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 proposal comes in tandem with the Commission’s proposal for a Directive (a law that must be implemented by each of the EU member states) on Alternative Dispute Resolution (ADR) with the objective of putting in place quality out-of-court entities to deal with contractual disputes between consumers and businesses. The Directive would apply to any contractual disputes between consumers and businesses, not just those online.

The proposed Directive will cover mediation procedures, procedures before consumer complaint boards and arbitration and conciliation procedures. It will not apply to consumer complaint handling systems operated by or on behalf of the trader. It also does not cover direct negotiations between the parties.

Each member state will be free to decide how best to ensure full ADR coverage in its territory. Countries with ADR entities that cover many different sectors will be free to keep them or create new ones, provided the entities respect the quality principles defined in the proposal. Consumers will be entitled to receive complete information about the ADR entity competent to deal with their contractual dispute in the main commercial documents provided by the trader and on the trader’s website. Member states may point consumers in the direction of the European Consumer Centre (ECC-net), which currently guides consumers to ADR entities competent to deal with cross-border disputes.

It is noteworthy that most ADR systems today are voluntary, which allows for flexibility and speed. The Commission’s proposal does not make ADR mandatory, but member states will be free to create their own national rules making the participation of traders in ADR procedures mandatory or their outcome binding on traders. It is likely therefore that in many parts of Europe the referral of consumer disputes to a national ADR body will become mandatory.

The proposed Regulation relating specifically to online consumer disputes builds on the national ADR entities contemplated in the draft Directive. Under the proposed Regulation all matters in dispute can be handled online and referred automatically to the relevant national ADR body, and this is designed to help solve disputes regarding online purchases where the consumer and trader are located far from each other. The single point of entry will be a user-friendly interactive website, accessible in all languages of the EU and free of charge.

There will be a set of common rules to ensure that the system is effective. These rules will set out the role of national contact points acting as ADR facilitators in the respective country and they will include a requirement to deliver a solution within 30 days.

The European Parliament and the EU Council have committed to adopting the package by the end of 2012. Member states will then have 18 months to implement the Directive, which means that it should be in place during the second half of 2014. It is hoped that the EU-wide platform for online dispute resolution will be fully operational by early 2015. The funding may be private (for example, by industry), by public funds or a combination of both.

The U.K.’s Department for Business Innovation and Skills has now issued a Call for Evidence (http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/11-1372-call-for-evidence-eu-proposals-dispute-resolution.pdf) seeking views from traders, consumer groups and regulators in the UK to help inform the UK’s negotiating position on the draft Regulation and Directive. In particular, it asks whether respondents believe that the European Commission’s proposals will lead to its anticipated benefits for consumers, and for views on the costs of, and standards required by, the proposals. Responses are requested by 31 January 2012. A consultation on how the UK will implement the EU proposals will be launched in due course

ADR is in the spotlight currently. A consultation by the European Commission, aimed at improving the use of ADR to resolve commercial disputes in the EU, closed on 15 March 2011. The responses to the consultation showed strong support for ADR schemes as an alternative to court proceedings, as well as for development of ADR to benefit both consumers and businesses.

© Taveners 2011

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

Recently there have been some discussions amongst those of us involved in IT and other outsourcing projects as to whether existing contract models are sufficient given the rapid evolution in technologies available today. In particular, some have attacked the “rigid” nature of IT contracts and the difficulties that arise with things like change control mechanisms.

The principal problem area is the specification of the product or service that is being bought in under an outsourcing arrangement. It is argued that a specification, to be effective, needs to be lengthy and detailed, and it is in that fact where its weakness lies; its details are fixed at the time the contract is signed, and it is therefore difficult thereafter to get those details changed. If the customer wants a more up to date IT solution incorporated part way through the contract then the supplier may well hold the customer to ransom and insist on a major price hike before it agrees to the change. If no change (at a reasonable price) can be agreed, the customer risks being stuck with an outsourced solution that is decreasing in efficiency compared to those solutions used by its competitors.

