May 2008 Newsletter

Partnership Can be Sued in its Own Name

A recent decision by the Court of Appeal has established that a partnership can be held liable in criminal proceedings as a separate entity from its individual partners. The individual partners’ assets are, however, protected unless complicity or negligence can be shown.

The case concerned W. Stevenson & Sons, a partnership involved in fish auctions, which was convicted at Truro Crown Court on various counts under the Sea Fishing (Enforcement of Community Control Measures) Order 2000. W. Stevenson & Sons, along with the eight partners, sought leave to appeal against the conviction and were refused.

The Court of Appeal held that as business activities were conducted in the name of the partnership and the partnership had identifiable assets that were distinct from the personal assets of each partner, there was no reason why the partnership should not be treated for the purposes of criminal law as a separate entity from the individuals making it up.

Given that the 2000 Order draws a clear distinction between a partnership and an individual partner, the view of the Court was that partnerships can be liable as independent entities. It followed that, where a partnership alone was indicted, any fine imposed could only be levied against the assets of the partnership.

The Court further held that only the convicted party could seek leave to appeal and, since the individual partners were joined with the partnership in the appeal application, they were not defendants and therefore not entitled to appeal. The partnership had not shown any arguable ground for appealing against the conviction so the application was refused.

Says Paul Mitchell, “Whilst the decision meant that the partners’ personal assets could not be confiscated, those of the partnership could. The decision could have wide implications for how partnerships hold their assets.”

Property

Contractor and Employer Need Certainty

Construction contracts usually provide for payments to be made in stages, with the amount payable being based on the amount of work certified as complete at the appropriate time. Where project milestones are not met, the contract will normally provide that extensions of time can be given, which can affect the amount of payment to be made under an interim certificate of work done.

In a recent case, a contractor’s work was behind schedule and the architect supervising the project issued a certificate of non-completion. A notice of intention to withhold payment was issued by the contractor’s employer eight days before the relevant stage payment was due and three days later the reduced payment was made. The sum deducted was £61,000 and the payment made was £126,000. Three days after the payment was made (i.e. two days before the final date for payment of the stage payment) the architect issued a retrospective notice of extension, which would have made the appropriate deduction only £12,000. The contractor carrying out the work argued that the stage payment should be increased by £49,000 as a result. The contractor’s employer paid the further £49,000, but only after the contractor had issued a default notice. The contractor considered this action to have brought the contract to an end as the employer had failed to pay the full sum, certified under the interim certificate of work done, by the due date.

The House of Lords was faced with the question of whether or not the retrospectively issued interim certificate had affected the employer’s right to rely on the previously issued certificate of non-completion.

The Lords ruled that a distinction must be made between the factual basis for the payment and the legal basis. The fact that a subsequent event had changed the factual basis under which the deduction was made did not change the legal basis under which the employer made the payment. Unless the contract specifically stated otherwise, the employer was not required to make the further payment of £49,000 immediately once the architect had granted an extension of time. The contract anticipated that shortfalls would be picked up in later certificates. To decide otherwise would make both parties to the contract subject to an unacceptable amount of uncertainty since neither would be able to rely on a notice as a conclusive statement of the position.

Says Louise Madely “Construction contracts can present numerous and sometimes formidable issues as they progress. Both the contractor and employer need as much certainty as possible. We can assist in the negotiation of any construction contract and in the drafting of any special contractual terms which may be required.”

Guidance on Letters of Intent

Letters of intent are widely used in the building trade, because it is normal for both developer and contractor to wish to make progress on a building project without having to wait until the formal contractual arrangements have been fully agreed. However, letters of intent are fraught with possible pitfalls and have led to a procession of cases coming before the courts. The best way to ensure their successful use is to take advice to ensure the drafting of any documentation is as tight as possible.

Following yet another recent case dealing with a dispute (this time involving more than £1 million) over work done under letters of intent, the court has issued guidance over their use.

