Arbitration is the Preferred Option
The Law Lords have handed down a significant judgment for people who have disputes over contracts which contain an arbitration clause. The case arose because of a dispute between businesses engaged in the chartering of ships. The ship owners brought an action for damages for conspiracy, bribery and breach of fiduciary duty relating to a charter contract that contained a clause which provided that disputes under the contract would be settled by referral to arbitration.
The ship owners argued that the arbitration clause did not apply for two reasons. Firstly, the question of whether the charters obtained by the defendants were procured by bribery was not a dispute arising under the charter contract and, accordingly, the dispute was ‘outside the agreement’. Secondly, the ship owners argued that the arbitration clause was liable to be rescinded and therefore not binding on them, because they had the right to rescind the entire contract if their allegations of bribery could be sustained.
The House of Lords could not accept these arguments. In its view, a contract was agreed by rational businesspeople who could have placed certain types of dispute outside the arbitration clause had they chosen to do so. In the words of Lord Hoffmann, “The language of the relevant clause of each charter contained nothing to exclude disputes about the validity of a contract on the ground that it was procured by fraud.”
The Lords also considered that the owners’ claim, that if they were right about the bribery they were entitled to rescind the whole contract including the arbitration clause, was flawed. An arbitration agreement can only be rendered void or voidable on grounds relating directly to that agreement. There were no grounds of challenge specific to the arbitration agreement so as to invalidate it. The claim that the main contract had been induced by bribery thus fell to be determined under the arbitration agreement.
If you are offered a contract which contains an arbitration clause, you might care to consider whether you wish to limit the application of the arbitration clause so that certain types of dispute are not covered by it. We can advise you on all contractual matters.
Partner Note
Fili Shipping Co Ltd. v Premium Nafta Products Ltd. (on appeal from Fiona Trust and Holding Corpratation v Privalov) [2007] UKHL 40. See
Company Road Safety – Police Get Tough
Employers who forget that their health and safety responsibilities extend to employees driving on company business should take note of a shift in the way police will investigate road accidents in future.
Research by the Health and Safety Executive shows that 20 people are killed and 250 are seriously injured each week in traffic accidents involving someone driving for business reasons. This has prompted the Metropolitan Police and several other forces to adopt a policy of investigating company road-safety procedures when an accident involving a work vehicle occurs.
Police will investigate whether the company has carried out basic checks, such as making sure employees using their own cars for business purposes have a valid driving licence, are insured to drive on business and have an MOT certificate for their vehicle. In addition, they intend to investigate the reasons for a vehicle involved in an accident being on the road.
Research by the Parliamentary Advisory Council for Transport Safety has found that employers often fail to consider the dangers posed by employees driving whilst tired. Practices such as expecting employees who drive on company business to work long hours or putting pressure on them to fulfil as many appointments as possible in a given period could be regarded as contributory factors by police investigating the reasons for an accident.
The Corporate Manslaughter Act, due to come into force in April 2008, will make it easier to bring cases against organisations that are negligent in carrying out their health and safety obligations and this causes someone’s death.
Contact <<CONTACT DETAILS>> for advice on implementing a company road-safety policy.
Consultation on Collective Redundancies
The Employment Appeal Tribunal (EAT) has ruled that the obligation on an employer, under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992, to consult over collective redundancies extends to consultations over the reasons for the closure of a business (UK Coal Mining Ltd. v National Union of Mineworkers). In the EAT’s view, the obligation to consult over avoiding proposed redundancies inevitably involves examining the reasons for the dismissals and that in turn requires consultation over the reasons for the closure.
This is an important decision as it overturns previously binding authority on this area of the law. One difficulty is that EC Directive 98/59/EC provides that an employer should begin consultations when ‘contemplating’ making collective redundancies, whereas this duty is given effect in domestic law as being a duty to consult when an employer ‘proposes to dismiss’ employees as redundant.
The EAT held that as domestic law now stands, the obligation to consult over the avoidance of dismissals has significantly widened the scope of the consultation obligations. In its view, in a closure context, where it is recognised that dismissals will inevitably, or almost inevitably, result from closure, dismissals are proposed at the point when the closure of the business is proposed. Where closure and dismissals are inextricably linked, the duty to consult over the reasons for the closure arises.
