Newsletter Archive

May 2010

Public Procurement – Act Promptly When Loss Suspected

A recent case shows the importance of acting promptly when a loss due to a breach of the public procurement rules is suspected.

It involved a company which had bid for a public procurement contract awarded by the Greater Manchester Waste Disposal Authority (GMWDA). The contract was awarded on 8 April 2009, although the losing tenderer was informed that it had failed to win the contract nearly a year earlier. In the time between the two events, the contract had been altered significantly by negotiation between GMWDA and the firm which won the contract under tender. The losing tenderer had not been invited to submit a further tender despite the changes.

The losing tenderer began legal action for damages against GMWDA in August 2009, arguing that it should have been allowed to resubmit its tender in the light of the significant contractual changes. It argued that it had little knowledge of these until some time after the contract was formally announced in April 2009 and did not realise that there might be grounds for making a claim for loss until some time later.

The rule in such cases is that an action for a breach of a public procurement procedure must be commenced within three months of the claimant having knowledge of the breach. In the view of the court, this occurred in April 2009, since that was when the unsuccessful tenderer must have been aware of the possibility of a loss arising.

As the claim was not brought until August 2009, it was dismissed as being out of time.

The moral of the story must therefore be that in a situation like this, the sensible thing to do is to bring the claim as soon as the potential for a loss is known and not wait to obtain the necessary evidence on which the claim can be quantified.

If you need advice on dealing with issues arising from public procurement contracts, contact Paul Mitchell, (pm@mitchellwilde.com)

General

Taking Advantage of the Recovery – ICAEW Business Guidance

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a useful booklet for company directors and their advisers on how best to take advantage of the economic recovery. Called ‘From Survival to Sustainability’, the booklet suggests seven strategies businesses should consider as the upswing gets under way.

The leaflet and other relevant information can be accessed from the ICAEW website at www.icaew.com/economicrecovery.

New Advertising Codes Published

Following a comprehensive review and full public consultation, the Committee of Advertising Practice (CAP) and the Broadcast Committee of Advertising Practice (BCAP) have published new UK Advertising Codes.

The new Codes will come into force on 1 September 2010. CAP and BCAP are providing a range of training and advice to help those involved in commissioning, producing or publishing advertising to familiarise themselves with the new rules. For further information, see http://bcap.org.uk/The-Codes/New-Advertising-Codes.aspx.

Property

Company Pays Price When Contract Terms Do Not Reflect Current Law

‘Pay when paid’ clauses in construction contracts came under the microscope in a recent case, with unfortunate results for a company that did not keep its contract terms up to date.

The case involved a contractor which was carrying out work for a firm that went into administration, owing the contractor sums for the work it had done. Some of that work had been subcontracted to two other firms. The sums involved were substantial, with one of the subcontractors owed nearly £1 million.

The contractor relied on a pay when paid clause, which meant its liability to the subcontractors was limited if the firm to which it was contracted (the ‘employer’) did not pay it the sums due to it. The operation of such clauses is prohibited by the Housing Grants (Construction and Regeneration) Act 1996 (HGCRA) unless it can be shown that the employer is insolvent. The precise wording of the relevant part of the Act has changed over the years, following an amendment in the Enterprise Act 2002 that changed the meaning of the section which relates to insolvent companies. The new wording means that where a company ‘self-certifies’ its need to enter administration, that suffices for the purposes of the relevant section of the HGCRA. Prior to that change, only an administration which resulted from a court order would qualify. Standard contract documentation now usually incorporates appropriate wording to allow for this change.

Unfortunately for the contractor, when it made its contracts with the subcontractors, it failed to change the relevant clause, with the result that the pay when paid clause was not triggered when the employer entered administration unless the administration was the result of a formal process.

In this case, the employer’s administration was by the informal, self-certifying route. Accordingly, the contractor could not rely on the pay when paid clause and was liable to its subcontractors whether or not it received payment.

“The judgment does not dwell on how it was that a contract of this size could fail to take account of changes in the law that are well known in the construction industry,” says Paul Mitchell, “and a trip to the Court of Appeal in pursuit of a lost cause magnified the loss.”

Involving us at an early stage in the negotiations in all contractual matters will help control your legal risks and avoid potential pitfalls.

Over-Optimism Not Grounds for Claim

The developer of the M20 services in Kent was recently successful in court in resisting a claim for damages from the tenants of the service area, who were dissatisfied because representations made to them regarding visitor numbers and the facilities of the site were not realised, causing them commercial losses.