The recommendations are that any letter should:

• state clearly whether it is intended to be binding or non-binding;
• state what the rights of the respective parties are in the event that a formal agreement is not subsequently reached. In particular, care should be taken to ensure that the method of dealing with any dispute and the effects of termination are clearly set out;
• set out whether it is intended to constitute a contract under the Construction Act (and if it is not so intended, care should be taken that the wording does not unintentionally create such a contract); and
• set out any financial, time or other limits which apply to the work done by the contractor under the letter of intent.

We can assist you in making sure that your letters of intent create the rights and obligations that you intend.

Contact Louise Madeley, (lm@mitchellwilde.com) for advice on any commercial property matter.

Tax

Tax on Capital Gains – How Entrepreneurs’ Relief Works

From 6 April 2008 disposals of qualifying businesses and business assets are eligible for Entrepreneurs’ Relief.

In simple terms, it allows business owners to reduce their Capital Gains Tax liability to the equivalent of 10 per cent of the chargeable gain.

The following notes will give you some idea of the conditions attached to Entrepreneurs’ Relief. The list is not exhaustive.

1. Relief is only available to individuals;
2. Disposal can include all or part of a business;
3. Disposal must include the sale of shares in the owner’s company;
4. The person making the disposal needs to own at least 5 per cent of the voting shares and be an officer or employee;
5. The company must be a trading company; and
6. All qualifying conditions must be met for at least 12 months.

Relief does not apply:

• to the sale of assets without the sale of the business; or
• on the cessation of trade.

The relief will be available to set off against any number of qualifying gains up to a lifetime limit of £1 million.

Tax Clearances – Procedures Improved

A tax clearance is a procedure by which a taxpayer considering making a transaction obtains the agreement of HM Revenue and Customs (HMRC) that the tax effects of the transaction are what the taxpayer believes them to be. A clearance allows certainty in the tax treatment to be obtained before the transaction takes place.

It was announced in the 2007 Pre-Budget report that improved procedures for clearances would be made available to all businesses, with effect from 1 April 2008. HMRC have produced a guidance note on the revised clearance process.

Obtaining a clearance is often advisable when a transaction’s tax consequences are ambiguous or debatable. When a clearance application is sought, HMRC have stated that they aim to give a decision within 28 calendar days, although in complex cases this may take longer.

Whilst it is unwise to let the tax tail wag the dog, the new procedure allows smaller businesses to obtain a degree of certainty, regarding the tax effects of transactions, which was not available hitherto.

Tax Briefs

HM Revenue and Customs (HMRC) have issued several releases recently, dealing with a number of areas of tax. Here are the ones of most relevance to most businesses.

HMRC have announced that local agreements, made between some employers and their tax offices, which do not comply with HMRC’s national PAYE operating guidelines, are being discontinued from 6 April 2008. If you have agreed a procedure which does not comply with the PAYE rules, the time to change it is now.

With regard to VAT, HMRC have issued a revised notice 726, which is applicable to traders in electronic goods that are commonly used in ‘carousel frauds’. The notice explains how a business can be made jointly and severally liable for the unpaid VAT of another VAT-registered business when buying and/or selling specified goods.

New rules have also been introduced (from 6 April 2008) which change the taxation treatment of shares and options held by employees who are not UK domiciled or ordinarily resident in the UK.

Furthermore, the seemingly never-ending saga of the taxation of non-domiciles has taken another turn, with changes having been made to HMRC’s guidance. See

http://www.hmrc.gov.uk/cnr/res-dom-faqs.htm.  Contact David Wilde for advice on any tax matter.

Company Law

Company Accounts – New Disclosure Requirements

The Companies Act 2006 has led to a number of changes in accounting requirements for companies, chief amongst which are the removal of the need to hold an annual general meeting and the change in the filing deadline for private companies to nine months after their financial year end. Public companies must file their accounts within six months of the year end and listed companies within four months.

Companies which do not hold annual general meetings must send out to members annual accounts, or summary financial statements if appropriate, by the time these are due to be filed with the Registrar of Companies.

Other important changes are the removal of the option not to prepare group accounts for medium-sized groups and the new requirement that medium-sized companies must disclose their turnover. There is, however, no need for an analysis of turnover.