Says <<CONTACT DETAILS>>, “It is important that employers are aware of this requirement to consult at an early stage in the decision-making process. Carrying out a redundancy programme always requires care and failure to consult as required can lead to an Employment Tribunal requiring the employer to make protective awards to the dismissed employees. If you are contemplating the closure of a business, or part of one, contact us immediately. We can help ensure that this difficult process is carried out with minimal risk of unanticipated financial consequences.”
Partner Note
UK Coal Mining Ltd. v National Union of Mineworkers. See
Directors’ Duties Under the 2006 Companies Act
The Companies Act 2006 was designed to modernise British company law, making it ‘fit for purpose’ for the 21st Century. In particular, there are several changes which affect directors. As of 1 October 2007, the duties of directors are, for the first time, specifically defined. They are:
· (S 171) The duty to act within their powers (the duty to adhere to the company’s constitution);
· (S 172) The duty to promote the success of the company. There are six things a director must consider here, including consideration of the company’s employees, the long-term consequences of decisions, fairness to members (shareholders) and the impact of decisions on the community and environment;
· (S 173) The duty to exercise independent judgment. This is not as restrictive as it may seem, but means not being the ‘yes man’ of the person responsible for his or her appointment. It does not prevent having an interest in transactions nor relying on the opinion of an expert where appropriate;
· (S 174) The duty to exercise reasonable skill, care and diligence. This duty has particular implications for non-executive directors, who can no longer afford to take a ‘hands-off’ approach;
· (S175) The duty to avoid conflicts of interest. This includes conflicts involving connected persons such as family members;
· (S176) The duty not to accept benefits from third parties; and
· (S177) The duty to declare an interest in transactions or arrangements. This includes the duty to declare interests of persons connected with the director.
Directors of companies should ensure that they and their fellow directors are fully aware of the provisions of the Act relating to their duties and comply with them. Contact us for individual advice.
The provisions of the Companies Act are being introduced in stages. For a full implementation timetable, see http://www.dti.gov.uk/bbf/co-act-2006/index.html.
Partner Note
For further information on the Companies Act 2006, see http://www.dti.gov.uk/bbf/co-act-2006/index.html.
Dividend Waivers – Making Them Work
When a company is set up, it is common to divide the shares in it in approximately equal proportions amongst the subscribers. Whether or not this proves to be the most effective way to split them in the long run depends on a variety of factors, of which the effect on the governance of the company is normally the most significant. However, one problem which sometimes results is that where dividends are paid in proportion to the shareholdings, this can lead to dividends being payable to a shareholder who does not need them or who would have to pay higher-rate tax on them.
When a shareholder does not wish to receive a dividend, this can be effected by the execution of a dividend waiver. The use of such waivers can be an effective tool in tax planning, so it is unsurprising that HM Revenue and Customs (HMRC) are generally not keen on them. Unless a dividend waiver is executed in the right way, HMRC are likely to use anti-avoidance legislation to attack the scheme.
The essential steps are:
- The dividend waiver must be a formal election by the person entitled to receive the dividend. It must be done on paper in appropriate form and dated and witnessed;
- The waiver must be executed before the dividend is declared; and
- It is always better if there is a commercial reason for the dividend to be waived – this will normally be to allow the company to retain funds for some specific purpose.
It is unwise to use dividend waivers too frequently. HMRC will look more closely at arrangements which are repeated and the practical effect of which reduces the overall tax payable – for example, where the shareholder executing the waiver is a higher-rate taxpayer and the shareholder who receives the dividend is not.
Partner Note
Source – Tips and Advice – Tax, September 2007.
Empty Properties – Rating Change Approaches
It has for some years been a bit of an oddity that with the economy buoyant, quite generous reliefs from business rates have been available where commercial premises are unoccupied.
Ironically, a change in the law reduces these reliefs just as the economy looks to be coming off the boil.
Vacant non-domestic properties are generally exempt from rates for three months. After that, rates are payable at 50 per cent until the property is again in occupation. Industrial properties and storage facilities enjoy 100 per cent rate relief until re-occupied. From 1 April 2008, subject to designated exemptions, the reliefs will disappear – after three months for non-domestic properties generally and after six months for industrial and storage premises.