The main cause of the tenants’ discontentment was that visitor numbers, estimated in an independent report commissioned by the developer to be between 6,000 and 7,000 a day on average, were in reality only about a tenth of the number anticipated.

In addition, the developer’s sales literature had envisaged having screens showing Channel Tunnel and port departure information. Lastly, the tenants claimed that the signage from the motorway was not of the expected standard. The former was later found to be impractical for technical reasons (despite being an idea which had attracted the support of the Port of Dover and Eurotunnel) and the latter was not under the control of the developer. The developer could not therefore be held to account for either of these issues.

When the lease documentation was examined, the court found that the developer had restricted its liability to any representation made by its solicitors in reply to questions.

The decision as to whether the shortfall in visitor numbers could lead to a claim therefore turned on whether the claim was made fraudulently to induce the tenants into executing their leases. The court sympathised with the tenants, but there was no ground for believing that it was: indeed, the developer had also suffered a large loss because of its reliance on the over-optimistic forecasts.

“If you intend to lease premises where footfall is crucial, it makes sense to negotiate an appropriate clause in the lease agreement, so that the rental paid will be less if expectations are not met,” says Louise Madeley. “We can assist you in negotiating a lease which protects your position if things do not turn out as expected.”

Tax

Delay Compounds Loss

A scheme to avoid Capital Gains Tax (CGT), which was successful initially but later led to a charge to CGT occurring even when a loss had been made, led to a man bringing a claim against the accountants who provided the tax planning advice.

The claim, for professional negligence, resulted from the carrying out of a two-stage scheme whereby a capital gain was rolled over into a new company which acquired companies that qualified for roll-over relief. These companies were then ‘hived up’ into the new company. Some of the businesses were subsequently sold at a loss. Because of how CGT law applies in such circumstances, the unfortunate effect was that a chargeable gain for CGT purposes arose on the sale of the businesses. Regrettably for the man, had the scheme been structured differently, no chargeable gain would have arisen. Had he acquired the assets of the ‘hived up’ companies, rather then the companies themselves, no CGT would have been payable.

The court had to consider the question of when the man’s loss had occurred. If he had suffered the loss when the new company was acquired, his claim would have fallen after the time limit for such claims to be brought, which is six years after the loss occurs.

The man argued that his loss occurred when he disposed of the businesses, which led to the CGT charge.

The court rejected the man’s claim. The loss occurred at the first stage. If the transaction had been structured so that the new company was set up with subsidiaries which bought the businesses of the other companies, the CGT charge would have been avoided. It was not. The subsequent loss flowed from that error. The damage which occurred then was sufficient for the six-year limitation period on claims to start to run from that time.

“If you have reservations about any tax planning exercise, obtaining a review in good time may be wise insurance if the alternative is to face a substantial tax bill years later for which no recourse can be sought,” says David Wilde.

HMRC – A Case for a Disaster Recovery Plan?

The powers of HM Revenue and Customs (HMRC) are considerable, as a recent case makes clear. It involved a company that HMRC suspected of Excise Duty evasion. A raid on its premises was undertaken and HMRC officers found quantities of alcohol for which there appeared to be no records of purchase. The officers seized the goods as well as computers and papers belonging to the company and also private papers.

HMRC held the computers and the papers for a week.

The company went to court, alleging that the seizure was unreasonable and that the length of time HMRC retained the computers and other material was excessive. The court gave the claim short shrift, agreeing with HMRC’s contentions that:

• it was reasonable to assume that the private papers may contain relevant information about the business;
• the return of the private papers had been prioritised;
• the claim that the computers should not have been seized was unreasonable; and
• given the volume of papers etc. seized, retention for a week was not unreasonable.

A seizure such as this, or a natural disaster such as a flood, can prove catastrophic for many businesses and having a disaster plan in place is a wise precaution. We can assist you with minimising legal risks.

VAT and Excise Penalties – The New Regime

A new regime for VAT and Excise penalties commenced on 1 April 2010. It provides that the penalties levied for underpayments of VAT and Excise Duty will depend on both the reason for the wrongdoing and whether the disclosure was unprompted or prompted.

Where there is a ‘reasonable excuse’, no penalty will be levied. Needless to say the criteria which allow such a claim to be made are strict and are likely to include only events which are ‘exceptional and beyond the individual’s control’.

In other cases, the penalties (in terms of the percentage of tax underpaid – these must be paid in addition to the tax due) sought will be as below.

