CorporateFILE November 2008

In-House News

Landlord Lawyer Makes Partner at Brethertons

Supporting Brethertons increase in Landlord instructions in the region, Geoffrey Cotterill, Commercial Property Lawyer has been promoted to Partner – strengthening five offices in Banbury and Rugby and bolstering its ambitious plans for growth.

Geoffrey qualified in 1985 and has acted for a variety of substantial Landlord organisations both in private practice and as an in-house lawyer.

Between 1998 and 2003, he was the Head of Legal Services at Anchor Trust, one of the country’s largest providers of housing to older people in England while prior to that he was an in-house lawyer to Equity & Law Life Assurance Society, part of the AXA Group with a multi-million pound property portfolio.

Geoffrey provides legal advice to a wide spectrum of property and corporate clients in respect of all types of commercial property including granting commercial leases, general landlord and tenant matters and freehold sales and purchases.  He also provides support in corporate transactions for the property aspects of the sale and acquisition of businesses.

According to Brian Auld, Commercial Partner at Brethertons:

“Geoffrey has a wealth of experience in acting for Landlords and strategy is to continue to develop that part of our services. That strategy is paying off as we have recently been appointed to: act for the landlords in the disposal of an 18,974 sq ft commercial development and are acting for a charity in the acquisition & commercial development of a 400 acre site.

Geoff has also worked extremely hard since joining Brethertons to develop case management system and on-line services which allows our clients to track and monitor their instructions. An invaluable and innovative tool for all commercial property clients and especially those with large portfolios.  Geoff’s skills and experience dovetail in perfectly with the substantial managing agent client base we have and our enfranchisement department.”

Brethertons Scores High in Legal 500 League Table

Brethertons has once again been confirmed as one of the UK’s leading law firms in the Legal 500 2008 directory and is the highest ranked Law Firm in both Banbury and Rugby.

Moving up 112 places in just one year, Brethertons LLP is recognised as the 221 largest law firm in the UK.   The Legal 500 series is widely regarded as offering an impartial judgement of law firm capabilities based on extensive research.  It is a comprehensive annual review covering each of the different legal disciplines and categorising the best firms.

Regional Law firm Brethertons is listed in the third tier of top West Midlands, South East and Thames Valley firms and has been recognised in seven of its specialist fields. 

From the Legal 500 - Areas where the firm’s teams are singled-out for particular praise include:

Recommended in Debt Recovery:

“Shaun Jardine at Brethertons LLP heads a group with ‘significant expertise and experience’ and ‘strong links with businesses in the firm’s area’. The group advises on commercial and property management debt recovery in the UK and internationally.  Mediation and online dispute resolution work are unusual strengths.”

Recommended in Family:

“Simon Craddock at Brethertons LLP, who has unusual expertise in international child abduction cases.”

Recommended in Employment in Thames Valley:

“Detailed and pragmatic associate Natalie Roach at Brethertons LLP.”

Richard Pell, Senior Partner at Brethertons LLP explains:

“To be recognised as a leading force in the market by the Legal 500 is a great achievement, and to have moved up 112 places in just one year is a fantastic accolade.  We are extremely pleased to be recommended so highly again particularly as the research reflects the voice of the profession along with our clients.”

Agency a Matter of Fact

Under EU law, agents have a degree of protection which mere resellers do not. For example, when an agency is lost, the agent is normally entitled to compensation from the principal. This does not apply where the relationship is one of a supplier and reseller. It is therefore important when a business relationship comes to an end to know whether it is one of agency or supplier and reseller.

In a recent case, a man who sold jewellery in the UK on behalf of a German firm claimed that he was a commercial agent as defined by the Commercial Agents (Council Directive) Regulations 1993. When the business relationship ceased, he sought compensation for the loss of his agency. His argument was based on the fact that he was the only UK supplier of the jewellery and ordered goods from the manufacturer only when he had received an order from a jewellery shop.

