The Regulations apply to a “relevant transfer”, which covers two types of event:

•         a transfer of a business, undertaking or part of a business or undertaking where there is a transfer of an economic entity that retains its identity (essentially the sale and purchase of an identifiable part of a business).

•         a customer engaging a contractor to do work on its behalf, reassigning such a contract or bringing the work “in-house”. There must be an organised grouping of employees whose principal purpose is carrying on the relevant activities on behalf of the customer and the activities must not consist wholly or mainly of the supply of goods for the customer’s use.

It is the second type of event which is, in effect, an outsourcing. However, it is to be noted that the Regulations will not apply to the second type of event if the activities concerned “consist wholly or mainly of the supply of goods” for the customer’s use. Such a state of affairs arose in the recent case of Pannu and others v Geo W King (in liquidation) before the Employment Appeals Tribunal.

The claimants were all employed by Geo W King Ltd (In Liquidation) (GWK) on an assembly line producing van parts for IBC Vehicles Ltd (IBC). GWK went into liquidation and the claimants were dismissed. IBC then entered into a contract with another company, Premier, to produce the relevant parts. Premier employed one of GWK’s workers, a supervisor, but none of the others.

The Employment Tribunal held that the employment contracts of the claimants did not transfer to either Premier or IBC as the activities involved consisted wholly or mainly of the supply of goods. On appeal the claimants argued that the facts pointed clearly to the conclusion that the activities were in truth the supply of services, rather than goods. The Employment Appeals Tribunal disagreed, holding that whilst the employees were providing a service to their employer, its activities did indeed amount to the supply of goods – specifically the supply of finished goods to IBC.

In addition, any change in the arrangements when Premier took over was irrelevant: either the nature of the activities changed, in which case the requirements of the Regulations were not met, or they remained the same, in which case a finding that GWK was providing goods meant that the Regulations did not apply.

It is clear that there are some advantages to characterising an outsourcing as principally a supply of goods if this is possible in the circumstances. Often this will not be the case, but it might be unwise on some occasions to wrap in unnecessary services to an outsourcing where the principal undertaking is to provide goods, since doing so might bring in the complexities of TUPE when, with some forethought, they might properly be avoided.

© Taveners 2012

The facts

In this case S owned 68.8% of the shares and was chairman of CH Ltd. The second director was B, who was described as “Group Managing director” in his employment contract, and B held the remaining 31.2% of the shares. The third director, H, the Group Financial Director, held no shares. The articles of CH Ltd incorporated the 1985 Table A Regulations (as is the case for most companies formed before 2009). In addition, special articles required that the quorum at meetings of shareholders was two, one of which had to be S, and further S was entitled to be a director so long as he held any shares in the company.

Between 2002 and 2005 S was allegedly involved in a cheque fraud involving two subsidiaries of the company, as a result of which substantial amounts of cash were allegedly diverted to S. The cheque fraud came to light in 2009, when it was investigated by the company. B took no steps against S at that time. However, by 2011 S was expressing reservations about the way that the company was being run by B and H and declared his intention to appoint another person as CEO. In May 2011 B on behalf of the company instructed solicitors to investigate possible fraud by S. S attended the offices of the company on 1 July 2011 to attend a board meeting, but was handed a letter setting out his immediate suspension. Following his departure B and H signed a resolution of the board authorising the suspension. After this B and H ran the company without reference to S.

On 18 July 2011 S requested that the company hold an EGM to consider the removal of B and H as directors of the company. B made clear that he would not attend such a meeting so that there would not be a quorum. Next day S instituted proceedings against B and the company, seeking a declaration that the decision to suspend him was invalid and that the court should grant an order that in the circumstances a general meeting could take place with a quorum of one.

The Law

Articles will usually provide that the business of a company is to be managed by the directors, who are empowered to exercise all the powers of the company. Those powers must usually be exercised by the board collectively at a properly convened board meeting. The board may not delegate any of their powers unless expressly authorised by the articles or a resolution of shareholders. Articles will therefore often include a provision providing for delegation to a managing director. For example, Regulation 72 of Table A provides:

“The directors may delegate any of their powers …. to any managing director or any director holding any other executive office such of their powers as they consider desirable to be exercised by him. Any such delegation may be made subject to any conditions the directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. …”

As a result the actual power of a managing director will depend on the articles which confer the power on the board to appoint him and upon the terms of the delegation, which will usually be in his employment contract. The office of managing director does not, without more, imbue an officer with powers over and above those enjoyed by any other director.

