Directors - Be Careful What You Sign

The Court of Appeal recently handed down a decision which should convince directors to take great care when they sign contractual documents on behalf of their companies because if the contract contains a misrepresentation, they can in some circumstances be held personally liable for it by the courts. The fact that the contract may not benefit the director is not a defence.

In the case in point, a company entered into a contract to pay for goods it then received. A director of the company signed the contract knowing that the company was insolvent and would be unable to pay for the goods.

The Court of Appeal ruled that the director had made an implied misrepresentation to the supplier. Since he knew the goods would not be paid for, the Court found him personally liable for the sum owed, on account of his deceit.

The message for directors is to be careful what you sign. 'Limited liability' may not be limited if the court decides that the director knew that the company could not meet its obligations. This could apply in a variety of instances, for example where the company enters into a long-term agreement such as a lease of new premises.

Says Kamlesh Chandarana, "The Companies Act 2006 places a statutory burden on directors to adhere to certain standards and consider specifically the effects of their decisions in various ways. A part-time, non-executive or even ‘shadow’ director (one who has no official position in the company but whose decisions are normally followed) can be in the firing line when things go wrong just as surely as can the full-time working directors."

Is My Company Deposit Account Safe?

Following regular news stories on the instability of banks, the Government's decision to raise the amount of deposit that it will guarantee in the event of bank failure to £50,000 was welcomed by all. However, it has not been made clear if the guarantee under the Financial Services Compensation Scheme (FSCS) applies only to individuals or whether it includes company deposits as well.

The FSCS protects the deposits of small companies, which are those which meet two of three criteria:
- they have fewer than 50 employees;
- their turnover is not more than £6.5 million per year; and
- the balance sheet total is less than £3.26 million.

The £50,000 limit is also available for unincorporated organisations, partnerships and sole traders, but in the latter case the limit would apply in total to all (i.e. business and personal) accounts held by the customer with the same lender.

The deposits of larger companies are not covered by the scheme.

One possible area for concern is whether deposits held in different members of the same banking group are covered separately. In this case, if each of the banks is separately authorised by the Financial Services Authority, the FSCS would pay compensation up to the limit of £50,000 per person, per authorised institution. If each of the banks is not separately authorised but is covered by the parent company's authorisation, the FSCS would pay compensation up to the limit of £50,000 once, irrespective of with how many different group members a person held accounts.

Deposit takers in the Channel Islands and Isle of Man are not covered by the scheme.

Contact us for advice on all company law and directors' liability matters.

Limited Companies - Do They Really Offer Protection?

There is a common belief that limited companies offer limited liability in the sense that they offer an absolute discharge from liability for their shareholders - the shareholders' liability being limited to losing their investment in their shares. This is essentially correct, but only in so far as it applies to shareholders who are not also directors. This article is concerned with the more common circumstance in which a limited company is incorporated and the shares are owned by the directors, who also manage the company. This is the normal form of organisation in a new or small company.

But first, let us deal with one important circumstance in which a shareholder can have a liability to the company. This can arise where the shares are either not paid for at all or are partly paid for (e.g. 25p is paid towards a £1 share). In this case, the unpaid balance is a debt due to the company. In the event of the company 'going under' it is possible for the liquidator to demand from shareholders any unpaid balance on their shares.

The first and most common situation in which the 'limited' in ‘limited liabilit’' gets undermined arises through the normal operation of commerce. It is not uncommon for traders and quite normal for banks and other lenders to require directors of limited companies to give personal guarantees for all or a proportion of the company's indebtedness to them. If the company defaults on its debts, they then look to the directors for the shortfall. This situation can also arise by operation of law. For example, if a supplier's terms of trade mean they own the goods supplied until paid for and a director sells the goods on knowing they cannot be paid for, he may be personally liable for the shortfall. This is particularly common where vehicles are sold which are still the subject of HP agreements. Indeed, directors can become personally liable for their company's debts whenever there is 'wrongful trading' - when they allow the company to incur liabilities which they know (or should know) it will be unable to pay. Where a company cannot pay its debts and goes into liquidation, guarantees may be enforced even some years after trading ceases.