However, the arguments against a commercial agency being in effect were strong. The man bought and sold through his own accounts, invoicing his customers in his own name and accounting to the supplier as a principal. His accounting records reflected that position. In addition, he had no authority to negotiate on behalf of the supplier.

The court could find no reason to impute into the business relationship something that was not there. As a matter of fact, there was no agency and no compensation was therefore due.

When making reseller arrangements, it is important to make sure the nature of the business relationship is clearly understood. We can assist you in drawing up the necessary agreements to establish an agency or a supplier/reseller arrangement.

Companies Act 2006 – The Next Round

The next round of changes resulting from the Companies Act 2006 came into effect on 1 October 2008. The most important of these are as follows:

• Every company must have at least one director who is a ‘natural person’. This means that companies where the directors are exclusively other companies (as is not uncommon for subsidiaries) will have to appoint at least one individual as a director. There is, however, a concession which allows companies that did not have a natural person as a director on the date on which the Act received Royal Assent (8 November 2006) to delay compliance until 1 October 2010;
  The restrictions on providing financial assistance for the acquisition of a company’s own shares are repealed (Part 18). This will make it easier for smaller companies to widen the base of their shareholdings. There are other changes in the rules governing reductions in share capital (Part 17)
• Substantial changes are made relating to a director’s duties with regard to avoidance of conflicts of interest. These are contained in Chapter 2 of Part 10 of the Act and are sufficiently important to be recommended reading for all company directors. See http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_13 (and scroll down)
• An objection to a company name may be made if it is sufficiently similar to another name that is owned by the objector and compromises their goodwill (Part 5); and
• New regulations requiring companies to display specified information at their trading premises and on documents or communications.

Failure to comply with any of the new requirements may leave the company and/or its directors liable to a fine. The final round of changes is due to come into effect in October 2009.

Copyright – Get it Right First Time

Yet another case highlights the need to make the ownership of intellectual property (IP) clear when negotiating contracts where the IP is in point. In the case concerned, a company was retained to develop financial forecasting software. It ran into financial problems and the employees working on the project left. They formed their own company, which subsequently agreed to work as a contractor to their former employer in order to finish the work. When the project was completed, the question arose as to who owned the copyright to the software, the original company or the new company formed by the ex-employees that was commissioned to complete the project.

The situation was not made easier by the lack of formal documentation of the contractual terms. Such documentation as there was made no mention of copyright. The company that commissioned the work claimed that it had been made clear in precise terms and was expressly agreed, albeit verbally, that it would own the copyright to the software and that, in any event, it was commercially necessary for it to retain copyright for confidentiality reasons. It claimed, therefore, that the validity of its claim should be ‘read into’ the contract. Both these claims were denied.

The case went to the Court of Appeal, which refused to read into the agreement something which was not there. There was no necessity for the commissioning company to own the IP in order to make the contract effective and therefore it did not.

Brethertons’ view:

“When development work of any kind is commissioned, IP of significant value often results. It is important to consider at an early stage the potential value of such IP and to agree, in writing, the ownership of the IP created and any necessary terms under which it can be exploited after the original contract is concluded.”

Discrimination by Association – ECJ Rules

The European Court of Justice (ECJ) has handed down its ruling (Coleman v Attridge Law) on whether the Disability Discrimination Act 1995 (DDA) properly implements the EU Equal Treatment Framework Directive.

Sharon Coleman, who worked as a legal secretary, brought a claim of disability discrimination and constructive dismissal against her ex-employer. She claimed that she had been treated less favourably than other employees because of her son’s disability.

Ms Coleman’s son was born with substantial respiratory problems and she requested more flexible working hours in order to care for him. She contended that other mothers at the firm had been granted flexible working hours and permission to work from home to care for children who were not disabled, whereas her request was turned down and she was placed in a pool of staff selected for redundancy. She also claimed to have been subjected to insulting and abusive comments and that this created a hostile working environment which gave her no option but to resign. 