One way that lawyers acting for the customer get around this sort of difficulty is to insert change control mechanisms into the contract which effectively oblige the supplier to agree to any change requested by the customer, with price issues being referred to an independent third party if the supplier and the customer cannot agree. The difficulty here, however, is that in practice such a mechanism is clumsy at best and divisive at worst, ultimately undermining a business relationship that is likely to be of considerable importance to both parties.

It is undoubtedly true that the validity of a fixed technical specification of any product or service will diminish over time; a customer signing up to a five-year outsourcing deal may not want to be stuck with the same technical solution throughout that time, and it is likely that few suppliers will want to be obliged to support outdated IT for one customer when all of its other customers have long since upgraded.

As a result, some have argued that a fixed technical specification in an IT outsourcing contract is redundant, probably causing more harm than good. They say that the contract should not include a specification, and indeed should not include a change control mechanism at all. Other traditional concepts such as acceptance tests also fall by the wayside since there is no specification against which such tests can be run. Instead, it is argued that the customer should start with a list of desired features for the service or solution which it wishes to purchase. This list, however, is not part of any contract, and can be changed and updated by the customer at any time throughout the life of the project unless and until individual items in the list are agreed by the customer and supplier to be “fixed”. The delivery of the solution is broken down into a series of time boxes which are fixed and can never be extended. At the end of each time box the supplier delivers whatever it has produced against the customer’s list, and the work in each subsequent time box is based on the work completed in previous time boxes. The work is iterative and incremental. The nature of acceptance tests for individual items on the customer’s list are agreed when those items become “fixed”.

It is probably fair to say that the pricing model to be used with such an approach can be something of a challenge. The iterative nature of this mechanism tends to point towards a time and materials model, but obviously this favours the supplier and leaves the customer at the beginning of the project somewhat in the dark as to how much the whole thing is going to cost. The approach also arguably encourages the supplier to spin things out, taking more time and thereby earning more money.

For me, a more fundamental flaw in this approach is highlighted by the litmus test of “if it all goes wrong, whose fault is it?” It is the answer to this simple but basic question that is at the heart of every contract – parties undertake obligations and must fulfil them, otherwise they will be in breach of contract and will be at risk of adverse consequences under the law. Without that fundamental underpinning the relationship between the customer and supplier seems to be akin to two people tied together in a three legged race, one wanting to go north (saving money) and one wanting to go south (earning money). A specification (together with related issues such as acceptance tests) provides the two racers with a clear track down which to race; without that track, they are unlikely to get anywhere fast.

Less radical iterative approaches do of course have their place in software development scenarios, but when it comes to outsourcing services in general the approach described above in my view misunderstands what outsourcing should be about; it is not about the precise methodology (this software application over that software application) but about the delivery of the solution (that data, on-time and in a form we can immediately use). In my experience customers do better out of outsourcing when their requirements are expressed in reasonably high level terms – specifying what they really want as an end product – and leaving it to the supplier to figure out how that end product should be achieved. If during the lifetime of the contract the supplier figures out a cheaper, faster way of delivering the end product, then both the supplier and the customer will be pleased (with the customer even more pleased if it has succeeded in inserting a contractual provision allowing it to benefit from lower costs as well). A correctly written specification can (and often does) lead to the win-win scenario both parties are looking for.

© Taveners 2011

The context

In announcing the review, David Cameron remarked “The founders of Google have said they could never have started their company in Britain. The service they provide depends on taking a snapshot of all the content on the internet at any one time and they feel our copyright system is not as friendly to this sort of innovation as it is in the United States. Over there, they have what are called “fair use” provisions, which some people believe gives companies more breathing space to create new products and services.

So, the key question appeared to be whether the laws of copyright should be subject to new limits which would permit copying in circumstances where it is currently unlawful in order to give a boost to the digital economy. But was “fair use” the answer? This is said to be a more flexible approach to the question of copyright exceptions, being a defence in the US copyright framework which builds on certain general principles through case law to develop permitted uses of copyright works. In essence, and on a case-by-case basis, US courts decide whether particular unlicensed uses of someone else’s copyright material is “fair” and should therefore not be stopped.