In this light the court held that there was nothing in B’s service contract whereby any of the powers of the board were delegated to B. The suspension of the Chairman was not a commercial decision, nor was it something occurring within the day to day running of the company’s business.

Further, any powers the Managing Director had depended on the Articles as a whole. The Special Articles were designed to protect S’s position as majority shareholder. They enabled him to ensure that the board could not pass a resolution dismissing him as Chairman. It could not have been intended that that could be sidestepped by an implied delegated authority of the Managing Director. The decision to suspend S was unlawful.

The court noted that B was not powerless as a result of the alleged dishonest conduct by S. He could bring a minority shareholder petition under section 994 of the Companies Act 2006 or he could attempt to bring a derivative action under section 206. What he could not do was to use his position as Managing Director to confer on himself powers which should properly have been exercised by the board.

The court also considered whether it should grant S an order permitting him to hold a shareholders’ meeting on his own (a quorum of one). This was a case where the majority shareholder should be entitled to exercise his ordinary voting rights to appoint and remove directors. The court felt that it was of considerable significance that B chose to take no action in respect of the alleged cheque fraud between December 2009 and May 2011 and only chose to raise it in May 2011 when S was threatening to use his power as majority shareholder to appoint a CEO to the board. It seemed plain that the decision to instruct solicitors to investigate the fraud was part of his attempt to protect his position as Managing Director. The court granted the order in favour of S.

Finally, there was the matter of B instructing solicitors on behalf of the company. In the absence of express delegation, the Managing Director had no authority to authorise the active defence of proceedings against the company by the majority shareholder without a board resolution. As noted above, the Articles were designed to protect S’s position. In those circumstances there was no implied delegated authority to bring proceedings against S. Equally, there was no implied authority to mount an active defence to S’s proceedings. The question of whether there should be an EGM with a reduced quorum was a dispute between shareholders over who should control the company. It followed that company funds should not have been used for the prosecution of an active defence in the application.

The case shows that even where a majority shareholder is alleged to be involved in wrongdoing his power as largest shareholder and, here, his position enshrined by the special articles could not be undermined by a “managing director”. The managing director had authority over day to day commercial matters of the company, but this position did not give him any special rights to act independently in relation to ownership and control issues.

© Taveners 2011

The delightfully named Hedgehog Golf Company Limited (HGC) had developed and patented a device known as a “hedgehog” which attached to the wheels of a golf trolley to enable golfers to play in wet conditions. HGC is currently involved in a patent infringement case against Masters Golf Company (Masters) in respect of the “hedgehog” patent. A Mr Hauser (H) was a 50 per cent shareholder in, and a director of, HGC. In March 2009 the other shareholder and director of HGC, a Mr Lantsbury (L) presented an “unfair prejudice” petition against H under the Companies Act 2006 claiming that H had been responsible for a series of actions which were unfairly prejudicial to the interests of L as a shareholder. In March 2010 the High Court gave judgement in L’s favour, and the judge concluded that among the appropriate remedies was “to allow [L] to purchase [H's] share at a value to be agreed or, if necessary, to be established by the court after due enquiry”.

The judgement was, as is usual, circulated to the parties in the case (H, L and their respective lawyers) a few days before the judgement was formally announced in court. Shortly after seeing it, H telephoned a Mr Baum, a consultant to HGC, and put forward a proposal which he asked Mr Baum to pass on to L. H said that, if his proposal were not accepted, he would not only decline to provide any further assistance in connection with HGC’s patent infringement claim against Masters, but would offer his services to the patent attorneys acting for Masters to assist them in their defence of HGC’s proceedings. H also warned that he would make it publicly known that there were shortcomings in HGC’s patent and that he would contact golf trolley manufacturers to offer his services in helping them to manufacture products that competed with the hedgehog and effectively circumvented the patent protection.

When the judgement was formally given in court, H agreed to give an undertaking that, in essence, he would do nothing to harm HGC in relation to the period “whilst [he was] a director of [HGC]“, but he declined to give any undertaking as to what he would do when he was no longer a director.

A few days after the judgement H notified Companies House of his resignation as a director of HGC without informing L or any other representative of HGC that he was resigning. H then telephoned Mr Baum and told him that L needed to come back to him with a financial offer “to stop [L] from offering [his] services to the other side”. H subsequently sent L an e-mail to similar effect.