For landlords with property portfolios including commercial properties currently unlet, there is now a strong incentive to find tenants before the changes have an impact.
For advice on any commercial property matter, please contact <<CONTACT DETAILS>>.
Partner Note
The Rating (Empty Properties) Act 2007 can be found at http://www.opsi.gov.uk/acts/acts2007/20070009.htm.
The legislation is not yet in final form. There are exemptions for certain not-for-profit organisations, provided (it seems) that the property is to be occupied by a not-for-profit tenant.
Enterprising Investment Made Simple
Successive governments have recognised that the spirit of entrepreneurialism, though deeply ingrained in the UK’s culture, is not really very well supported by the financial institutions. In an attempt to provide more ready access to investment capital for entrepreneurs, a variety of schemes have been created – such as the Loan Guarantee Scheme, which provides financial guarantees for loans made by lenders to smaller businesses.
One of the less well-known schemes is the Enterprise Investment Scheme (EIS), which allows an investor to subscribe for new shares in a qualifying company and to obtain Income Tax relief on the investment at 20 per cent. If the shares are held for three years after the investment is made, any subsequent gain on them is not subject to Capital Gains Tax (CGT). EIS shares can also be used to ‘roll over’ a prior gain – deferring the resulting CGT liability until the EIS shares are disposed of.
For a company to issue EIS shares, certain conditions must be met:
- the shares cannot be quoted on a recognised stock exchange and arrangements for a flotation cannot be in progress. Note that a flotation on the Alternative Investment Market does not count for this purpose;
- there are limitations on the trades that are allowed for EIS relief. In particular, land-based businesses, professional services and financial activities are excluded;
- the company must have fewer than 50 full-time employees;
- the gross asset value in the company’s balance sheet must be less than £7m before the issue of the EIS shares (£8m afterwards); and
- there is also a limitation of £2m in any twelve-month period on the total amount which can be raised using the EIS or similar schemes, such as Venture Capital Trust investments.
A number of limitations apply regarding who can invest in the EIS shares of a company – investments by ‘connected persons’ and some others do not qualify for EIS treatment.
The EIS can be both a useful investment vehicle for investors not afraid of the risk involved and a source of capital for the smaller company which may find more conventional finance difficult to obtain.
Contact <<CONTACT DETAILS>> for advice on all corporate finance matters.
Partner Note
Source – ‘Business Matters’, autumn 2007.
European Court Backs Squatters’ Rights
The European Court of Human Rights has handed down a judgment which accepts that the UK's law of ‘adverse possession’ is not a breach of the property owner's human rights.
Under UK law, anyone who is allowed unopposed occupation of a piece of land for more than the statutory period can acquire the legal right to the land. This is called adverse possession. Numerous safeguards for property owners were introduced by the Land Registration Act 2002, which introduced a system of notices before the title could be transferred.
An earlier decision of the Court had indicated that to pass the legal title to land by the exercise of ‘squatters’ rights’ would breach the human rights of the original owner as the title would pass without any compensation being paid. This decision was, unsurprisingly, contested in a case in which the land concerned, which had planning permission, was estimated to be worth £10m.
The judgment will serve as a wake-up call to property owners who allow others to occupy land they own as if it were the squatters’ own land.
The system now in place, which involves giving notices to owners of land when an application to transfer the title is made, should reduce the frequency with which ownership by adverse possession is claimed. The new system also makes it relatively easy to prevent the registration of title to the land by squatters. However, there is still much unregistered land in the UK and it is often difficult to ascertain the ownership of that land in order to give the required notices. Furthermore, an owner who is unable to deal with notices served, by way of infirmity or because they are absent from their home, could face particular problems if steps are not taken to oppose the registration of title. Once an application for registration has been refused, if the squatter remains in occupation for a further two years and submits a further application, this will be accepted by the Land Registry.
If you have property occupied by someone else which is not the subject of a lease or licence arrangement involving a payment, take advice to make sure you are not inadvertently exposing yourself to avoidable risk.
Partner Note
European Court of Human Rights (ECHR) judgment, 1 October 2007. Reported in the Times. The original ECHR ruling can be found at
Fear of Disease Not Actionable
The House of Lords has recently issued its judgment in a case involving a claim for compensation from employers by employees who had been diagnosed as having ‘pleural plaques’. It has confirmed the earlier decision of the Court of Appeal that damages are not payable.