There are also particular rules relating to non-payment of tax liabilities (especially PAYE) that need to be borne in mind.

Another pitfall is when a director trades with his or her own company and makes a profit on that trading. This is a complex area, but is, in principle, unlawful and can lead to the director being sued for the profits.

Where a company suffers loss due to the negligence, neglect or criminal behaviour of a director, the director may be liable to be sued by the company. Most company insurance policies will cover this contingency (except fraud or criminal behaviour) but do check the wording of your ‘corporate all risks’ or ‘D&O’ policy.

Another pitfall is when a director improperly incurs liabilities in the company's name - for example, by ordering goods beyond his authority. In such circumstances, the 'long stop' of the company is to sue the director personally, as indeed suppliers may be able to if they remain unpaid.

The last major area in which 'limited' can become 'not limited' is when a director treats the company's assets as his or her own, for example by withdrawing 'dividends' without the proper resolutions and paperwork or which are in excess of the ‘available profits’. Directors do not own the assets of their companies. Where directors withdraw from a company assets or cash in excess of their contractual entitlement, a debt to the company results.

If there is a moral, it is that director shareholders who want ‘limited liability’ to mean what it says need to comply with all the necessary regulations and to get their paperwork right (especially as regards anything they take out of the company) and to make sure they take only such actions on behalf of the company as are permitted by its internal rules and by their contract.

Avoiding the End of Lease Blues

With the recession beginning to bite, many occupiers of rented property are looking to move to less expensive premises or reduce the space they currently occupy.

If you are thinking along these lines, here are some tips, which may help you determine your best course of action.

Read your lease. It is surprising how many times problems arise because the tenant isn't familiar with the lease. For example, most quarterly leases with a notice period require the tenant to pay the rent until the end of the subsequent quarter. Failing to give notice at the right time can be an expensive exercise.

Check the position on dilapidations. Hopefully you will have made a detailed schedule of the condition of the premises when you moved in. Agree with the landlord early on in the proceedings the dilapidations for which you are responsible - it may well be cheaper for you to make any necessary repairs than for the landlord to have them done and for you to then foot the bill.

Check the position as regards payment for utilities, rates and so on.

Remember that your landlord is likely to be a realist and may well prefer you (a known, good tenant) to stay in occupation at a reduced rent than for the premises to be unlet or let to a tenant of unknown quality. There may well be room for negotiation if you would really rather remain in situ at a lower rent than vacate the premises.

If you do move, make sure that you are not breaking your contract of employment with your employees (a modern contract should obviate this issue, but it can happen).

If you are assigning your lease, check the position as regards the guarantee of the incoming tenant's obligations. This can operate as a ‘double whammy’ as not only can you find yourself with an unexpected liability if the new tenant defaults, but your bank may well want to keep your account on a tighter reign while the potential liability hangs over you.

Moving premises is a serious business and should not be undertaken without the benefit of professional advice. We can advise you on any commercial property matter.

Arrears of Rent - A Landlord's Rights

With the economy in decline, commercial landlords can reasonably expect to face an increasing problem with rent arrears and breaches of lease terms by tenants. In such cases, a landlord has rights which can be enforced without a court order but, as in all such matters, it is important to take professional advice before you act.

When faced with arrears of rent, one possible solution is to exercise the remedy of distraint, the law relating to which has recently been revised. A landlord is entitled to enter a tenant's premises to seize goods of sufficient value to secure the payment of overdue rent. If the rent remains unpaid, the landlord can sell the goods distrained to pay the rent due. There are complex rules which limit which goods can be distrained and when, but it can be an effective remedy if used correctly.

The biggest problems with the use of distraint are that not only does it almost inevitably destroy any goodwill between the landlord and tenant, but also the seizure of goods often removes the only source of income for the tenant from which the rent might be paid.

Another possible remedy is that of forfeiture, under which the landlord enters the premises and repossesses them, terminating the lease. This remedy is normally only available for rent arrears, not for other breaches of the rent agreement. This has the effect of making the tenant's liability for rent terminate from the date the premises are taken over by the landlord. In the present market, finding another tenant may not be easy, a factor that should be borne in mind if forfeiture is being considered.