At this stage HGC obtained from the court an interlocutory injunction restraining H until 15 April 2010 from disclosing “any confidential information as to the practice, business dealings or affairs of [HGC] or any of [HGC's] customers or clients”. The order provided for the “confidential information” to include, among other things, confidential information relating to the hedgehog patent. That injunction was subsequently extended.

On 21 January 2011 H made a witness statement in support of patent proceedings issued by HUA Services LLP. The witness statement referred extensively to the application pursuant to which HGC’s hedgehog patent had been granted. As a result HGC went back to court.

The judge found it easy to conclude that HGC was well-justified in its concern that H, if not restrained by injunction, would disclose confidential information without HGC’s consent. He had in the past shown a “blatant disregard” for L’s rights; he had revealed an intention to destroy or damage HGC; he had made a number of threats, including to assist a party with which HGC was engaged in litigation; he had shown a willingness to reveal information about HGC, to its prejudice, even at the risk of breaching a previous court order. The judge therefore granted a perpetual injunction to restrain H from improperly disclosing confidential information.

Passions can run high when people who’ve previously worked very closely together fall out amongst themselves, but it can be an expensive mistake to allow the heart to rule the head. Even if one of the founding fathers of a business was primarily responsible for its success, that success, together with related confidential information and intellectual property, belong to the business and not to any one individual. The present case confirms that the courts are ready to step in on very short notice in appropriate cases and use their full powers to prevent the abuse of such rights.

©Taveners 2011

This note will take a look at the key offences under the new Act (which carry penalties of up to 10 years imprisonment and unlimited fines), how the defence to section 7 is likely to work in the light of the new guidance, and the circumstances in which prosecutions are likely to be brought against both individuals and organisations under this new regime.

Section 1

Bribing another person: a person (“P”) is guilty of an offence if either of the following cases applies.

Case 1 is where P offers, promises or gives a financial or other advantage to another person, and P intends the advantage either to induce a person to perform improperly a relevant function or activity, or to reward a person for the improper performance of such a function or activity. Note that it does not matter whether the person to whom the advantage is offered, promised or given is the same person as the person who is to perform the function or activity concerned.

Case 2 is where P offers, promises or gives a financial or other advantage to another person, and P knows or believes that the acceptance of the advantage would itself constitute the improper performance of a relevant function or activity.

In cases 1 and 2 it does not matter whether the advantage is offered, promised or given by P directly or through a third party.

The guidance indicates that “improper performance” of a function is performance which amounts to a breach of an expectation that the person will act in good faith, impartially, or in accordance with a position of trust. Functions in both the public and private sectors are included. The test is what a reasonable person in the UK would expect, and where the function is not subject to UK law then local custom or practice will nonetheless be disregarded unless the activity which otherwise amounts to “improper performance” is permitted or required by local written law contained in a written constitution, legislation or judicial decision. Hence, if local law in a foreign jurisdiction neither expressly permits or requires what, in essence, is bribery, then the fact that that local law does not expressly outlaw it will mean that the activity is caught under the new UK Act.

Offers of hospitality and similar benefits could be caught under section 1, but only if P intends it to induce an improper performance of a function or if P knows or believes that the acceptance of the hospitality would itself constitute improper performance (for example where P knows that the person to whom he is giving the hospitality is specifically prevented from accepting it by the rules attaching to his job).

Section 2

Accepting a bribe: a person (“R”) is guilty of an offence if any of the following cases applies.

Case 3 is where R requests, agrees to receive or accepts a financial or other advantage intending that, in consequence, a relevant function or activity should be performed improperly (whether by R or another person).

Case 4 is where R requests, agrees to receive or accepts a financial or other advantage, and the request, agreement or acceptance itself constitutes the improper performance by R of a relevant function or activity.

Case 5 is where R requests, agrees to receive or accepts a financial or other advantage as a reward for the improper performance (whether by R or another person) of a relevant function or activity.

Case 6 is where, in anticipation of or in consequence of R requesting, agreeing to receive or accepting a financial or other advantage, a relevant function or activity is performed improperly, either by R, or by another person at R’s request or with R’s assent or acquiescence.