Pleural plaques are fibrous scar tissue in the lungs and are the result of exposure to asbestos. They are benign, but indicate that the risk of developing mesothelioma and other lung cancers is heightened. It was admitted that the exposure to asbestos was due to negligence on the part of the employers.
The claimants argued that notwithstanding the fact that they had not as yet developed an asbestos-related disease, the increased risk of so doing caused them distress. Most of the claimants sought ‘provisional damages’ – an award based on the probability that they would develop lung disease. The action of one of the claimants was also based on the fact that he had developed clinical depression as a result of the fear he had of developing lung cancer following his becoming aware that he had pleural plaques.
The Lords did not accept that the employer was liable in either case. Development of the plaques was insufficient basis for a claim. They were not of themselves harmful and the mere fear of a future illness was not a factor which could of itself give rise to a claim for damages. In the case of the claimant with the psychiatric injury, the Lords concluded that the injury, though real, was not a ‘reasonably foreseeable’ result of the exposure to asbestos and could therefore not give rise to a claim. In the words of Lord Hoffman, “Applied to the broader question of psychiatric illness, that means that in the absence of contrary information, the employer is entitled to assume that his employees are persons of ordinary fortitude.”
It is understood that the Scottish Parliament intends to introduce legislation to reverse this decision in Scotland.
Partner Note
Grieves v F T Everard & Sons Ltd. and Others conjoined appeals [2007] UKHL 39. See http://www.publications.parliament.uk/pa/ld200607/ldjudgmt/jd071017/johns-1.htm.
Fines Should be Proportionate
A small firm and its director, who were originally fined £96,000 and £14,000 respectively following breaches of Health and Safety law which led to the death of an employee, have had their fines reduced to £80,000 and £10,000 by the Court of Appeal.
The case involved an employee of a vehicle-recovery firm. He died as a result of a workplace accident. The company and its managing director were prosecuted, the prosecution proving that the company and its management required and encouraged working practices which were known to be dangerous. The man’s death was the direct result of this approach and occurred when a vehicle which was being raised in an unsafe manner fell on him and crushed him.
On appeal, the Court of Appeal considered that the original judge had failed to take account of the relatively modest financial position of both the company and its managing director and therefore reduced the fines.
Says <<CONTACT DETAILS>>, “The reduction in the fines was relatively small, still leaving the company and its managing director facing substantial liabilities in line with what the court believes to be appropriate in such severe cases. By the time the costs of the appeal hearing have been met, the actual reduction in liability is likely to be very modest. The courts have little sympathy for firms which take a cavalier attitude to or wilfully endanger their employees.”
Partner Note
Re David Farrell and Hough Green Garage Ltd [2007] EWCA Crim 1896.
Insolvency Fees Ruling – Damages After Fees
A recent case involving the long-running saga of the insolvency of Leeds United FC has potential implications for employees of companies which go into administration.
The administrators of Leeds United are the ‘Big 4’ accountancy firm KPMG, who were appointed administrators of the club in May 2007. Leeds United was relegated to League 1 at the end of the 2006/07 season, but still had players on wages based on being in the Premier League. Wishing to be able to cut the club’s payroll, KPMG applied to the court for a ruling on whether any damages payable for wrongful dismissal would rank for payment before or after KPMG’s own fees for the administration. The action related to the contracts of four footballers, the unexpired portions of whose contracts were worth £2.2m. The issue for the club was that if the administrators did not accept the contracts, the club would lose its most valuable assets because the players would become free agents. If the administrators accepted the contracts, there would be a substantial liability if the players were not paid. The administrators foresaw a problem if they were to be considered to have wrongfully dismissed the players because the legislation places sums arising out of a ‘debt or contract’ adopted by an administrator in respect of ‘wages or salary’ as priority items for payment in such circumstances.
At issue was whether a liability in damages arising for wrongful dismissal was a sum arising out of debt or contract in respect of wages or salaries. In the view of the court, ‘damages payable to the employee are not wages’. In similar circumstances, therefore, it is to be expected that the court would rule that damages arising out of other breaches of an employment contract would not have the preference given to wages and salaries in the insolvency legislation.