Many of Google’s early activities were indeed based on findings of “fair use” in its favour. It has been suggested that this is one of the factors creating a positive environment in the US for innovation and investment in innovation. However, Hargreaves concludes that the success of high technology companies in Silicon Valley owes more to attitudes to business risk and investor culture than it does to the shape of IP law.

However, even if “fair use” had been a decisive factor allowing US technology companies achieving heights which UK companies can only dream about, a second-year law student could have told Cameron that the idea of importing the US concept of “fair use” into UK law is a complete nonstarter; in the way there is the small matter of European law, which takes precedence over UK law. It seems it took Hargreaves six months to discover that Cameron’s quick fix to our apparent digital woes (i.e., we haven’t got our own Google) was not going to fly, and the report acknowledges that European law will simply not allow this. However, in the report’s view all hope is not lost; there are some changes to IP law that the UK can make on its own (that is, without the permission of the EU), primarily because they’re already allowed under European law.

The Review makes 10 recommendations “designed to ensure that the UK has an IP framework best suited to supporting innovation and promoting economic growth in the digital age”. In my view three of those recommendations are worth looking at in some detail.

1. Limits to copyright – specific exceptions in the absence of a “fair use” doctrine

Hargreaves complains that EU law confines copyright exceptions to a closed list of categories, such as criticism, news reporting, research, and archiving. Almost all are restricted to non-commercial uses. Individual EU countries may implement exceptions within these categories to a greater or lesser degree, but there is no flexibility to create exceptions in new areas. The UK does not currently exploit all the exceptions available; there are no exceptions for private copying or for parody, and Hargreaves criticises the current UK exception for archiving as falling “well short of current needs”.

Hargreaves therefore proposes what he calls “a twin track approach”: pursuing specific exceptions where these are feasible within the current EU framework, and, at the same time, trying to persuade our EU partners to adopt a new mechanism in copyright law to create “a built-in adaptability to future technologies”. Hargreaves refers to this as “an exception allowing uses of a work enabled by technology which do not directly trade on the underlying creative and expressive purpose of the work”. He mentions data mining and search engine indexing in particular.

In the meantime the specific exemptions under the current EU framework which the UK should be exploiting are:

Enabling New Research Tools

The Government should introduce a UK exception under the non-commercial research heading to allow use of data mining and analytics for non-commercial use.

Private Copying / Format Shifting

The Government should introduce an exception to allow individuals to make copies for their own and immediate family’s use on different media. In other EU countries private copying exceptions are supported by levies on copying equipment, but Hargreaves prefers to see rights holders free to pursue whatever compensation the market will provide by taking account of consumers’ freedom to act in this way and by setting prices accordingly.

Extension of archiving

Libraries should benefit from an extension of the archiving exception so that this includes fully audio visual works and sound recordings. Hargreaves argues that supporting the potential of new technologies for archiving will prevent the loss of works, and could open the way to new services based on digital use of those archives. This public digital archive may turn out to have considerable economic as well as social and cultural value.

Exception for parody and pastiche

Hargreaves suggests that this is more a matter of freedom of expression (and therefore outside his review’s terms of reference), but he argues that there is also an economic link. “Video parody is today becoming part and parcel of the interactions of private citizens, often via social networking sites, and encourages literacy in multimedia expression in ways that are increasingly essential to the skills base of the economy. Comedy is big business.”

Hargreaves cites with approval the “Newport State of Mind” parody (based upon Empire State of Mind, a hit song by the American rapper Jay-Z) which at once achieved great success when posted on YouTube last year but at the same time resulted in action by the right owners to exercise their legitimate authority under UK copyright law to have it removed from the internet. In the US, many previous parodies of the same original song have not attracted such action, perhaps because US Fair Use can protect parodies. In practice, the offending video has remained both visible and popular, giving rise to further parodies in response.