In cases 3 to 6 it does not matter whether R requests, agrees to receive or accepts the advantage directly or through a third party, or whether the advantage is for the benefit of R or another person. In cases 4 to 6 it does not matter whether R knows or believes that the performance of the function or activity is improper. Finally, in case 6, where a person other than R is performing the function or activity, it also does not matter whether that person knows or believes that the performance of the function or activity is improper.

Section 6

Bribery of foreign public officials: a person (“P”) who bribes a foreign public official (“F”) is guilty of an offence if P’s intention is to influence F in F’s capacity as a foreign public official. P must also intend to obtain or retain business or an advantage in the conduct of business. P bribes F if, and only if, P offers promises or gives, directly or through a third party, any financial or other advantage to F or to another person at F’s request or with F’s assent or acquiescence, and F is neither permitted nor required by the written law applicable to F to be influenced in F’s capacity as a foreign public official by the offer, promise or gift.

“Influencing F in F’s capacity as a foreign public official” means influencing F in the performance of F’s functions as an official, and includes any omission to exercise those functions, and any use of F’s position as an official, even if not within F’s authority. The guidance indicates that where, for example, local planning law permits or requires a company doing business in a jurisdiction to put some additional investment into the local economy this is unlikely to trigger a section 6 offence unless the additional investment would advantage the official himself and the local law is silent on the matter, in which case the UK prosecution authorities might consider prosecuting in the public interest.

Section 7

Failure of commercial organisations to prevent bribery: a relevant commercial organisation (“C”) is guilty of an offence under this section if a person (“A”) associated with C bribes another person intending either to obtain or retain business for C, or to obtain or retain an advantage in the conduct of business for C. For the purposes of this section, A bribes another person if A is, or would be, guilty of an offence under section 1 or 6 (whether or not A has been prosecuted for such an offence).

A “relevant commercial organisation” is a body or partnership incorporated or formed in the UK (regardless of where it carries on business) or an incorporated body or partnership (regardless of where it is incorporated or formed) which carries on business or part of a business in the UK. Whether or not an organisation carries on business in the UK in any particular case would be a matter to be determined by the court, but the new guidance suggests that merely being listed on the London Stock Exchange would not automatically mean that the company “carried on business in the UK”. In addition, the fact that an organisation has a UK subsidiary would again not automatically mean that it carried on business in the UK for the purposes of section 7 since a subsidiary may act independently from its parent. Much will turn on the facts of each case.

A person (“A” above) is “associated” with a commercial organisation if he, she or it performs services for on behalf of the organisation. This can cover employees, agents, subsidiaries, contractors, suppliers and subcontractors. The guidance acknowledges that an organisation is likely only to have control over its relationship with persons with whom it has a contract and that it may not even know the identity of its subcontractors or that they are performing services ultimately on its behalf. However, all the guidance suggests is that the organisation concerned imposes anti-bribery procedures on its contractor (presumably by way of the contract) and requires the contractor to adopt a similar approach with the next party in the supply chain. As a result “anti-bribery clauses” are likely to become far more common in English law commercial contracts.

It is a defence to the section 7 offence for C to prove that C had in place “adequate procedures” designed to prevent persons associated with C from undertaking such conduct. The newly published guidance sets out six principles which should inform those procedures:

Principle 1: Proportionate procedures.

A commercial organisation’s procedures to prevent bribery by persons associated with it are proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organisation’s activities. They are also clear, practical, accessible, effectively implemented and enforced.

The nature of the risks faced by an organisation will be ascertained by a risk assessment exercise and will depend on factors such as its size, the nature and complexity of its business and the type and nature of persons associated with it.

Principle 2: Top-level commitment.

The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable.

The guidance makes clear that top management must be involved with developing anti-bribery procedures and communicating to the rest of the organisation its anti-bribery stance.

Principle 3: Risk assessment.

The commercial organisation assesses the nature and extent of its exposure to potential external and internal risks of bribery on its behalf by persons associated with it. The assessment is periodic, informed and documented.

The guidance makes it clear that the risk assessment exercise needs to consider elements such as country risks, sectoral risks, transaction risk, business opportunity risk and business partnership risk.

Principle 4: Due diligence.

The commercial organisation applies due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks.

The guidance suggests that an organisation’s monitoring of associated persons should continue throughout the business relationship. Organisations should also carry out due diligence in relation to their own employees who are in a position of vulnerability in relation to the potential for bribery.

Principle 5: Communication (including training)

The commercial organisation seeks to ensure that its bribery prevention policies and procedures are embedded and understood throughout the organisation through internal and external communication, including training, that is proportionate to the risks it faces.