Another recent decision has confirmed that protective awards made to dismissed employees after a company is put into liquidation are not debts due by the company at the date of liquidation. The employees concerned are not therefore creditors of the company.
Partner Note
1. Richard Dixon Fleming, Mark Granville Firman and Howard Smith (administrators) v David Healey, Jonathan Douglas, Kevin Nicholls and Jermaine Beckford [2007] EWHC 1761 (Ch).
2. Day v Haine and another – Chancery Division, published 28 December 2007. Reported in the Times.
Is a Director an Employee?
When a company becomes insolvent, whether or not a shareholder and director is an employee, within the meaning of section 230 of the Employment Rights Act 1996 (ERA), for the purposes of a claim for statutory redundancy payment from the Secretary of State for Trade and Industry, can be difficult to ascertain. The Employment Appeal Tribunal (EAT) considered this issue in the case of Nesbitt and Nesbitt v Secretary of State for Trade and Industry.
Mr and Mrs Nesbitt were directors of APAC Computer Training Ltd. They managed the company on a day-to-day basis and between them owned 99.99 per cent of the shares. From the start, they had written contracts of employment with the company, in the same form as those of other company employees. They were paid salaries commensurate with their roles as the senior managers of the business but did not receive directors’ fees or dividends.
In the course of 2006, the company became insolvent and on 3 July of that year the remaining employees, including Mr and Mrs Nesbitt, were made redundant by the liquidator. The couple applied to the Insolvency Service for redundancy payments under the insolvency provisions of the ERA. Their claims were rejected on the ground that they were not employees within the meaning of the Act.
The Employment Tribunal agreed with the Insolvency Service on the basis that the Nesbitts were in joint control of the company.
The EAT overturned this decision on appeal. In its view, the fact of the Nesbitts’ control over the company was not sufficient of itself to deprive them of employment status if they otherwise satisfied all the criteria for employment. Mr Justice Underhill stated, “I believe that the law is that the fact that a claimant under the employment protection legislation is a majority shareholder and a director of the company which employs him does not affect his status as employee unless the tribunal finds that the company is a ‘mere simulacrum’… and thus, by the same token, that the contract between it and the putative employee is a sham.”
In this case, apart from the level of control they had over the company, all the indications were that Mr and Mrs Nesbitt were employees. They had proper employment contracts (equivalent to those issued to other employees), they received all their remuneration by way of salary and they ‘behaved like employees’.
Says <<CONTACT DETAILS>>, “One of the relevant factors to be taken into consideration in cases such as this is the contract of employment. We can assist you to ensure that your employment terms make sure you have the appropriate contractual relationship with your company.”
Licensing – Changes Proposed to Procedures for Minor Amendments
The Government has announced proposals to simplify the process to vary Licensing Act Authorisations under the Licensing Act 2003. Currently, this requires licensees to apply for a new licence or variation to their existing licence in several circumstances of minor import – for example where licensable activities are varied or the plan attached to the authorisation is to be changed.
The idea is that licensing authorities should consider whether there is likely to be an impact on the licensing objectives and, if not, whether an application to vary the licence needs to be made. This should save licensees the cost of making applications for minor amendments.
The proposals for reform put forward three possible approaches:
- To amend the Act to introduce a new process for minor variations, broadly defined as any variation that does not impact adversely on the promotion of the licensing objectives. The decision regarding the impact of the application would be left up to the authority. This is the Government’s preferred approach.
- To amend the Act to introduce a new minor variations process as above, but with constraints on the freedom of discretion of the authority spelled out in the legislation.
- To leave the system as it is.
The consultation document can be found at http://www.culture.gov.uk/Reference_library/Consultations/2007_current_consultations/cons_minorvvariations_plcpc. The deadline for responses is 20 February 2008.
Making Training Costs Tax Deductible
You would be forgiven for thinking that training costs aimed at improving your skills or business profits would automatically qualify for tax relief, but that is not necessarily the case. The complexities of the UK tax system mean that the availability of tax relief depends on who is paying for the training and what the training is designed to achieve.