The right strategy to adopt towards any tenant demands careful consideration of the individual circumstances. We can advise you on your options and help you decide which approach to take.

Can’t Get Paid by A? Try B!

One of the less well-known ways in which a business or person who is owed money by someone who fails to pay can obtain payment is by the use of a Third Party Debt Order (TPDO). In essence, this is a court order which requires someone (B) who owes money to another (A) to pay you instead, when A owes a debt to you. Usually, B is a bank or building society.

A TPDO can be applied for at any time after you have obtained judgment against A in court. An order will not be made unless A has failed to pay the amount of the judgment when it was due or has failed to pay one or more of the instalments due under the terms of the judgment.

The application for a TPDO is examined by the court and, if granted, you and B will be sent a notice. A week later, the notice is sent to A. This stops A from being able to circumvent the order by moving cash out of an account before the order is put into effect.

Once notice of the order has been served on B, it serves to freeze money held on A's account on the day the notice is received by B. So, for example, if the order is received by B on Tuesday, money paid into the account on Wednesday will not be frozen. This makes the planning of the timing of service important.

At a later date, a hearing is held to confirm that the money frozen is to be paid to you.

If B is not a bank or a building society, they must let you and the court know within seven days if they claim not to owe A any money or to owe less than the sum claimed. If you wish to dispute this, you must file your written evidence with the court not less than 3 days before the hearing.

If B is a bank or building society, it will supply information regarding the accounts held by A and will confirm that the sum it holds on A's account is sufficient to pay the sum due or advise the balance if not. It will also advise if it is entitled to retain any sum to offset A’s liabilities to B.

A can file an objection to the order not less than 3 days before the hearing is due to take place. The objection must be in writing and A must send you a copy. The judge will hear A’s objections at the hearing. If A is an individual, rather than a business, and can prove that he and his family are suffering hardship in not being able to meet day to day living expenses as a result of an amount or amounts being frozen, then a hardship payment order may be made which will 'unfreeze' some of the frozen money. Where A is a business, it must prove that real prejudice would be suffered by not having access to the money.

A TPDO will not normally be issued where A has become insolvent.

If you are having trouble collecting debts due to you, contact us for advice.

Collecting Debts - What to do Next

If a business cannot obtain payment of a debt from a customer after the normal credit control procedures are exhausted, then it will need to consider taking further action to recover the sum due. Mediation with the debtor, involving negotiation through a third party, can be used to resolve the position, but if this fails other measures are available. These may involve using external debt collectors or starting court or insolvency proceedings.

Debt collection agencies generally have the time, expertise and resources to chase up the outstanding payment due and can act quickly. However, an agency's commission will typically be 8-10 per cent of the cost and perhaps more if it is an old debt. If you use a debt collection agency, it is worth checking that it is registered with the Creditor Services Association to ensure their methods and practices are reputable.

Taking formal legal action is generally more cost-effective for larger debts. The ‘small claims track’ can be used for debts under £5,000. This is a relatively simple process, not normally requiring legal representation, although professional advice is useful in preparation of evidence in suitable form. Debts exceeding £5,000 are pursued in court, the procedure used depending on the size of the claim. The court issues a summons to the debtor. If the debtor does not respond, judgment in default can be obtained, which automatically requires the debtor to make payment without considering the merits of the case. If the debtor contests the claim, a request for summary judgment can be made so the court can decide if the debtor has any legal basis for refusing payment. If the debtor admits the debt, no court hearing is necessary and enforcement action can be taken.

It is also possible to start bankruptcy proceedings for debts of £750 or more by issuing a statutory demand or, if the debtor is a company, a winding-up petition. A winding-up petition is more commonly used where there are several creditors and is generally more expensive than court proceedings. Failure to pay a statutory demand within 21 days is grounds for presenting a petition for the bankruptcy of the debtor.

Choosing how to proceed with collecting a debt will depend on factors such as the size of the debt and the cost (financial and time) involved. If you are having difficulty in obtaining payment from a customer, it is best to seek professional advice on how to proceed with your claim.

Directors’ Duties Under the 2006 Companies Act

The recession has coincided with a more stringent regime applying to the duties of directors, as introduced by the Companies Act 2006.