The guidance indicates that internal communication will include a statement of policies, and external communication may include codes of conduct including information on the organisation’s procedures, controls and sanctions. Employees must be trained, along with associated persons where this is proportionate, and such training should be continuous, regularly monitored and evaluated.

Principal 6: Monitoring and review.

The commercial organisation monitors and reviews procedures designed to prevent bribery by persons associated with it and makes improvements where necessary.

The guidance acknowledges that bribery risks will change over time and so policies and procedures should be kept under constant review. Emphasis is placed on financial control mechanisms. The results of reviews should be supplied to top management and an organisation should also consider external appraisal of its policies and procedures.

Prosecution

In England and Wales the main prosecution authority with responsibility for enforcing the Bribery Act is the Serious Fraud Office (SFO). The new offences under the Act are wide and, although there is the prescribed defence to the section 7 offence, generally prosecutors seem to have a particularly wide discretion which they must administer if injustices are to be avoided. As a result the SFO and the Director of Public Prosecutions issued guidance 30 March 2011 on bribery prosecutions under the new Act.

The general rules relating to most criminal prosecutions will still apply; there must be sufficient evidence of the offence and it must be in the public interest to bring the proceedings. Current guidance indicates that it is unlikely the prosecution will be in the public interest if the court is likely to impose only a nominal penalty, the suspect has already been subject to appropriate regulatory proceedings or a relevant civil penalty, or the offence was committed as a result of a genuine mistake or misunderstanding. But in addition the new bribery prosecution guidance suggests that prosecutions will not generally be brought where the harm caused is minor and resulted from a single incident, or the organisation involved adopts a genuinely proactive approach involving self reporting and remedial action. Interestingly the new guidance also suggests that if an organisation has sound anticorruption procedures, not only may this be a defence against a charge under section 7 but it may also lead the prosecutor to conclude the prosecution would not, in any event, be in the public interest. Such a stance reinforces the importance of commercial organisations adopting new and appropriate compliance procedures. However, the new prosecution guidance makes the point that under section 7 the defendant organisation has to prove on a balance of probabilities that its anti-bribery procedures were “adequate”; if the matter goes to court then there is an onus on the organisation to satisfy the jury that its procedures were sufficiently robust.

Conclusions

By and large sections 1, 2 and 6 restate the existing criminal law in respect to bribery and corruption. Section 7, by contrast, exposes a commercial organisation to unlimited fines for matters which may take place overseas without its knowledge. The defence is to persuade the authorities and, ultimately if necessary, a jury, that the organisation has procedures designed to prevent bribery on its behalf and those procedures are “adequate”.

A key element in all of the offences is intention; in essence, along with the giving or taking of money or other advantage there must be an intention that someone somewhere will behave “improperly”. But again section 7 departs from the usual approach here; it is not the intention of the commercial organisation (“C”) to induce improper behaviour that is required, but merely the intention of the person offering the bribe (“A”). Once that intention on A’s part is proved, the fact that C had no idea what was going on is irrelevant; C is liable for a very serious criminal offence unless it can prove it had adequate procedures designed to prevent such activities.

Given the extraterritorial reach of the new UK Act, companies who deal internationally will need to carefully assess their risks based, largely, on where they do business in the world and the types of people they do business with and through. Contracts will need to be more carefully drawn than in the past, and documented procedures will need to be put in place. Lawyers and compliance officers will have plenty to do, but how this affects the competitiveness of UK plc against those countries with less robust anti-bribery laws is perhaps another question entirely.

The new guidance from the Ministry of Justice is at http://www.justice.gov.uk/guidance/docs/bribery-act-2010-guidance.pdf.

© Taveners 2011

At the beginning of 2007 Formula One team Spyker MF 1 Racing (the Team) found major sponsors in the shape of Etihad, Abu Dhabi’s national airline, and Aldar, a major Abu Dhabi property development company (the Sponsors). Immediately before the opening of the 2007 F1 season a binding Heads of Terms Agreement dated 13 March 2007 was entered into, and a full contract followed on 12 April 2007.