For employees who pay for their own training, tax relief will not normally be given even if the sole purpose of the training is to make them better able to do their job. If an employee needs training as a necessity to carry out their job (so that the training is ‘wholly exclusively and necessarily incurred’) then tax relief will be given. The key word here is ‘necessarily’, as unless the training is necessary, its cost is not deductible. Any training designed merely to enable an employee to undertake a new job does not qualify for tax relief in their hands. Employees who pay for their own training should bear in mind that expenses paid for by them and reimbursed by their employer constitute a benefit in kind which will be taxable.
The situation as regards training paid for by employers is very different. By and large, any training which makes their employees better at their jobs (and this includes very general sorts of training which may not have an immediate impact on their ability to do the job) will be allowable.
Clearly, therefore, the sensible thing for an employee to do is to get their employer to pay for their training, using a salary sacrifice if necessary.
For the self-employed, the criteria used to determine whether training expenses are allowable for tax relief are somewhat different. Here, training expenses will be deductible for tax purposes if they are incurred ‘wholly and exclusively’ for the purposes of the trade, which is a much more liberal definition than that which applies for employees. However, a further consideration must be taken into account, which is whether the training is of the nature of an expense or an investment. If the latter (for example, the acquisition of know-how to enable new products to be developed), then strictly the cost is a capital item and tax relief should be claimed by way of capital allowances.
If you have a need to incur substantial training expenses, it is sensible to take professional advice on how best to structure the expenditure.
Partner Note
See ‘Business Matters’ November 2007.
Music While You Work
If you allow your staff to listen to music whilst working, the Performing Rights Society (PRS) has warned that you could be liable to pay a licence fee.
PRS is a not-for-profit organisation that licenses the public performance of music on behalf of its 50,000 composer, songwriter and music publisher members. It pays its members royalties for each time a piece of their music is played in public.
According to PRS, a tariff for music in the workplace applies to ‘the mechanical performance within the society’s repertoire as a background to work, meals, stand-down times and breaks at work’.
PRS is taking Kwik Fit, the automotive parts repair company, to court for violating musical copyright because it claims that the company’s mechanics play the radio loudly enough for it to be heard by colleagues and customers. In the view of PRS, this constitutes a ‘performance’ of the music, which requires the payment of royalties to the artists. PRS is claiming £200,000 in damages because Kwik Fit has refused to obtain the appropriate licences, claiming that the company has a policy banning the use of radios at its premises.
For those who allow music to be played at work, the situation is complicated by the fact that you may also need a licence from Phonographic Performance Ltd. (PPL). PPL collects and distributes airplay and public performance royalties in the UK on behalf of over 3,500 record companies and 40,000 performers.
The cost of a licence depends on how the music is used. For further information, see the PRS website at http://www.mcps-prs-alliance.co.uk/Pages/default.aspx and the PPL website at http://www.ppluk.com/.
New Money Laundering Regime
Business owners are reminded that the new Money Laundering Regulations 2007 came into effect on 15 December 2007. These replaced the existing money laundering legislation. The aim of the new regime is to further restrict criminal access to the financial system, thereby deterring crime and terrorism.
The Regulations apply (with certain exceptions) to the following types of business:
· credit institutions;
· financial institutions;
· auditors, insolvency practitioners, external accountants and tax advisers;
· independent legal professionals;
· trust or company service providers;
· estate agents;
· high value dealers; and
· casinos.
It is the ‘high value dealer’ who is probably least likely to be aware of the impact of the new law. The legislation defines a high value dealer as ‘a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when he receives, in respect of any transaction, a payment or payments in cash of at least 15,000 Euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked’. Clearly, this definition will cover many businesses supplying high value goods where the customer wishes to pay in cash. At the time of writing 15,000 Euros is approximately £11,000.
A simple summary of the new rules can be found at http://www.hm-treasury.gov.uk/media/2/6/moneylaundering_guide150807.pdf.
If you would like advice on how the new Money Laundering Regulations affect your business, please contact <<CONTACT DETAILS>>.
Partner Note
HM Treasury’s information sheet for firms can be found at
The Money Laundering Regulations 2007 can be found at
No Agreement Means Software Writer Owns Copyright
A recent case has illustrated the common legal difference between intellectual property (IP) produced by a freelancer and that produced by an employee. In the case of IP produced by an employee, the rights to the IP almost invariably rest with the employer. If the IP is supplied by a contractor, in the absence of a specific contractual arrangement to the contrary the courts will normally conclude that the IP belongs to the person who created it. In these circumstances, the law of copyright states that copyright rests with the author, although the person commissioning the work gains an implied licence to use it. In some instances, however, an implied transfer of copyright to the person commissioning the creation of the IP is considered to arise.