The Act was designed to modernise British company law, making it ’fit for purpose’ for the 21st Century. In particular, it has made several changes which affect directors. For example, the duties of directors are now specifically defined. They are:

• (S 171) The duty to act within their powers (the duty to adhere to the company’s constitution);
• (S 172) The duty to promote the success of the company. There are six things a director must consider here, including consideration of the company's employees, the long-term consequences of decisions, fairness to members (shareholders) and the impact of decisions on the community and environment;
• (S 173) The duty to exercise independent judgment. This is not as restrictive as it may seem, but means not being the 'yes man' of the person responsible for his or her appointment. It does not prevent having an interest in transactions nor relying on the opinion of an expert where appropriate;
• (S 174) The duty to exercise reasonable skill, care and diligence. This duty has particliar implications for non-executive directors, who can no longer afford to take a 'hands-off' approach;
• (S175) The duty to avoid conflicts of interest. This includes conflicts involving connected persons such as family members;
• (S176) The duty not to accept benefits from third parties; and
• (S177) The duty to declare an interest in transactions or arrangements. This includes the duty to declare interests of persons connected with the director.

Directors of companies should ensure that they and their fellow directors are fully aware of the provisions of the Act relating to their duties and comply with them.

Contact us for individual advice.

Partnership Dissolution - Rights and Responsibilities

When partners fall out, there can be many difficulties, especially if either side acts in a unilateral way.

What duties and obligations do a partner leaving a firm and the firm being left owe to one another?

Firstly, every partner owes fellow partners a duty of fidelity - in other words, to be honest in their dealings with each other and to safeguard their partners' interests. This does not end when the partnership ceases as regards partnership property and it should be respected by all during the period before the break-up of the partnership.

For example, a partner who is intending to leave should not make use of the partnership resources (employees, cars, computers, telephones etc.) to help set up in competition, nor should they pursue their new business objectives during the business hours of the partnership nor make use of information which belongs to the partnership. A departing partner should not attempt to entice staff or customers away from the firm. This is one of the main areas of dispute when partnerships break up as it is widely ignored. That this can be less than sensible is demonstrated by several cases in which ex-partners who ‘poached’ clients from their old firms have been required to account to them for all of the profits made from those clients for a period of time. This situation is specifically dealt with in the current Partnership Act, which requires partners who compete with their firms to account to them for all of the profits they have earned by so doing.

Attempting to entice employees to join a new firm without giving the required period of notice can lead to a claim for attempting to induce a breach of contract.

One notoriously problematic area is that of restrictive covenants, if any are included in the partnership agreement. If the agreement contains no restrictive covenant clauses, then none will be deemed to exist. Furthermore, if the clauses that are there are unreasonable, the courts will not enforce them. The outcomes of cases based on breaches of restrictive covenants are difficult to predict. For example, a covenant against setting up in competition within a mile may well be enforced, whereas one stipulating a twenty mile limit probably would not. The courts have, over time, given less and less hope to those wishing to rely on clauses that can be seen as reducing competition through restrictive covenants.

Where there are enforceable terms, an injunction may be sought to prevent a breach of the covenants or an attempt may be made to sue for the profits made as a result of the breach.

The likelihood of success in pursuing a claim will depend on the quality of evidence of the breach and the loss. It will also depend on the existence of a clear and unequivocal partnership deed outlining the responsibilities and rights of the firm and departing partners. Establishing the appropriate level of economic loss is difficult enough without the basis of the claim being unclear. We would be pleased to assist you in protecting the partners and the partnership by drawing up an agreement appropriate to your individual circumstances.

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 were payable to Kynixa by the three ex-employees.

We can advise you when drafting post-termination restrictive covenant clauses to ensure that they are tailored to cover the particular circumstances relating to the individual employee concerned.

The Recession - Keep an Eye on Your Lender!

With lenders trying every device to maximise their income, it is worth thinking about your banking facilities and what the future might hold.