Under the contract the Team undertook that it would adopt the name “Etihad Aldar Spyker F1 Team” during the years 2007, 2008 and 2009. However, under clause 5 of the contract the Team had the right to source an alternative Team sponsor for the years 2008 and/or 2009 with full naming and livery rights, enabling an alternative sponsor to become the main Team sponsor, but only if the Team obtained an irrevocable and enforceable written commitment from the alternative sponsor to pay more money than was due under the existing contract from the Sponsors. In the event that such a commitment was received the Sponsors had the right then to (i) match the new money and keep their naming and livery rights, (ii) effectively share sponsoring rights with the new sponsor at a reduced price, or (iii) terminate the agreement.

Clause 21 contained a reasonably standard termination provision, which read: “The Sponsors may terminate this Agreement with immediate effect on the giving of written notice to SPYKER at any time [if]… SPYKER has committed any material breach of this Agreement which, if capable of remedy, has not been remedied within ten (10) Business days of receipt of written notice giving particulars of the breach and requiring its remedy.” The clause did not refer to what would happen in the case of an irremediable breach.

On 1 September 2007 Dr Vijay Mallya, a prominent Indian entrepreneur and billionaire, announced that he had made a successful bid for the Team. He proceeded in short order to rename the Team “Force India Formula One Team” (Force India), it would seem on the basis that he felt that Etihad and Aldar, whom he had inherited as the main sponsors of the Team, were paying too little for the privilege. As part of the general rebranding, Mallya also arranged for a new livery for the Team’s car sharing the Sponsors’ logos on the car with the prominent use of the Kingfisher logo. Kingfisher was not only another airline, which detracted from the branding of Etihad, but also the major beer brand in India, which did not go well with the antipathy to alcohol in Muslim Abu Dhabi.

Discussions ensued between the Team and the Sponsors, but eventually, on 27 January 2008, Etihad and Aldar served a letter terminating the contract. The Team claimed that they did so out of the blue and in bad faith, and, because of the provisions of clause 21, they were not entitled to do so. If there had been any breaches, then these had been remediable, and the Sponsors should have given the Team 10 days notice. If the breaches were irremediable then the Sponsors had delayed too long and had effectively waived their rights to terminate. By serving notice of immediate termination as they had done on 27 January 2008 it was, in fact, the Sponsors who had repudiated the contract, and Force India was entitled to damages.

In English law there are 2 types of breach of contract that can give rise to termination rights, firstly a breach that falls within the terms of any termination clause which may exist in the contract itself and secondly what is known as a “repudiatory breach”. A repudiatory breach of contract is a breach which is sufficiently serious that it gives the innocent party the right to bring the contract to an end. In such circumstances the innocent party has 2 options; it can “accept” the repudiation and the fact that the contract is at an end, with the right then to sue for damages for breach of contract, or it can “affirm” the contract and insist that the other party continues to perform the contract. If it affirms the contract then it effectively loses its right to treat the contract as terminated. The right in English common law to effectively terminate a contract for a repudiatory breach exists whether or not there is a termination clause in the contract itself.

The High Court found that, if there had been any breach by Force India, that breach had effectively been waived by the Sponsors as a result of the discussions between the parties between September 2007 and January 2008, and so when the Sponsors came to terminate the contract for alleged breach they had acted too late and that termination was unlawful. Somewhat surprisingly therefore, Force India was entitled to substantial damages from the Sponsors.

The Court of Appeal took a substantially different view. There was evidence of considerable communications between the parties during the latter part of 2007, and in the view of the court this showed that there had been a cumulative process of breaches of contract as Force India had sought to distance itself from the naming and livery obligations it owed to the Sponsors in order to rebrand itself as an Indian team. The key questions were what kind of breach of contract did this process amount to, what, if any, termination rights arose, and did the Sponsors do anything which meant that they lost those rights.

Clause 21 did not apply to irremediable breach, only to a material but remediable breach. As a result, no prior written notice of termination was required in the case of an irremediable repudiatory breach. In the view of the court, when Force India changed its team name and abandoned the contractual Team Name by omitting the names of its main sponsors Etihad and Aldar, this was a clear, grave and continuing breach of the contract. There had been no approval by the Sponsors of the use of the Kingfisher logo, and the deliberate change of the car livery without consultation with, and the approval of, the Sponsors was a further serious breach of the contract.

The judge in the High Court had concluded that any such breaches were remediable, in the sense that Force India “could have put matters right”, either by changing the Team Name back to Etihad Aldar Spyker F1 Team and/or by reverting to the previous livery and removing the Kingfisher logo. However, the Court of Appeal completely disagreed. An analogy was drawn between the publication of confidential information and the publishing of advertising matter not containing a party’s name: one releases information which should be kept confidential, the other broadcasts a product in an inappropriate way. In neither case was it possible to put the genie back into the bottle. The breach was irremediable.