Reason for Wrongdoing	Disclosure	Minimum penalty	Maximum penalty
Careless	Unprompted	10 per cent	30 per cent
Careless	Prompted	20 per cent	30 per cent
Deliberate	Unprompted	20 per cent	70 per cent
Deliberate	Prompted	35 per cent	70 per cent
Deliberate and Concealed	Unprompted	30 per cent	100 per cent
Deliberate and Concealed	Prompted	50 per cent	100 per cent

Contact David Wilde, (dw@mitchellwilde.com) for advice on any tax matter.

Company

New Company Name Check Facility

On 28 April, Companies House introduced a new ‘Company Name Availability Search’ as part of its WebCHeck service, which will return the ‘same as’ matches as defined in the Companies Act 2006. This will allow those wanting to set up companies to ascertain straight away whether the company name they are considering using is likely to be available. If so, don’t forget to check that the appropriate Internet domain name is also available!

The new facility can be found at http://www.companieshouse.gov.uk/about/miscellaneous/nameAvailability.shtml.

Contract

Businessmen Denied Profit for ‘Borrowed’ Business Plan

When someone breaches a confidence and as a result of that breach makes use of confidential information to make a profit, one of the legal remedies which may be sought is to require the person committing the breach to account for the profit made as a result.

In a recent case, two businessmen sought an ‘account of profit’ from a venture capital company, which had purchased and then floated on the stock exchange for more than £29 million the business the two had wanted to buy.

The men had wished to secure backing to buy out a pawnbroking business and had approached the venture capital fund with their business plan. Their proposal was that, after the acquisition, they would both have senior management roles. They signed contracts with the venture capital company which contained confidentiality agreements.

The venture capital fund liked the business plan, but decided to buy the target company itself, without the two men being involved, and later floated the company. The two men sued it for the profit made.

In court, the judge ruled that the men were only entitled to be paid the reasonable sum the venture capital firm would have paid to be released from its duty of confidentiality to them under the contract. The two men had brought no ‘new idea’ or process or design to the negotiations but had merely uncovered a good business opportunity. Furthermore, there was no fiduciary duty owed to them by the venture capital firm.

The court found that, rather than a share in the profits, the two men were entitled to a payout based on the shareholding of the company the venture capital firm would have been compelled to give them to take the proposal and put it into effect itself. On that basis, the sum due to them was approximately £2.5 million.

Says Paul Mitchell, “To many, this result may seem unfair. The basis of settling the claim could easily have been very different had the two men gone to the venture capitalist with a business plan based on exploiting a patent which they owned and that patent had then been breached. In this case, a more stringent contract at the beginning might also have yielded a better result for the businessmen.”

If you are negotiating any contract, especially one involving confidential information, contact us for advice.

Court Decides on Contract Terms

Starting work before the details of the contract have been agreed can be risky, because it could end up with the court having to decide if a contract exists and, if so, on what terms.

A recent case, which involved a dispute over the supply and installation of packaging equipment under a contract worth more than £1.6 million, was argued all the way to the Supreme Court. The supplier and the customer had agreed a letter of intent, which stated that the final terms were to be specified in a subsequent final contract. The draft final contract was produced and points of it were negotiated between the two parties, but it was not executed. It ended up with the supplier and the customer disputing whether or not there was a contract and, if so, the basis of the agreement.

In such cases, the court has to make a decision based on an examination of the facts before it. In this case, the Supreme Court considered that it was unrealistic to consider that the parties had not intended to create contractual relations and that the agreement was as per the terms of the draft final contract.

“The Supreme Court is not the best place to decide the details of a contract,” says Paul Mitchell.  “It is a far better option to make sure that proper contractual relations are agreed earlier, rather than later, in the business relationship.”

Contact Paul Mitchell (pm@mitchellwilde.com) for advice on any aspect of contract law.

Intellectual Property

Digital Economy Act 2010

As part of the pre-election ‘wash-up’, the Digital Economy Bill was passed into law, bringing with it the right for the Secretary of State to create secondary legislation to require Internet Service Providers to take ‘technical measures’ against subscribers who infringe the Intellectual Property (IP) rights of others by downloading files.

If you didn’t have a robust Internet usage policy in your business before the Act was passed, now is a good time to get in touch with us for advice.

For advice on any IP matter, contact David Wilde, (dw@mitchellwilde.com)

Insolvency

Businesses Fear Effects of a Double Dip Recession

Although the UK economy is slowly emerging from recession, the effects of the economic downturn have left many businesses weakened.

Recent research carried out by R3, the trade body for insolvency professionals, reveals that more than a quarter of small businesses in the UK (those with a turnover between £50,000 and £1 million) fear they will become insolvent should the economy suffer a double dip recession.