Ms Coleman argued that the Equal Treatment Framework Directive affords protection from unfair treatment that arises out of association with a disabled person. However, the wording of the DDA does not appear to allow a person who is not disabled, but who is discriminated against because of another person’s disability, to bring a claim. The Employment Tribunal referred the question to the ECJ.

In the Advocate General’s view, the purpose of the Directive, as regards employment, is to eliminate all forms of discrimination relating to disability. His opinion was followed by the ECJ, which ruled that the Directive would provide insufficient protection and be rendered less effective if it were restricted only to those who are themselves disabled. In the Court’s view, an employee who is the primary carer of a disabled child is protected from direct discrimination and harassment that is related to the disability of their child.
 
The case will now return to the London South Employment Tribunal to decide whether the DDA can be interpreted in a way that complies with the Directive as clarified by the ECJ’s ruling.

This decision has far-reaching implications. As the Directive also covers discrimination based on religion or belief, age or sexual orientation, employees should also be protected from associative discrimination on these grounds. Employers are advised to take care when considering requests for flexible working arrangements from employees who have caring responsibility for disabled or elderly people and to check their recruitment and equal opportunity policies in the light of this decision.

Limitation of Auditors’ Liability – Take Care What You Sign

It is when times get tough that problems which might have been easy to gloss over in better times start to make themselves visible. When serious problems that have remained undiscovered for a substantial period come to light, a company’s auditors may well find themselves facing a writ.

The sections of the Companies Act 2006 which allow auditors to limit their liability in relation to audit work, with the agreement of their audit client, are now in force and the Financial Reporting Council (FRC) has issued guidance on the use of such agreements.

Any agreement setting a limit on the liability of a company’s auditors must be approved by the company’s shareholders. An agreement cannot cover more than one financial period and will only be effective insofar as it is ‘fair and reasonable’. In practice, whether or not the limit on liability is fair and reasonable will be determined by the courts, depending on the particular circumstances of each case.

The FRC guidance:

• explains what is and what is not allowed under the 2006 Act
• sets out some of the factors that will be relevant when assessing the case for an agreement
• explains what matters should be covered in an agreement and provides specimen clauses for inclusion; and
• explains the process to be followed for obtaining shareholder approval and provides specimen wording for inclusion in resolutions and the notice of the general meeting.

Many company directors can expect to receive a letter from their auditors, enclosing a liability limitation agreement, before their next financial year end.

Brethertons’ view:

“This seemingly small change could have a significant impact and directors should give thorough consideration to the ramifications of signing any agreement limiting the liability of their auditors. Directors have the same responsibilities to a company’s shareholders and creditors in this situation as they would when entering into any other agreement on the company’s behalf. If your auditors propose a liability limitation agreement of any kind, we can advise you on your individual circumstances.”

Loss May be Based on Potential

Buying a business can be a risky undertaking. Even if the normal due diligence work is done with great care, sometimes there can be skeletons in the cupboard, which can emerge to your detriment. It is a particularly risky business when the vendors are less than totally honest.

In a recent case, the purchaser of a business discovered, some time after having taken it over, that it had at its core corrupt practices which related to its major customer. The vendors of the business had, as one might expect, concealed what was going on. The purchaser claimed against the vendors for deceit, breach of contract and warranties and breaches under the Misrepresentation Act 1967.

The claim’s resolution by the court revolved around two issues. Firstly, to what extent a limitation clause could be relied upon in such circumstances and secondly, whether the buyer could claim for losses on an ‘opportunity cost’ basis.

The defendants sought to strike out the claims for misrepresentation and breach of contract because the sale agreement contained a limitation clause which required the purchaser to provide written particulars of any claim within two years of the sale, which was not done. The court rejected this defence on the basis that such a clause did not apply where the warranties were fraudulently given and the truth deliberately concealed.

This then brought into point the amount of the claim. This was calculated based on the loss to the purchaser, which had resulted from the false representations made by the defendant, of the opportunity of investing in another business. Had these representations not been made, the purchaser would have invested in a different business. The claim was therefore calculated with reference to the profits the purchaser would have earned had it bought the other business instead and the value of the other business that it would have acquired.