2. Copyright licensing: the “Digital Copyright Exchange”

Hargreaves cites examples of inefficiency in copyright licensing such as the BBC finding that it took nearly five years to assemble the rights necessary to launch its popular iPlayer service. He acknowledges, however, that many of the problems come down to the fact that many SMEs are not willing or able to pay prices acceptable to the licensors and/or that their new business models are not viable. Hargreaves concedes that these are the judgments that licensors in a free market are entitled to make, but he argues that they also indicate the difficulties which arise when a market fails to deliver clear signals about price and other terms of trade as a matter of routine.

Hargreaves therefore advocates the creation of a “Digital Copyright Exchange” (DCE) as a mechanism to streamline the licensing of copyright material. He quickly makes it clear that he is not advocating that Government should itself create the DCE, but it should seek to persuade other to do so. Participation should be voluntary but the Government should also ensure that participation in the Digital Copyright Exchange confers clear benefits and that there are costs of voluntary exclusion. Hargreaves is silent on what these costs may be, but incentives might include:

• providing that remedies, for example damages, are greater for infringement of rights to works available through the licensing exchange than for other works;

• making sanctions under the Digital Economy Act apply only to infringements involving works available through the exchange;

• requiring that an orphan works search requires checking of the licensing exchange as part of a diligent search (see the orphan works discussion below);

• giving creators the right to withdraw from future publisher/record companies contracts where the latter are not marketing a creator’s works through the exchange;

• putting publicly owned copyright material on the Copyright Exchange at day one and exerting its influence on other public bodies to do likewise;

• providing funding for the costs of establishing the exchange (including development of IT) – possibly from the reserves of the Intellectual Property Office (IPO);

• working with Internet search providers to ensure that sites that are part of the exchange are flagged and highlighted to enable users readily to find them before they encounter less legitimate sites.

Whilst not run by the government, the DCE would be regulated either by the IPO or by Ofcom. The UK should also support the European Commission’s proposals to establish a framework for cross-border licensing, which might increase the DCE’s remit.

3. Orphan Works

According to Hargreaves, the problem of orphan works – works to which access is effectively barred because the copyright holder cannot be traced – represents the starkest failure of the copyright framework to adapt.

In the case of mass licensing there should be a scheme involving a diligent search of rights registries (to ensure the supposed orphans are not in fact owned and opted out of the collective licensing scheme). Hargreaves argues that such searches would be made much easier once the DCE is functioning. Following diligent search, a licence would be issued. Any fees paid should be held by the collecting society running the scheme until the owner is identified, or a reasonable period of time elapses, in which case the monies should be used for social or cultural purposes, or as a contribution to the running costs of the DCE.

For licensing of individual works, a similar system is envisaged, involving Government granting an authorisation to deal in a specific work where the copyright owner has not been found or identified after a diligent search. Should an owner later come forward, future use of the work from that point would be subject to negotiation, but there would be no liability for past use beyond any licence fee set by Government or its appointed agent.

Hargreaves claims that in most cases the fee for use of orphan works would be nominal, “recognising that the works involved represent a national treasure trove”.

The seven dwarves

The other seven recommendations seem to fall into the “motherhood and apple pie” category:

4. “Government should ensure that development of the IP system is driven as far as possible by objective evidence”. A sentiment that is as worthy as it is unrealistic, this amounts to asking politicians to stop being politicians (listening to any lobbyist who can promise them money, votes or both). Good luck with that one.

5. “The UK should resolutely pursue its international interests in IP… It should attach the highest immediate priority to achieving a unified EU patent court and EU patent system…” That a European unified patent (a single patent covering all 27 members of the EU) is a “good idea” has been accepted for most of the past four decades in which the EU has been working on it. The difficulty has been its implementation, which several member states continue to wrestle over. The review does not make any recommendations on how the impasse should be resolved.

6. The Government should take a leading role in cutting patent office backlogs internationally, try to prevent an extension of patent rights to software and business methods (which is the position in the US), and investigate ways of limiting so-called “patent thickets” (“an overlapping set of patent rights” which require innovators to reach licensing deals for multiple patents from multiple sources). Easier said than done, and some of this may cost government money which is unlikely to be a popular idea just now.