R3 President Peter Sargent commented, “The low level of business confidence is to be expected. Many struggling businesses drew heavily on their reserves in order to survive and their resources have now begun to run out.

“It is easy to forget that banks are not a company’s only creditors, for many their largest creditor is the Government. With close to 300,000 firms in crucial ‘time to pay’ tax arrangements with HMRC, it seems that a large number of businesses are in need of a financial health check.”

The research showed that owners of manufacturing businesses are the most positive, with fewer than one fifth believing that their businesses will be at risk if the economy suffers a further setback. The hotel and catering sector was the least positive, with almost half of businesses fearing that another recession of similar magnitude could result in them becoming insolvent.

If your company is experiencing problems, contact us for advice as soon as possible.

Competition

Court Supports Ex-Director’s Right to Start New Business

When senior employees leave a company, the commercial risks presented can be considerable.

A recent case on this subject concerned a director who left the company he worked for and then set up in competition with it. The company supplied energy surveys of buildings to its customers, normally annually. The director had left his employment in October 2008. Initially, he had joined another firm but his employment there was terminated four months later and he set up his own business. Both of his new positions involved the carrying on of business activities that competed with his former employer.

His contract of service with the first company contained a clause that prevented him from soliciting business from any client of the company (which included any person who had been a client in the preceding 12 months) with whom he had dealt to a material extent, for a period of six months after his employment ceased. His contract of employment also prevented him from divulging any confidential information about his former employer’s business that was not in the public domain and which had come to him by way of his employment.

In addition, the Companies Act 2006 contains a statutory duty regarding the conduct of directors, which prevents them from acting in their self-interest in a way which conflicts with their duties as a director. The Act contains provisions whereby conflicting acts can be approved by shareholders or other directors, but those provisions were not relevant to this case.

The man’s first employer went to court to obtain an order restraining him from canvassing or soliciting its customers. The ex-director argued that his knowledge, which he applied to his new business, was not the exclusive property of his former employer and that it would be unfair for the court to prevent him from exploiting his abilities for his own benefit. The restriction in his contract was for six months, and that period had expired very shortly after he left his new employer.

The court concluded that the former employer had failed to provide adequate evidence of the man’s use of confidential information acquired whilst he was a director. Had he made use of a particular trade secret, the decision may well have been different.

Furthermore, it could not be shown that he had attempted to acquire specific contracts or interests which had been under negotiation when he was a director: he had merely left in order to pursue a new opportunity.

This case provides support for the proposition that when a director leaves his former company and sets up a new business, where he does not breach his contract of employment or (in effect) conspire against the old company before resigning as a director and does not make use of what is clearly confidential information acquired as a result of his former position, there is a good chance that the court will find nothing actionable in his conduct.

The courts are often not willing to make rulings which could be interpreted as denying a person the right to make a living using their existing knowledge and skills.

If you face the loss of senior personnel (whether by their choice or yours), we can help you protect your business to the maximum extent possible under the law.

Environment

Fines for Breaches of Environmental Law

The Court of Appeal has ruled in a case which establishes an important precedent for the setting of fines for breaches of environmental law.

Thames Water had appealed against a fine of £125,000 for a mistake which had led to pollution of the river Wandle. It claimed that the fine was excessive. The law in such cases makes the offence one of ‘strict liability’ – a conviction follows if the offence occurs and there is no defence.

On appeal, the Court set out fourteen factors which should be taken into account when determining the appropriate fine in such cases.

The most important of these are:

• The size of the fine depends on the facts of the case;
• The purpose of deterrence dictates that the fine should always exceed any expense avoided by the commission of a breach of the law;
• Mitigating factors would include a good past record of compliance, a timely admission of guilt and a good response after the event;
• Various factors would aggravate the seriousness of the offence, such as the noxiousness of the pollutant, the time the effects persisted, whether the health of people or animals was affected and so on; and
• It would be an aggravating event if the company fell short of its duty, showed a poor attitude to compliance or response to the event and failed to heed advice, etc.

Taking into account Thames Water’s previous good record, the Court reduced the fine to £50,000.

Says Paul Mitchell, Environmental law in the UK is strict and the penalties for non-compliance can be severe. Taking liberties with the law can prove very expensive. We can advise on all aspects of environmental law.”

Employment

Collective Consultation – Obligation to Consult in Special Circumstances

A recent case before the Employment Appeal Tribunal (EAT) dealt with a situation that is quite common in the construction industry, whereby problems encountered on site require adjustments to the working and staffing arrangements in order to adapt to the change in circumstances (Shanahan Engineering Ltd. v Unite the Union).

