer accessible websites are at a disadvantage as they miss out on the potential to access the spending power of the ten million disabled people who have rights under the DDA, estimated to be around £80bn per annum.

The DRC has published a guide to good practice in commissioning accessible websites aimed at those responsible for commissioning or maintaining public-facing websites and web-based services. One electronic copy of the guidance is available free per individual. For more information, see http://www.drc-gb.org/library/website_accessibility_guidance/pas_78.aspx.

So far there has not been a court case on this discrimination issue in the UK, but it is likely to be only a matter of time before there is.



Employment Law

The Legality of Pay Based on Length of Service
According to the Equal Opportunities Commission, over thirty years after the Equal Pay Act 1970 made it illegal to pay a woman less than a man for doing the same job, a pay gap of 18 per cent still exists between women and men working full-time. Incremental pay scales based on length of service can disadvantage women, who tend to have built up a shorter length of service either because of career breaks to look after children or because they are relatively new entrants into traditionally male dominated professions.

In the case of Cadman v Health and Safety Executive (HSE) the courts had to consider whether the use of length of service as a criterion in a pay system requires justification if it disproportionately affects one sex.

Mrs Cadman brought an equal pay claim against her employer, the HSE, on the grounds that male colleagues (the comparators) on the same pay grade received a substantially higher salary on account of their greater length of service. The HSE operates an incremental pay system which reflects and rewards length of service. The proportion of men with longer service, in the relevant part of the workforce, is greater than the proportion of women. Mrs Cadman therefore claimed that the use of length of service to determine pay is indirectly discriminatory and therefore requires objective justification under equal pay legislation.

The issue was whether the longer service of the male workers amounted to a genuine material difference which was not a difference of sex for the purposes of the Equal Pay Act.

The Employment Tribunal (ET) upheld Mrs Cadman’s complaint. The EAT, however, found that there was little or nothing to show that the ET had weighed up the discriminatory effect of the pay structure against the justification put forward for operating the scheme. Also, in what, for obvious reasons, has become known as the ‘Danfoss case’ (Handels-og Kontorfunktionærernes Forbund i Danmark v. Dansk Arbejdsgiverforening for Danfoss A/S, ECJ 109/88), the European Court of Justice (ECJ) had expressed the view that when determining pay, the use of length of service was automatically justifiable. Taking these and other points into consideration, the EAT overturned the ET’s ruling.

The Court of Appeal further considered the issues, particularly whether the Danfoss case created an ‘enduring qualification’ in cases where discrimination results, at least in part, from the use of length of service as a criterion for remuneration or whether subsequent cases relating to part-time workers mean that the Danfoss case is no longer authoritative.

In order to clarify case law in this field, the Court of Appeal remitted the matter to the ECJ to determine whether differences in pay based on length of service need to be objectively justified to be lawful and whether it makes any difference if the workers are full- or part-time.

The ECJ judged that as a general rule the criterion of length of service is appropriate to attain the legitimate objective of rewarding experience acquired which enables the worker to perform his or her duties better. An employer does not generally have to produce specific proof in order to justify the practice unless a worker provides evidence capable of raising serious doubts as to whether the link between pay and length of service is in fact rewarding experience which enables the worker to perform better. In that case, the employer must demonstrate the absence of unlawful discrimination.

The case will now go back to the Court of Appeal to decide whether the points raised by Mrs Cadman do amount to ‘serious doubts’ as to the appropriateness of the scheme which must be justified by the HSE.To avoid problems of this nature, employers who operate a pay scheme linked to length of service should make sure they can justify paying those who do the same job different amounts. Length of service-based pay increases based on five years’ service or less are permitted under the Employment Equality (Age) Regulations 2006. It remains to be seen how exactly this legislation will be interpreted with regard to service of more than five years in the light of the Cadman case.



Health and Safety

HSE Warning – Check Gas Appliances
The dangers of carbon monoxide poisoning have been in the news recently following the tragic deaths of two children while on holiday at a beach resort in Corfu.

The Health and Safety Executive (HSE) has issued a warning to all those with responsibility for gas appliances to make sure that they are safe to use.

Around 30 people die each year in the UK as a result of carbon monoxide poisoning caused by badly fitted appliances or flues, whilst many others become ill as a result of exposure to the gas.

Carbon monoxide is invisible and has neither smell nor taste. It is produced when there is insufficient air for complete burning of the fuel.

Further information on gas health and safety can be found at http://www.hse.gov.uk/gas/.

Corporate Manslaughter Latest
The new Corporate Manslaughter and Corporate Homicide Bill has been wending its way through Parliament since July. The new Bill defines corporate manslaughter as occurring if the way in which any of a company’s activities are managed or organised by its senior managers:

• causes a person’s death; and
• amounts to a gross breach of a relevant duty of care owed by the organisation to the deceased.

More recently, the Government has proposed to change the wording of the Bill to provide that an organisation will only be guilty of an offence if the way in which its activities are managed or organised is a substantial element in the commission of the offence.

PRESTON-ROUSE COMPANY
6 Gray's Inn Square, Gray's Inn, London WC1R 5AX
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