Interestingly, the Court approved of this reasoning and awarded damages of £8 million.

Such reasoning, if it becomes commonplace and can be backed up by sufficient evidence of the ‘opportunity cost’ loss suffered, could lead to claims being made which appear to have little relationship to the measured loss.

Protecting Business Interests

When an employee leaves to go to work for another organisation, their employer may wish to have in place safeguards to protect sensitive information relating to the business, to prevent it from falling into the hands of a competitor.

One possible way of doing this is through a post-termination restrictive covenant, but this will only be enforceable if the ex-employer can show that it is reasonably necessary to protect his legitimate business interests, which include trade secrets or confidential information and customer information. A restrictive covenant that goes beyond what is reasonably necessary to protect these interests will not be enforceable. However, a restrictive covenant that is widely drafted may be reasonable in the case of senior employees, depending on the individual circumstances involved.

In addition, all employees have a duty to serve their employer with honesty and fidelity. Company directors owe a fiduciary duty to act in the best interests of the company, as do employees who hold a senior position within the organisation. Employees who become shareholders may also be bound by the terms of any shareholder agreement entered into.

In Kynixa Ltd. v Hynes and others, Mr Hynes, Ms Preston and Ms Smith had held key roles working for Kynixa, a specialist provider of rehabilitation and case management services for people who have suffered an injury. Over a period of time, all three resigned and went to work for a competitor company, without informing Kynixa of their intentions or the identity of their new employer.

The High Court found that all three ex-employees had breached their duty of fidelity by positively misleading Kynixa as to their true intentions. In addition, Mr Hynes and Ms Preston were found to be in breach of their fiduciary duties because they had not informed Kynixa of their negotiations with a competitor. The two also held shares in the company and were found to be in breach of restrictive covenants, contained in the shareholders’ agreement, which ran for one year from the date when they ceased to be connected with Kynixa. Mr Hynes and Ms Preston argued that this was too long a period to be enforceable but the Court judged that although the post-termination covenants were very wide, in the circumstances they were reasonable to protect the legitimate interests of the business and were therefore enforceable. Kynixa operated within a small, fiercely competitive market and the disclosure of trade secrets to a competitor could be particularly damaging to its business. Furthermore, Mr Hynes and Ms Preston had a choice as to whether or not to enter into the shareholder agreement and they had both chosen to do so for (potentially) substantial gain.

As a result of this ruling, substantial damages will be payable to Kynixa by the three ex-employees.

Rent Payable During Notice Period

The courts often have to deal with disputes over the payment of rent and charges for the period after a tenant has given notice to vacate a let property. A recent case concerned just such an issue.

The circumstances were that premises were occupied under licence, with the licensee paying £450 plus VAT per month. The licence could be determined by either party by giving a month’s notice. After a short period, the licensee and the landlord agreed that the licensee could make a one off payment of £6,000, to cover the VAT inclusive charge for occupancy for the next 12 months. This represented a discount of approximately £25 plus VAT per month.

The licensee emailed the property owner to confirm that during the 12 month period for which the charge was prepaid the property owner’s right to give a month’s notice, as provided for in the licence, would be suspended.

About eight months later, the licensee gave notice to terminate the agreement and claimed the balance of his prepayment back from the landlord.

In court, it was ruled that the licensee’s email had only suspended the landlord’s right to terminate the arrangement on a month’s notice, not his own. Therefore, the balance of the payment was refundable. The landlord appealed to the Court of Appeal.

The Court of Appeal took account of the email, but considered that it must be regarded as preventing either party from exercising the right to terminate the arrangement on a month’s notice. The occupier had secured the right to occupy the property for the full 12 months by making the payment, but could not then demand a refund for leaving the premises earlier, nor could the owner of the property compel him to vacate it before the 12 month period was up.