Existing Loans and Overdrafts

The renegotiation of loans and overdrafts has been getting more difficult for some time, with lenders seeking increased margins, additional security and reductions in their exposure. One common gambit is to propose that the interest on a loan or overdraft facility should be based on a margin over LIBOR (the London Inter-Bank Offered Rate), rather than bank base rate. LIBOR is quoted for overnight rates, 3 month rates and 12 month rates. All of these rates have one thing in common: they are traditionally well above base rate, a fact that lenders may fail to highlight.

Future Loans and Overdrafts

It is not uncommon for a verbal agreement regarding the ability to draw down additional funds to be countermanded, so it is unwise to rely on anything which is not formally contracted in writing. In addition, if the lender becomes insolvent, all bets could be off regarding extensions of loans or facilities.

Other Facilities

The same logic applies to revolving facilities, such as stocking loans and factoring arrangements. The big downside here is that the reduction or withdrawal of funding may be sudden, leaving the business little time to make alternative arrangements - an outcome which may be catastrophic. It makes sense to review the terms of any revolving finance as a matter of urgency and to consider the possibility that access to it may be cut.

As a general rule, it is also now more risky to breach a banking covenant, as this may provide the lender with an excuse to review your agreement with it, to your disadvantage.

Contact us for assistance in all matters to do with the negotiation of funding and finance contracts.

Failure to Pay Instalments on Time Means Contract Void

When times are hard, there is always the temptation to delay payments to those owed money and, in many cases, the main disadvantages of this will be a cooling of one's relationship with the supplier and possibly some deterioration in service received

However, there are some payments for which 'time is of the essence' and, in such cases, failing to make the payment on time may have unfortunate results.

In a recent case, a buyer of a company agreed to purchase the shares in instalments and was taken to court by the vendor after failing to make the agreed payments. The contract did not have a clause which made the date of payment of the essence of the contract. The vendor alleged that the failure to pay the instalments as agreed breached the contract and entitled him to terminate it.

The vendor had the choice of either serving a notice making time 'of the essence' and requiring the purchaser to comply with the contract terms within a stated time, in which case failure to comply would terminate the contract, or, alternatively, if he was satisfied that the buyer's actions demonstrated an intention not to perform its obligations under the contract, the vendor would be entitled to terminate the contract.

In this case, the vendor treated the contract as terminated once the second instalment in payment for the shares was not received. He took possession of the company and managed it for his own benefit.

This action led to a predictable claim by the purchaser and counterclaim by the vendor.

The case originated in the Bahamas but went as far as the Privy Council, where the vendor's claim was upheld.

Says Kamlesh Chandarana "The case itself is unremarkable, but is important for two reasons. Firstly, it highlights the importance of careful drafting of contracts, especially those dealing with payments to be made in instalments. Secondly, it illustrates the fact that the courts will prefer to protect the right of the 'wronged' party to terminate a contract where payment terms are not met. This is particularly important in contracts of insurance - so make sure your premiums are paid on time. If you are late, you may find that the insurer terminates your cover, especially if you make a claim under the policy."

Failure to Reserve Rights Means Landlord's Plans Stymied

A landlord, which wished to add an extra floor to maisonettes it owned, recently came unstuck because the drafting of the leases for the maisonettes was insufficiently precise.

The landlord's attempt to develop the property was opposed by the top-floor tenant. Firstly, he argued that the roof space above his flat (to which he had no access) was part of the premises demised to him under the lease. Secondly, he argued that the development would result in him suffering a loss of light, because his flat had three skylights.

The court agreed that the tenant's lease did include the roof space and roof, despite the fact that there was a landlord's obligation to repair the roof within the terms of the lease. The lease referred to the roof and walls of the premises and, furthermore, the skylights were clearly integral to the design of the tenant's flat.

The tenant's first ground for objection was successful. Although this meant that his argument regarding loss of light did not need to be heard, it is likely that the tenant would have been successful on that ground also.

In this case, the original lease had clearly not been drafted with any thought of a future addition of an extra storey in mind. Had it been, the landlord would have reserved sufficient rights to enable it to undertake the works. The tenant was therefore in a position to prevent the development.

When negotiating leases or contracts it is important to think ahead to make sure that any future rights required are preserved as well as those needed presently. Contact us for assistance in the negotiation of legal agreements and the preparation of all necessary documents.