7. “The design industry… the IPO should conduct an evidence-based assessment of the relationship between design rights and innovation, with a view to establishing a firm basis for evaluating policy at the UK and European level.” Design rights have indeed been something of a Cinderella in terms of IP rights, and more should be done given their importance to the UK economy, but merely calling for another review doesn’t take matters much further.

8. Better, and cheaper, enforcement of IP rights. Often called for, and the Review calls for a new small-claims track in the Patents County Court to be created for low-value IP claims. But that’s not new.

9. Small firms to have better access to IP advice. Also not a new idea, and the Review is light on how this might be achieved.

10. “An IP system responsive to change”. The IPO should be given the necessary powers and mandate to ensure that it focuses on its central task of ensuring that the UK’s IP system promotes innovation and growth through efficient, contestable markets, and it should also be empowered to issue statutory opinions where these will help clarify copyright law. This sounds as if it will cost the government money, and as indicated above this is unlikely to be popular at the moment.

Conclusions

“Fair use” was always a nonstarter, and the idea that there be an EU exception which does not “directly trade on the underlying creative and expressive purpose of the work” is so vague that it seems doomed to remain in the long grass of European lawmaking for possibly decades to come.

As noted above, the context behind the review was to find ways for the intellectual property framework in the UK to promote innovation and growth. In that context, finding some areas in which specific exceptions to copyright could be extended under current EU law is a rather strange direction in which to travel, given that, as Hargreaves himself acknowledges, most of these areas relate to non-commercial use only. Hence a UK exception enabling the use of new research tools will only help universities carrying out non-commercial work; copying as part of any research with a commercial flavour (including work funded by a commercial partner) will still be prevented. Similarly, the removal of restrictions on parodies such as “Newport State of Mind” are hardly likely to boost the U.K.’s flagging economy, even if they might lift our spirits. The proposed extension of archiving will cause many publishers considerable concern, faced with the prospect of expensive multimedia publications being freely available via public libraries, and they will argue that this is in fact damaging to the U.K.’s economy.

The orphan works proposal, however, does appear to be sensible, and although there are plenty of details to work out here there do not appear to be strong arguments against the principle. The radical idea of the Digital Copyright Exchange appears useful if it enables licensors and licensees to come together more quickly and efficiently, but without government funding it is hard to see this getting off the ground.

Cynics may say that we’ve been here before, and recently. Hargreaves acknowledges this when he refers to “the pile of IP reviews on the Government’s doorstep – four in the last six years”. Government has indicated that it aims to publish its substantive response to the review by the end of July. It remains to be seen whether, in the absence of Cameron’s “quick fix”, the government will have the appetite to spend any money or precious legislative time in making tweaks to the IP system that are unlikely to make the Digital Roundabout spin appreciably faster.

© 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

For many years the Football Association Premier League Ltd (the FAPL), has sought to achieve the most lucrative exploitation of the copyright for the live transmission of its football matches by granting its licensees the exclusive right to broadcast only within their broadcasting area, generally a particular country. Thus a French broadcaster would be licensed to broadcast exclusively in France, a UK broadcaster exclusively in the UK, and so on. In order to protect this territorial exclusivity, each broadcaster undertook in its licence agreement with the FAPL to encrypt its satellite-delivered signal and to restrict the circulation of authorised decoder cards outside its own territory.

This arrangement was threatened, however, when some people obtained decoder cards and exported them from one part of the EU to another. Perhaps unsurprisingly, the cost of a decoder card to watch English Premier league football is considerably more expensive in the UK than it is in Greece, and so a lucrative trade arose re-selling Greek decoder cards to people in the UK in breach of the restrictions described above. Karen Murphy, who ran a pub in Portsmouth, obtained such a decoder card so that her customers could watch English football over a pint. Those charged with protecting the FAPL’s interests discovered what Ms Murphy was doing and decided to bring a private prosecution against her under laws emanating from Europe designed to prohibit the circumvention of electronic copyright restrictions. Having been convicted and fined, Ms Murphy appealed to the English High Court, which in turn referred certain questions of European law to the European Court of Justice.