Auditors Seeking Limitation of Liability

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 for audit work, with the agreement of their audit client, are now in force. However, because the Financial Reporting Council is delaying the provision of guidance on the form such agreements should take, it is likely to be some time before your auditor proposes a ‘liability limitation agreement’ to you.

Competition Law

Construction Companies in Price Rigging Row

Following one of the largest ever investigations under the Competition Act, the Office of Fair Trading (OFT) has issued a Statement of Objections (SO) against 112 firms in the construction sector in England that it alleges have engaged in bid rigging activities and, in particular, in ‘cover pricing’.

Cover pricing occurs when one or more of the parties bidding for a contract collude with a competitor during the tender process in order to obtain a price or prices which are intended to be too high to win the contract. The tendering authority, for example a local council or other customer, is left with a false impression of the level of competition and this may result in it paying inflated prices.

In addition, the SO formally alleges that a minority of the construction companies have entered into one or more arrangements whereby the successful tenderer would pay an agreed sum of money (known as a 'compensation payment') to the unsuccessful tenderer. These more serious forms of bid rigging are usually facilitated by false invoices. 

The allegations cover a range of projects, including tenders for schools, universities and hospitals.

The 112 parties concerned now have the opportunity to make written and oral representations in response to the case set out by the OFT. These will be taken into account before a final decision is reached as to whether competition law has been broken and as to the appropriate amount of any penalties the OFT may decide to impose on each of the firms concerned.

For more information, see http://www.oft.gov.uk/news/press/2008/52-08.

Intellectual Property

High Court at Loggerheads with UKIPO Over Software

The High Court has been busy overturning decisions of the UK Intellectual Property Office (UKIPO) regarding the patenting of software applications.

UKIPO has been refusing patent applications based on its interpretation of the Patents Act 1977, which excludes from patentability computer programs and business methods to the extent that a patent or application relates to that thing as such. In patent terminology, such material is ‘excluded matter’. UKIPO interprets this strictly, looking at the structure of the thing being patented in applications which involve software, rather than at the invention as a whole. If the patent application involves software, UKIPO is likely to refuse it.

A four-stage test was proposed for determining whether applications for patents incorporating software or business methods should be excluded. The stages are to:

1. Properly construe the claim;
2. Identify the actual contribution;
3. Ask whether it falls solely within the excluded subject matter; and
4. Check whether the contribution is actually technical in nature.

The courts, however, are taking a more holistic approach. This is evidenced by a recent case in which a patent was refused by UKIPO for a new method of identifying customers for casinos from encrypted credit card information, without the need to decrypt the information. In the view of UKIPO, this was a business method or computer program and thus excluded. The court did not agree. The patent was for a technical process that had a business application. The application would have succeeded had its wording been sufficiently precise. As it was not, the applicant was granted the right to resubmit the patent application.

Another recent case also saw UKIPO’s rejection of a patent application overturned. It had refused to grant a patent in respect of a software application that solved a technical problem relating to the storage of data on computers. The court rejected the approach that treated all computer programs and software as being excluded matter. In this case, the technology had technical content that made it more than a mere computer program ‘as such’. It is understood that UKIPO intends to appeal this decision.

It is worthy of note that as far as European patents go, the authorities in other EU countries are adopting the more liberal view of the UK courts.

Says David Wilde, “Until such time as UKIPO and the UK courts adopt a common approach to this problem, there will be uncertainty. However, just because an invention is substantially software-based does not necessarily mean that it will never be patentable. We can assist you in protecting the intellectual property of your business.”

Contract

Genuine Counterclaim Prevents Winding Up

British law does not support the concept of a penalty when contract terms are not complied with. The right of the wronged party is to be compensated so that they are in the same position in which they would have been had the other party not broken the contract. So, when a claim arises under which compensation is sought, one of the first issues is to examine whether the claim constitutes, in effect, a penalty (in which case the court will not enforce it) or is for reasonable recompense, in which case it can be enforced.

It is common in construction disputes for a claim to be met by a counterclaim and where this occurs, the reasonableness of both claims must be considered.