Fitness for Purpose - Knowledge Critical

One of the most important principles of law governing buyers and sellers is that an item sold must be fit for the purpose for which it has been supplied. It is unusual for a 'fit for purpose' argument to arise in a building dispute, but cases do crop up from time to time.

In a recent instance, a contractor had engaged a subcontractor to supply a pipe to be used in a tunnel. When it was laid, the pipe was bedded in with foam concrete. Due to the highly alkaline nature of the concrete, the pipe burst four years after it was laid. This caused extensive damage and loss to Thames Water, which owned the tunnel.

The contractor who laid the pipe settled with Thames Water and sought to recover his losses from the subcontractor who supplied the pipe, on the ground that it was not fit for purpose since it was not resistant to the attack. It was argued that the Sale of Goods Act 1979 created the obligation on the supplier to supply a pipe that was reasonably fit for the purpose.

The problem with the contractor's argument was that the pipe supplied by the subcontractor was specified to be fit for the purpose of carrying water. It could not be shown that any representation had been made that the pipe was fit for use in foam concrete nor, indeed, that the subcontractor knew that it was to be so used. Nor was there any reason why the subcontractor should have known the likely effect of the alkaline environment on the pipe.

Had the contractor specified that the pipe must work in a particular environment, the argument might have succeeded. However, since the pipe was fit for the purpose specified, the claim failed.

"This case illustrates the critical importance of making sure your contracts are carefully worded and include any necessary conditions," says Kamlesh Chandarana. Contact us for assistance with your contractual negotiations.

Make Your Arguments at the Right Time

In a recent case, a claim was made for summary judgment after an adjudicator made a decision regarding a construction dispute. The defendant tried to resist the judgment by claiming that it had received a large amount of new evidence, relating to the claim, which had not been taken into account in the adjudication process and that this omission prevented it from being able to defend the claim effectively. It was argued that this constituted a denial of natural justice. The contention was that the claim was not 'crystallised' and thus the adjudicator did not have jurisdiction over it.

One of the observations of the Court was that a failure to complain about a breach of natural justice during the course of the adjudication will be persuasive evidence that there has been no breach. Therefore, making that argument to defend against the subsequent enforcement proceedings will be a lost cause.

The moral of the story is to be sure to make your arguments at the right time. Failing to advance early on in the proceedings a line of argument on which your case depends can be an expensive error.

We can advise you on all commercial and civil disputes.

Guarantee Clause Not Linked to Assignee

With times being tough, unexpected traps in agreements are coming to light with greater regularity. A recent landlord and tenant case shows the sort of thing that can happen if insufficient attention is paid in negotiation to clauses that might seem unimportant at the time.

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

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

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

The Court of Appeal did not accept this argument. The original tenant was liable under the guarantee. The liability of the original tenant as guarantor was separate from that of the assignee.

‘Your potential responsibilities under a guarantee if you assign a lease may not be uppermost in your mind when you are negotiating to take on new rented premises,� says Kamlesh Chandarana. �However, attention to detail pays dividends and, in the present environment, landlords may agree to limit or remove guarantee clauses if pressed.’

Possession is 9/10ths of the Responsibility

When someone holds goods belonging to someone else, (a 'bailee' in legal terminology), that person owes the other person a duty of care. A recent case shows that such responsibilities should not be taken lightly.

The circumstances were that a company named Matrix had sent 5,000 Bluetooth adaptors worth £375,000 by airfreight to Hong Kong. It used a company called Birkart to ship them. Birkart's subcontractor mistakenly delivered them to a warehouse belonging to Uniserve. They were stolen from the warehouse. Matrix sued Uniserve and Uniserve sued Birkart, Uniserve alleging that there was an implied contract between it and Birkart which was governed by the standard British International Freight Association terms.

Uniserve was not involved in the transaction but became a bailee. It therefore had a responsibility to the owner of the goods (Matrix) to exercise reasonable diligence and skill to prevent the theft.

The legal arguments were many and varied, but the court ruled that as Uniserve was a bailee, it bore the burden of proof to show either that it had taken all reasonable steps to take care of the goods or, if it had not done so, that the failure was not what caused their loss. The judge enumerated a list of failures by Uniserve which persuaded him that had the company acted correctly, the goods would not have been stolen but would have been collected by Birkart and delivered to the airport the same day. Accordingly, Uniserve's procedural failures caused the loss and it was therefore liable to Matrix.