A decision on the part of an innocent party to affirm the contract (and therefore let it continue in force) requires knowledge of the relevant facts and a communication of the decision, in words or conduct, in clear and unequivocal terms, to the other party. A party may be taken to have elected to affirm where it acts in a manner which is consistent only with a decision to affirm or where it allows too much time to pass by without indicating any decision. The delay in this case, which took place during the winter break between 2 Formula One racing seasons, did not mean that the Sponsors lost their right to accept the Team’s repudiation of contract. As a result, the Sponsors were entitled to bring the contract to an end, which they did on 27 January 2008, and were accordingly entitled to damages.

It is interesting to note that, in coming to its conclusions with regard to the precise terms of the contract (and therefore whether it had been breached), the Court of Appeal took into account not only the terms of the contract itself but also the preceding heads of agreement which had in principle been superseded by the contract. As a result, great care should be taken to ensure that pre-contractual heads of agreement are drafted accurately or, at the very least, any later contract expressly overrules any particular terms in the heads.

© Taveners 2011

A privileged position

Legal professional privilege (LPP) is the rule that entitles a client to refuse to disclose documents or answer questions, and to require his legal adviser and others to refuse to do so as well, subject to very limited exceptions. In 2002 one Law Lord said

“LPP is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice.”

Various private matters relating to the rights and risks relating to a proposed contract are likely to be discussed prior to and during any negotiation, and most businessmen would be horrified if they thought that the details of those discussions might be released at some future stage to, as one court put it, “the police, the executive, business competitors, inquisitive busybodies or anyone else”. Legal advice will often be at the heart of many of these private discussions, and as one court pointed out “legal advice is not confined to telling the client the law; it must include advice as to what should prudently and sensibly be done in the relevant legal context”.

But the benefit of LPP only applies to communications between a client and a member of the legal profession. In October 2010 the Court of Appeal confirmed the position by holding that legal advice in relation to tax law given to the Prudential Insurance Company by its accountants was not covered by LPP and had to be disclosed to HM Revenue & Customs. Had that legal advice being given by a solicitor with a current practising certificate the communications would have been privileged and the Revenue would have had no power to see them.

Accountants, contract managers, “legal consultants” and others may give legal advice relating to contracts from time to time, but if a dispute later arises then all relevant documents and other communications, whether written or oral, however confidential or damaging, are likely to become open to scrutiny.

Safety first

Solicitors firms are regulated by the Solicitors Regulation Authority which imposes stringent standards relating to honesty and integrity as well as the way a firm’s business is run generally.

One of the most onerous obligations on a firm is the requirement to carry special professional indemnity insurance meeting minimum criteria designed to protect the client to the utmost. A standard insurance policy will not pay out in favour of the client if the adviser has obtained the insurance cover by fraud or nondisclosure; the policy mandated by the SRA will pay out however dishonest or forgetful the solicitor has been with his insurer. Once claims have reached the level of cover under a standard insurance policy the policy will lapse; a solicitor must carry insurance that has a level of cover “per claim” with no limit on the number of claims in any year. Finally, even if the solicitors firm ceases business those behind it are obliged to continue to carry “run-off cover” for a further 6 years after it has stopped trading.

No other professional body imposes standards like these.

© Taveners 2010

Unfortunately there is no magic to any of these terms in English law – the documents themselves can mean whatever the parties intend them to mean, and the courts will decide on their legal effect by what the documents say, not what they are called. Worse still, recent case law suggests that what the courts decide in such cases will not always be the most obvious conclusion.

To bind or not to bind

It’s a big part of Contract Law 101 that a binding contract comes into force when one party makes an offer that the other party accepts. Acceptance can be in the form of a signed document, but it does not have to be; if the parties take steps to perform the contract then courts for centuries have held that this can be good enough to form a binding contract.

In one case last year the makers of Muller yoghurt entered into discussions with an equipment manufacturer for the supply of a number of automated packing machines. The discussions went on for years, with the manufacturer producing no less than 10 quotations over time, with terms and prices changing as the discussions went on. The manufacturer eventually supplied 2 production lines, and subsequently was told by Muller over the telephone that the manufacturer had won the contract. The parties agreed a price of £1.6 million. Muller then sent the manufacturer a “letter of intent” stating that full contractual terms would be based on a specified standard industry format known as MF/1 and full terms and technical specifications would be agreed within 4 weeks. The manufacturer agreed to this, subject to 2 points of detail.