In the case in point, a programmer was commissioned to produce software for a company. Later on, a dispute arose as to who owned the copyright. At issue was whether the IP supplied led to an assignment of copyright or the creation of an exclusive licence to use the IP. Over £40,000 of royalties were at stake, claimed by the writer of the software, based on sales of the product incorporating the software. The court ruled that the copyright rested with the writer of the software, but the person commissioning it had an exclusive licence to its use. Accordingly the royalties were payable.
“When commissioning any work which creates IP, it is important to think through the issues that arise and ensure that the agreement under which the work is done covers the IP issues to your satisfaction,” says <<CONTACT DETAILS>>. “In principle, it is almost always better to try to obtain the ownership of IP where this is possible and makes economic sense.”
Partner Note
Laurence Wrenn (2) Integrated Multi-Media Solutions Limited v Stephen Landamore, 23 July 2007 [2007] EWHC 1833 (Ch).
Non-Cooperation Sufficient for a Ban
A director of a company who failed to cooperate with the Financial Services Regulator and (although the company was not insolvent) with the Official Receiver recently found that an order was made banning him from acting as a director.
Mr Ghassemian was a company director and ignored requests for information from the Financial Services Regulator and also the Official Receiver. When an order banning him from being a director was made by the Secretary of State, he argued that the order was invalid because the Secretary of State had no jurisdiction to make a complaint on behalf of the Financial Services Regulator and, also, that the allegation regarding non-cooperation with the Official Receiver was irrelevant since his company was not insolvent.
The High Court dismissed his appeal. Failing to cooperate with the appropriate regulators could be sufficient grounds to show unfitness to be a company director.
This case illustrates the fact that the authorities take a dim view of directors who fail to cooperate with them when they make enquiries. Company directors who receive requests from regulators and have any qualms about complying with them should ensure that they take advice regarding what level of cooperation needs to be given.
Partner Note
Ghassemian v Secretary of State for Trade and Industry [2007] 9 Current Law 69. Reported in Accountancy, November 2007.
Patent Protection Depends on Proof of Invention
A recent ruling by the House of Lords, in a case involving a patent, marks a significant change to UK patent law. Prior to the decision, under UK law an action brought to prove entitlement to a patent could only be commenced against someone if it could be demonstrated that they had breached the law in some way. The House of Lords ruled that this approach was incorrect and that in a claim to assert entitlement to a patent, all that is necessary is that the claimant is able to prove that he or she was the inventor of the subject of the patent. The Lords also ruled that an amendment of a claim from one of joint entitlement to a patent to one of sole entitlement did not amount to a new claim. Accordingly, the two-year limitation period on such claims did not apply.
In the words of Lord Hoffman, “The first step in any dispute over entitlement must be to decide who the inventor or inventors of the claimed invention were. Only when that question had been decided could one consider whether someone else might be entitled.”
This ruling is important as it enables those who can prove that they invented a patentable invention to claim the right to the patent or prevent someone else patenting it. This significantly advances the rights of inventors.
Contact <<CONTACT DETAILS>> for advice on protecting your intellectual property rights.
Partner Note
Rhone-Poulenc Rorer International Holdings Inc & Anr v Yeda Research & Development Co Ltd., HL 24 October 2007. See
Overturning Markem Corp v Zipher Ltd. [2005] RPC 31.
Policy Wording Negates Claim
Yet another case illustrates the wisdom of reading through the small print of commercial insurance policies to make sure that the risks you think are covered are actually covered by the policy.
In the case in point, supermarket giant Tesco was denied the right to claim compensation for the sum of money it had to pay out to Network Rail when construction operations Tesco had carried out caused the collapse of a tunnel, thereby causing a loss of revenue to Network Rail because their trains could not use the tunnel for six weeks.
When Tesco sought to reclaim the costs from its insurers, the claim was turned down on the basis that the policy covered only losses which were caused by a harm for which a liability arose in the law of tort. In particular, the policy covered losses resulting from nuisance to or trespass over the land concerned. The loss suffered by Tesco was not a loss due to a tort, so it had no right to claim on its policy.