Uniserve's claim against the carrier failed. There was, as a matter of fact, no contract between it and Birkart.

The importance of this case is that it emphasises that responsibilities can arise unintentionally. In similar circumstances, you should make sure that action is taken promptly to advise those involved of the error and ensure that the goods are protected. If such circumstances are a possibility, it is also worth reading your commercial all-risks policy carefully to check that your insurance covers you.

Who is Responsible? Look at the Contract

In a contract, who is responsible for what is determined by the wording which is why it is crucial to get the wording right from the outset. In a recent case, a company bought oil on a standard FOB (free on board) contract.

The oil was of satisfactory quality when it was put on the ship, but not when it arrived in port after an uneventful passage at sea. The buyer held the seller responsible, implying a condition into the contract that the oil would be fit for purpose on delivery. The seller denied responsibility, pointing to a clause which excluded all guarantees, warranties or representations, express or implied, of merchantability, fitness or suitability of the oil.

The case turned on the wording of the contract. The court ruled that there was an implied term (a �condition�) in the contract that the oil would be of satisfactory quality on delivery to the port after a normal passage at sea. The exclusion clause did not, as stated, exclude a change in quality of the oil. The effect of the condition was that the vendor was responsible for the oil failing to be of merchantable quality at the port of discharge.

Kamlesh Chandarana can advise you on any aspect of contract law.

Reliance on Pre-Contract Negotiations Revisited

The 2007 case involving Persimmon Homes and landowner Chartbrook Ltd. has now been decided in the House of Lords. The case turned on the meaning of an agreement which contained a �grammatical ambiguity�, which applied to a formula used to calculate the sum due under a property contract. This led Chartbrook to claim more than �4 million from Persimmon. Persimmon calculated its liability at under £900,000, basing its argument on pre-contract negotiations.

The Court of Appeal had rejected Persimmon�s claim, ruling that relying on definitions of terms agreed in pre-contract negotiations was only appropriate when a claim for rectification was made. Rectification is the phrase used for a contract being altered to mean what both parties to it thought it meant originally. No claim for rectification of the contract had been made in the initial case, so the Court could not entertain one. In any event, the meaning of the contract was clear.

Persimmon appealed to the House of Lords, which overturned the decision of the Court of Appeal. It ruled that interpreting the contract under the ordinary rules of syntax made it commercially nonsensical. The contract had to have the meaning that a reasonable person would have understood to be the intention of the parties to it when it was made.

We can assist you to make sure that the contract you sign incorporates the exact terms agreed in your negotiations.

Extended Audit Powers for the ICO

From April 2010, extended data protection audit powers will be available to the Information Commissioner's Office (ICO) under the Coroners and Justice Act 2009.

The auditing process allows the ICO to assess whether organisations are processing personal information in accordance with the Data Protection Act 1998 (DPA). Where it has been identified that personal data is at risk, the ICO will continue to request consent to carry out an audit. However, where an organisation refuses to cooperate with the auditing team and there is a significant risk of compromising personal information, the ICO will have the power to serve a compulsory audit notice or an Assessment Notice.

The ICO has developed a Code of Practice for Assessment Notices, which sets out the framework for how audits will be conducted when an Assessment Notice has been served on an organisation.

Initially, the ICO will only be able to conduct compulsory data protection audits on central government departments but will, where it can make a good case, seek to extend its powers to undertake compulsory audits in the rest of the public and private sectors. The Code contains advice on the ICO's auditing framework relevant to all public and private sector organisations and will apply whether an audit is carried out with consent or not.

The ICO does not intend that 'consensual' and 'compulsory' audits will lead to formal enforcement action. Follow up may be by way of obtaining written assurances from the data controller that remedial action has been taken, or a further audit. The Code states that the Information Commissioner will not impose a monetary penalty on a data controller where a breach of the DPA is discovered in the course of carrying out an audit. However, the Commissioner reserves the right to use any of his powers in the case of any identified major non-compliance where the data controller refuses to address a recommendation within an acceptable timescale.