Negotiations continued for some time afterwards, with the 4 week period being extended by agreement several times, but although all of the major points were settled the parties could not agree on final terms.

The judge in the High Court held that, after the 4 week period and by no later than 29 June 2005, a new contract came into existence because the parties had agreed all of the main contractual points and proceeded, largely, to perform it. However, the Court of Appeal saw things differently. Clause 48 of MF/1 stated “the Contract… shall not become effective until each party has executed a counterpart and exchanged it with the other.” The effect of these words was that, whilst the letter of intent had been binding during the initial 4 weeks and then as extended, no contract after that could come into force at all unless it was signed and exchanged by both parties.

The Court of Appeal decision was something of a surprise, and Muller appealed. On 10 March 2010 the Supreme Court confirmed that in a case where a contract is being negotiated subject to contract and work begins before the formal contract is executed, it cannot be said that there will always or even usually be a contract on the terms that were agreed subject to contract.

However, the Supreme Court went on to say that English law did recognise that in some cases, although certain terms of economic significance to the parties might not be agreed, neither party intends agreement of those terms to be a precondition to a concluded agreement. The parties regard them as relatively minor details which can be sorted out without difficulty once a bargain is struck. The parties agree to bind themselves to agreed terms, leaving certain subsidiary and legally inessential terms to be decided later. This was the case here. The parties had effectively reached a binding agreement on or about 25 August (which incorprated more details than the initial judge had thought applicable) and, by acting as they did and proceeding with the work, the parties had waived the requirement set out in clause 48 for the contract to be in writing.

“Subject to contract” – does it always work? No.

If it is the intention of the parties that a letter of intent or similar is not to be contractually binding then applying the words “subject to contract” will usually do the trick. However, even here the position is not crystal clear. In the recent case of Jirehouse Capital v Beller a trial of a previous dispute between the parties was due to commence on 29 June. On 23 June lawyers on both sides started to discuss a settlement using “subject to contract” in their correspondence. A deal in principle was agreed, and on 30 June one side’s lawyer sent out final documents to the other side marked “subject to contract” stating that “draft settlements are attached for your final consideration. All terms have been agreed”.

The parties subsequently fell out again, and the question was raised whether the settlement reached had been binding or whether the use of the words “subject to contract” had prevented this. The High Court held that the use of the words on 30 June was not effective; the parties had done the deal, it was binding, and the lawyers did not by then intend to use the expression.

“Subject to contract” – should you bother to use it? Yes.

In Whittle Movers v Hollywood Express a provider of distribution services (H) decided to use W as its subcontractor, and sent W a letter of intent that was expressed to be subject to negotiation and execution of a mutually satisfactory and legally binding documentation; the letter was not binding on either party, and any work done in anticipation of the contract was at that party’s risk and cost. In the event, whilst an interim agreement was entered into, no full contract was ever agreed, but nonetheless W started doing work for H and invoiced H accordingly. Subsequently the owners of H decided to sell the business and H gave W six months to terminate any contract there might be.

The High Court decided that there was a binding contract between the parties and that this was based on the interim agreement together with the circumstances of the performance of the contract. The Court of Appeal, however, said that there was no contract at all – the parties had never finished their negotiations, and the courts should be slow to overturn the effectiveness of the use of “subject to contract”.

The dangers of letters of intent

It is alarming that the Muller case came before three courts (the High Court, Court of Appeal and Supreme Court) and three different judgements were handed down. To avoid this kind of nightmare letters of intent need particularly careful drafting so that a situation does not arise where one party thinks it has a binding commitment from the other, whereas the other thinks it remains free to walk away at any time because no binding contract has been reached. By their nature such documents are intended to be relatively brief outlines of the deal as a whole which will be contained in a later, more comprehensive document, and sometimes there is a temptation to avoid using clear language for fear of delaying the negotiation process. Those who succumb to that temptation can face a very uncertain ride in front of the English courts at the moment.

Lord Clarke, when giving the judgement of the Supreme Court in the Muller case, said “the moral of the story is to agree first and to start work later”. Which of course is easy for a judge to say – he’s not trying to run a business…

© Taveners March 2010