The satellite broadcast industry enjoys a number of protections under European laws that other industries do not benefit from. In her Opinion the Advocate General had to consider Directive 98/84 on the protection of devices for access to services based on conditional access (the law under which Ms Murphy had been prosecuted) and Directive 93/83 on copyright and rights related to copyright applicable to satellite broadcasting and cable retransmission. However, in her view these industry specific provisions had to be read in the light of the fundamental freedoms granted by the European Treaty itself and, in addition, what the Treaty lays down in respect of competition law.

One of the key fundamental freedoms in the Treaty is the freedom to provide services throughout the European Union. This requires the abolition of all restrictions on the ability of a service provider established in one Member State to provide a service in another Member State. In the view of the Advocate General the the restriction on the reselling of decoder cards prevented the utilisation of services from other Member States, the services in this case being access to television programmes. In a key passage of the Opinion she states that “this impairment of freedom to provide services is particularly intensive as the rights in question not only render the exercise of freedom to provide services more difficult, but also have the effect of partitioning the internal market into quite separate national markets. Similar problems exist with regard to access to other services, for example the sale of computer software, musical works, e-books or films via the internet”.

In the field of the free movement of goods such as hardcopy books, CDs and so on, the principal intellectual property right is the exclusive right to copy the work and to place the copies on the market. European caselaw over many years has shown that this exclusive right is exhausted once a product has been lawfully distributed on the market in a Member State by the actual proprietor of the right or with his consent. In most cases intellectual property rights cannot preclude the re-sale of such goods within the internal market. In other words, the rights holder can only sell the copy of the work once; nothing can stop the purchaser then reselling that copy, and the rights holder has no right to benefit from that reselling. The FAPL argued that, in the field of the provision of services, there is no exhaustion of rights comparable to the movement of goods.

However, the Advocate General was firmly of the view that services do not differ significantly from goods in this regard. Referring to other examples of digital goods/services – music, films and books –  she said that these “also show that the question at issue has considerable importance for the functioning of the internal market beyond the scope of the cases in the main proceedings. A delimitation of the markets based on intellectual property rights means at best that access to the goods in question will be granted subject to differing conditions, in particular as regards prices or digital rights management. Often, however, access to such goods is completely precluded on many markets, either because certain language versions are offered only to customers from certain Member States or because customers from certain Member States cannot acquire the product at all. For example, in autumn 2010 dealers from the United Kingdom announced that they could no longer sell e-books to customers outside that Member State. No comparable products are offered for sale in other Member States in the case of many English-language books.” It is noteworthy that at this point in her Opinion the Advocate General made specific reference to an article on Bookseller.com (http://www.thebookseller.com/news/waterstones-halts-overseas-e-book-sales.html) reporting Waterstones’ decision to stop selling e-books to customers outside of the UK and Ireland in order to comply with the legal demands of publishers regarding the territories into which it can sell digital titles.

Having decided that goods and services should both be subject to the principle of exhaustion of rights, the Advocate General held that the rights in the transmission of football matches are exploited through the charge for the decoder cards, and once those cards have been sold European law would not allow any restrictions on their resale.

Finally, the Advocate General was firmly of the view that agreements aimed at preventing or restricting parallel exports between Member States are likely to be contrary to European competition law. In this case a contractual obligation linked to a broadcasting licence requiring the broadcaster to prevent its satellite decoder cards from being used outside the licensed territory had the same effect as agreements to prevent or restrict parallel exports. Such an obligation was intended to prevent any competition between broadcasters through a reciprocal compartmentalisation of licensed territories. Such licences with absolute territorial protection were incompatible with the internal market. 

The Advocate General’s Opinion itself is not binding – it is a formal recommendation to the full court of how the case should be decided. However it is rare for the full court to disregard an Advocate General’s Opinion. Given that the Opinion sets out what has been the state of European law for several decades it should come as no surprise – perhaps the biggest surprise is that satellite broadcasters have got away with this for so long. Whoever had the bright idea of bringing a private prosecution against Ms Murphy, an action which has snowballed into the current case before the European Court of Justice, may well have succeeded in causing the downfall of the very system that the prosecution was designed to defend.

© 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