In one such case, a groundworks contractor delayed in carrying out its obligations under a contract. The company for which it was doing the work did not pay all the invoices raised by the contractor on the basis that the delay in completion of the work had caused it to incur substantial extra financing costs. The contractor issued a statutory demand for payment. A statutory demand is a device which allows the person or firm owed the money to apply for a winding-up or bankruptcy order against the debtor if the payment is not made within 21 days.

The company went to court to obtain an injunction to prevent the contractor from presenting a winding-up petition and presented a counterclaim which reduced the sum owing to the groundworks contractor to less than nil.

The court accepted that the counterclaim was genuine and granted the injunction restraining the winding-up petition.

Says Paul Mitchell, “Receiving a statutory demand for payment can be very unsettling. When one is received, it should be dealt with as a matter of urgency. However, it is not uncommon for statutory demands to be used in an attempt to browbeat the debtor into paying sums which are not properly due. If you receive a statutory demand, contact us for advice straight away.”

Insolvency

Insolvency – Directors Have Benefit of Doubt

The Insolvency Act 1986 requires that the books and records of an insolvent company must be handed over by the company’s officers to the insolvency practitioner appointed to deal with the insolvent company’s affairs. Failure to do so is an offence, but there is a statutory defence to the charge, which is available when there is no intent to defraud the creditors. Failure on the part of a director to deliver up to the liquidator all documents belonging to the company that he is required by law to produce can lead to a fine or imprisonment.

Recently, the court considered the question of on whom the burden of proof was placed when the statutory defence was claimed. In the view of the court, the company’s officers were likely to have a better knowledge of the circumstances which led to their non-compliance with the demand for the records than did the prosecution. The presumption of innocence therefore applied and the prosecution had to prove its case on the balance of probabilities.

Says Paul Mitchell, “Although the penalties under the Act for non-compliant officers (a term that includes shadow directors) are severe, this case illustrates the point that proceedings against the officers of an insolvent company can be successfully defended when the circumstances are appropriate, which will come as a relief to directors of companies facing insolvency. If you are an officer of an insolvent company – or the advisor of such a company and are likely to be regarded as a shadow director – it is important to take professional advice as early as possible when insolvency is anticipated.”

Data Protection

Dealing with Data Loss

The loss of personal data is a regrettably common occurrence. Any organisation which knowingly suffers a loss of data on its customers, suppliers or members (e.g. employees) needs to consider carefully what action to take.

The Information Commissioners Office (ICO) has recently issued guidance for organisations that lose personal data, having reported that it has been notified of nearly 100 such incidents to date.

One of the less intuitively obvious suggestions is to think carefully about whether all the potentially affected people need to be notified. For example, notifying all your customers about a security glitch which affects only a small proportion of them may produce a flood of enquiries and requests for further information from unaffected people, as well as possibly undermining their confidence in your organisation.

What is advisable is to obtain an accurate understanding as soon as possible of the scale of the loss and the potential impact on the people whose personal information has been lost. For example, if the information is such as to make identity fraud a possibility, it is likely to be more important to notify the people concerned than if the lost information is simply a list of names and addresses (which could be obtained easily from other sources).

The ICO advises that there are four important elements to consider when creating a breach management plan. These are

1. Containment and recovery;
2. Assessment of ongoing risk;
3. Notification of breach; and
4. Evaluation and response.

The guidance is recommended reading for any organisation which holds personal data and should be considered as part of your data risk management strategy. It can be found at

http://www.ico.gov.uk/upload/documents/library/data_protection/practical_application/guidance_on_data_security_breach_management.pdf.

Reference should also be made to the ICO’s good practice guides on data security management at

http://www.ico.gov.uk/Home/what_we_cover/data_protection/guidance/good_practice_notes.aspx.

In April, the Financial Services Authority published its report on data security in financial services. The report contains much useful information and advice on the maintenance of good data security. See http://www.fsa.gov.uk/pubs/other/data_security.pdf.