Shanahan Engineering Ltd. won a contract to build two steam generators for a power station being constructed by Alstom. The plan was to construct the generators simultaneously. By the beginning of April 2008, Shanahan was employing 145 workers at the site. Unite the Union was recognised by the company in respect of its employees and, as the short-term nature of the work made it inevitable that redundancies would arise at the end of the contract, Shanahan and the union had reached prior agreement as to the selection process to be used in this event. No redundancies were anticipated at that stage, however.

By the end of April, the situation had changed. There were problems with the site and a decision was made to construct the generators one at a time. Alstom gave instructions to Shanahan to reschedule the works with immediate effect. Shanahan decided that 50 or so workers would have to be made redundant and selected them in accordance with the agreed method. Their employment was terminated with effect from 2 May with a week’s pay in lieu of notice.

The redundant employees contended that Shanahan was in breach of its duty under Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) by failing to consult when proposing to make more than 20 employees redundant and accordingly claimed for the payment of protective awards. Shanahan argued that there were special circumstances in this case which meant that it was not reasonably practicable to comply with the statutory requirement.

The Employment Tribunal (ET) was satisfied that the events were such as to relieve Shanahan of its duty to commence consultation at least 30 days before the dismissals took effect. However, it saw no justification for failing to carry out such consultation as was reasonably practicable in the circumstances. There is no requirement under TULRCA that the consultation must last 30 days. As there was an agreed selection procedure already in place, it was unlikely that the consultation process would have taken more than a few days. The ET was satisfied that the failure to consult was a serious failure and made 90-day protective awards in respect of the redundant employees.

Shanahan appealed against the ET’s decision. The EAT upheld the ET’s finding as regards the employer’s failure to consult. Even though there were special circumstances in this case, this did not relieve Shanahan of its duty to consult its employees, with a view to reaching agreement regarding the redundancies, and it remained reasonably practicable to do so in the time available.

As regards the level of the protective award, however, the EAT did not agree with the ET’s finding that there were no mitigating factors that would justify setting the award for any lesser period and remitted the case to the ET for reconsideration on this point.

Says Paul Mitchell, “Employers who find themselves in a situation where it is not reasonably practicable to commence consultation according to the timescale laid down in TULRCA are advised that there remains an obligation to do so in whatever time is available. We can advise you to ensure the actions you take minimise the risk of claims for failing to consult.”

Health and Safety

Fire Service Training Facility Fails to Comply with Fire Safety Law

The UK Fire Service College, which is based at a 400-acre site in Moreton-in-Marsh in Gloucestershire, provides training to the UK Fire and Rescue Services as well as to other UK and international emergency response teams.

In May 2009, a fire broke out at the training facility, which resulted in £1 million worth of damage. It transpired that no current fire-risk assessment was in place for the area affected, although the College was in the process of revising its fire-risk arrangements when the incident occurred. Although no one was hurt in the blaze, more than 60 firefighters were called to the premises and eleven fire engines were destroyed when the garage housing them burned down.

Local Fire Authorities no longer issue fire certificates. The Regulatory Reform (Fire Safety) Order 2005 introduced a risk-based approach to fire safety. It introduced a legal requirement to carry out a fire-risk assessment for all non-domestic premises in England and Wales. This includes the shared areas of houses in multiple occupation. The person responsible must identify any possible dangers and risks from fire to anyone who might be on the premises, consider who may be especially at risk and eliminate or reduce those risks as far as is reasonably practicable. Measures must be put in place to protect users of the premises from any risks that remain and a plan drawn up of the action to be taken in the event of an emergency. These findings must be kept up to date. Employees and others working at the premises must be informed of the risks and the preventive and protective measures in place and provided with adequate safety training. There are additional emergency measures that must be taken if there are dangerous substances present.

Failure to comply with the legislation is a criminal offence, punishable by fines or even a prison sentence. In this case, however, no enforcement action was taken against the Fire Service College as the failures had not resulted in any injuries or loss of life.

In Scotland, fire safety duties are contained in Part 3 of the Fire (Scotland) Act 2005, as amended, and the Fire Safety (Scotland) Regulations 2006.

The Government has guidance on making your premises safe from fire at

http://www.communities.gov.uk/publications/fire/regulatoryreformfire.

Contact Paul Mitchell (pm@mitchellwilde.com) if you would like individual advice on ensuring your business complies with health and safety law.