Says <<CONTACT DETAILS>>, “You cannot be too careful when negotiating insurance. Make sure you read and understand the policy, particularly the limitations on cover, or you could get a nasty shock. We can advise you on the meaning of the wording of your policies.”
Partner Note
Tesco Stores Ltd. v David Constable and other members of Lloyds syndicate 386, QBD Comm, 14 September 2007. Reported in The Law Society’s Gazette, 4 October 2007.
‘Pre-Pack’ Administration Gets Court Approval
Insolvency law has produced more than its share of legal argument. One contentious matter which recently came before the court was whether ‘pre-pack’ transfers of insolvent businesses can be justified.
A pre-pack occurs when an insolvent business (or a part of it) is transferred to another business and, in effect, continues to trade. At issue is whether the whole process is merely a way of the old business shedding its liabilities and continuing, leaving creditors in the lurch. Pre-packs often involve some of the members of the management team of the failed company, which can cause anger on the part of creditors of the old company who have been left out of pocket. The new business appears to outsiders to be the same as the old one, except that it is now shorn of its liabilities.
In the case in point, the administrators of an insolvent partnership wished to transfer the business to a new limited liability partnership for a sale price of £400,000. The administrators considered that this would be the best solution as the value of the partnership’s assets and goodwill would be maximised and there would be continuity of service to the clients of the firm. In addition, the jobs of approximately 50 employees would thereby be saved, which would in turn reduce the preferential claim on the assets of the partnership (for compensation for loss of office) which would otherwise result.
HM Revenue and Customs (HMRC) was the major creditor of the partnership, being owed over £1.7m in PAYE, VAT and National Insurance Contributions. They opposed the sale by the administrators. However, in such circumstances it is for the court to decide whether or not to approve the sale, not the creditors. Had the proposal been decided by a vote of the creditors (such votes give creditors voting power proportionate to the sum they are owed), HMRC would have been able to defeat the proposal.
The judge dealing with the case was particularly impressed that the sale would lead to the preservation of employment of the firm’s staff. He accepted the impartiality and expertise of the insolvency practitioners and was of the view that only very strong evidence to the contrary should be allowed to overturn arrangements made on the basis of their professional judgment.
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Partner Note
DKLL Solicitors v HMRC [2007] EWHC 23067 (Ch).
Retention of Title Can Include Commingled Goods
Retention of Title (ROT) clauses are often used in contracts for the supply of goods. The effect of the ROT clause is that the goods which have been supplied remain the property of the supplier until paid for in full by the purchaser. If the buyer goes broke or fails to pay for the items, the vendor has the right to recover its property.
For discrete items such clauses are relatively straightforward, as the items which are the subject of the ROT clause are easily identifiable. Problems arise, however, when the goods subject to the ROT clause are incorporated into something else. Clearly the vendor does not own the other goods, so is the ROT clause valid?
Normally, in such cases, if the goods subject to ROT have been converted into a new product or products, the ROT clause fails. However, a recent case showed an exception to the rule. It involved a company that supplied 217 tonnes of zinc in the form of ingots to another company. Zinc is normally supplied in ingot form. The company which purchased the zinc ingots melted them and mixed them in a tank with zinc from another supplier. There was a total of 265 tonnes of zinc in the tank.
The supplier claimed that 217 tonnes of the molten zinc in the tank belonged to it under the ROT clause. Despite the fact that the actual zinc it had supplied could not be distinguished from that supplied by others, the judge agreed. Crucially, the zinc in the tank was essentially the same material (though slightly less pure) than the material originally supplied. The zinc was still identifiable and thus the ROT clause held good.
Says <<CONTACT DETAILS>>, “When selling goods, retention of title clauses are almost always worth including if there is a risk of non-payment and the goods themselves will be identifiable enough for the clause to be enforceable. If you supply goods, it might be worth checking that your current terms of trade incorporate best legal practice. We will be pleased to advise you.”
Partner Note
CKE Engineering Ltd. (in administration) – UKHC 4275 of 2006, 24 Sept 2007.
Taper Takes Toll
One of the more important changes announced in the recent pre-budget report was that Capital Gains Tax (CGT) taper relief, which was introduced in 1998, will be abolished with effect