Data security is an important but widely neglected issue for organisations in general. Failure to follow adequate data protection procedures can have severe consequences, not only from the point of view of fines, but also loss of reputation and possible claims for losses suffered by those whose data has been compromised. We can assist you in helping to make sure that your legal risks due to data loss are minimised.

Environment

Site Waste Management Plans

Construction clients are reminded that the Site Waste Management Plans Regulations 2008 came into force on 6 April 2008. In accordance with these Regulations any client intending to carry out a construction project on one site with an estimated cost greater than £300,000 must, before work begins, prepare a Site Waste Management Plan (SWMP). SWMPs apply to all aspects of construction work, including preparatory work such as demolition and excavation, and record the amount and type of waste produced on a construction site and how it will be reused, recycled or disposed of.

The aim of the Regulations is to encourage the use of materials and methods of construction that produce the minimum amount of waste, to increase the amount of construction waste that is recovered, re-used and recycled, thereby improving materials resource efficiency, and to prevent illegal waste activity by requiring that waste is disposed of appropriately, in accordance with the Waste Management Duty of Care provisions.

The Regulations will not apply to projects planned before 6 April 2008 as long as the construction work begins before 1 July 2008.

Tools to assist in developing and implementing a SWMP and guidance can be found at http://www.defra.gov.uk/environment/waste/topics/construction/pdf/swmp-toolkit.pdf.

Employment Law

Age Discrimination – Young Workers

The Employment Equality (Age) Regulations 2006 make direct and indirect age discrimination illegal in an employment context, unless the treatment can be objectively justified. The legislation applies to discrimination against young as well as older workers.

Recently, a woman who claimed that she was dismissed for being ‘too young’ won her claim of age discrimination (Wilkinson v Springwell Engineering Limited).

Leanne Wilkinson was 18 years old when she began working for Springwell Engineering Limited, in Newcastle upon Tyne, as an office administrator. She was dismissed without notice during a three-month probationary period and asked to leave the premises immediately.

Miss Wilkinson claimed that her employer told her that it needed an older, more experienced person to do the job. Springwell Engineering claimed that she was dismissed on grounds of capability.

The Employment Tribunal upheld Miss Wilkinson’s claim. The company had relied on a ‘stereotypical’ assumption that capability equals experience and experience equals older age. There was also a lack of any ‘orthodox procedures’ when recruiting Miss Wilkinson and when her employment was terminated.

Miss Wilkinson was awarded £5,000 for injury to feelings, approximately £5,000 for loss of earnings and two weeks’ pay because the company had failed to provide her with full written particulars of her employment. The award was increased by 50 per cent because the employer had failed to follow statutory procedures. In addition, the company was ordered to provide any prospective employers with a truthful reference stating that Miss Wilkinson’s dismissal was due to a breach of the age discrimination regulations, not that she was dismissed on capability grounds.

Employers are reminded that employees do not have to have worked for a specified period before they are entitled to bring a claim for discrimination. Equal opportunities training should be given so that stereotypical views linking age with competence do not go unchecked, leaving you open to a claim.

Contact Paul Mitchell for advice on any employment law matter.

Health and Safety

Pool Cars – Are They Safe?

Approximately one third of all road traffic accidents involve someone who is at work at the time. Following a series of checks carried out by its examining engineers on over 21,000 pool cars, the RAC has reported that nearly a fifth of pool car fleets may not be roadworthy.

The investigation found that:

• 16 per cent of the pool cars examined were unroadworthy;
• almost 8 per cent did not have the correct fluid levels;
• 14 per cent did not have the correct tyre pressure or tyre tread; and
• 19 per cent did not have a full service history.

The findings suggest that many pool cars are not undergoing basic checks and maintenance or regular servicing.

Businesses that operate a car pool for employee use should have procedures in place to ensure that the vehicles are well maintained to reduce the risk of an accident. Routine maintenance and safety checks should be recorded and a full service history kept for each vehicle.

Says Paul Mitchell, “With the introduction of the Corporate Manslaughter Act on 6 April 2008, businesses which adopt a cavalier attitude to any aspect of workplace health and safety are walking a tightrope. We can review your health and safety policies and procedures to help you minimise the legal risks to your business.”