In Brief - 24/7 WebCHeck Service

Companies House has announced that from now on its 'WebCHeck' company search service will be available all day every day…so, if a company owing you money is causing you to lose sleep, you can at least download their accounts in the middle of the night.

The WebCHeck service is available at Companies House.

Landlord's Intention Must Be Long Term

When a tenant's lease is governed by the Landlord and Tenant Act 1954, the landlord has limited grounds for refusing to renew the lease. One possible ground is that the landlord wishes to make use of the premises for its own business purposes

In a recent case, a tenant who had applied for a new lease had his application opposed. The landlord argued that he wished to use the premises in order to run a retail news agency. He offered to give an undertaking that he would not use the premises for any other business purpose for a period of two years.

The tenant believed that the landlord wished to have possession of the premises so that he could sell them, even though the property was not on the market and no prospective buyer was in place.

The legislation does not specify for how long a landlord must intend to occupy premises for the purposes of his business in order to be able to oppose the renewal of a lease. However, the Court of Appeal considered that if the landlord's intention was to sell the property within five years, he did not intend to occupy it for a long enough period to satisfy the 'for the purposes of his own business' condition.

The undertaking offered by the landlord merely prevented him from running any other type of business and was limited to two years. It did not require the landlord to trade and the landlord had closed an adjacent business he owned.

On the balance of the facts before it, the Court ruled that there was sufficient ground for doubting the landlord's intention to use the property for his own business purposes and the application to refuse a new lease to the tenant therefore failed.

Landlords who wish to obtain possession of leases covered by the Act can expect the courts to adopt the five-year time period referred to above as a rule of thumb for determining whether or not they have successfully made out the case that they require the premises for the purposes of their own business.

Massive Litigation Shake-Up Proposed

Lord Justice Jackson's eagerly awaited final report outlining proposed changes to the British system of civil litigation has been published and promises a massive shake-up of the current system, which is considered to impose excessive costs on losers in litigation.

Among the changes proposed are:

• The end of the 'loser pays' principle in British law. A winning defendant's costs will normally no longer be payable by the claimant in those instances in which the claimant is normally an individual and the defendant an organisation;
• The end of the current system of 'no win, no fee' agreements by making lawyers' success fees and the costs of 'after the event' insurance premiums paid irrecoverable from the losing party. No win, no fee was widely regarded as a panacea when introduced, but in reality has proved problematic; and
• Allowing lawyers to charge contingency fees, by which they receive a percentage of the judgment sum and take the risk of not being paid if the case is not won. In effect, this will replace no win, no fee and should act as a brake on pursuing weak cases.

The current pre-action protocols are to be retained and judges are to be encouraged to become more involved with cases to assist in controlling costs.

The 584-page report can be found on the judiciary.gov.uk web site.

Misrepresentation Leaves Burgled Company Uninsured

Theft of goods by burglars from a secured cage in a warehouse may seem to be a straightforward matter as far as making an insurance claim goes, but a recent case shows otherwise.

The insured held goods including cigarettes and tobacco and had a standard commercial risks policy which covered losses due to theft. The high-value goods were stored in a cage inside the general warehouse on an upper floor.

When burglars stole them, the company claimed on its policy and the insurer refused to settle the claim.

Firstly, the insurer claimed that the company had failed to carry out the necessary maintenance of the security equipment and alarm which was required under the policy.

In the view of the court, such a clause was only breached if the insured became aware of defects and then failed to put them right or was reckless as to whether there were defects or not. Otherwise, the requirement that defects be rectified promptly would absolve the insurer from liability in almost all such cases.

However, the insurance policy also contained a stipulation that the theft of cigarettes and tobacco outside business hours would not be covered unless these were kept securely and on the ground floor. The stipulation had been lifted once the insurers had received assurances from the insured that necessary improvements to the security arrangements had been made. Here, however, the company had made a material misrepresentation. Accordingly, the insurers were entitled to rescind the variation to the original policy with the result that the theft was not insured.

Says Kamlesh Chandarana, "Insurers are never keen to pay out on policies and it is important to have a thorough understanding of the terms of your policy."