Commercial E-newsletter November 2010




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Communications Needed to Understand the ‘Factual Matrix’ Are Admissible

‘Without prejudice’ communications, made when negotiating legal disputes in order to aid agreement, are not normally admissible in court. The idea behind them is to allow the parties to explore possible areas of agreement and make suggestions and admissions which they would not be willing to admit to in court.

A recent case shows, however, that just heading a communication ‘without prejudice’ does not offer blanket protection from disclosure.

The Supreme Court ruled that facts communicated in without prejudice correspondence, which would be admissible but for the without prejudice rule, could be admitted in evidence in a subsequent dispute to which they were relevant, provided that their disclosure was appropriate in order to understand the circumstances surrounding the matter and served as an aid to the construction of the agreement reached.

Although it may seem that this makes it risky to rely on the precept that disclosures made without prejudice will remain undisclosed, the ruling made it quite clear that the disapplication of the rule would not be extended beyond evidence necessary to explain the ‘factual matrix’.

Contact us for advice on all aspects of business law.


First Service Ruled In
Taking care over the service of documents is important, if only to prevent an unnecessary appearance in court to determine whether or not a document was properly served.

Recently, a construction dispute was dealt with by an arbitrator. In order to express dissatisfaction with the arbitrator’s decision, the dissatisfied party had to serve a notice to this effect within four weeks of the arbitrator’s decision. Failure to do so would mean the arbitrator’s decision would be binding on both parties.

One party was dissatisfied and sent a notice on the 28th day to the other party’s solicitors, who forwarded it on to their client. The question arose as to whether the service was valid, as the contract contained a provision that a notice had to be served ‘at the last address notified by the recipient for receiving communications’. In view of the doubt this created, the notice was also served (after the four-week deadline) directly on the other party to the dispute.
It took a court appearance to determine if the solicitors’ office was ‘the last address notified by the recipient for receiving communications’. Fortunately, the court decided that the service to the solicitors was ‘good service’, so the issue of whether the subsequent (late) notice should be accepted did not have to be argued.

The moral of the story is to take care when serving notices – and not to leave everything until the last minute.

For advice on all aspects of commercial property law, contact <<CONTACT DETAILS>>.


HMRC Issue New Tax Guides
HM Revenue and Customs (HMRC) have issued three new ‘toolkit’ guides to help taxpayers reduce the risk of submitting an incorrect tax return. Although primarily aimed at tax advisers and agents, the toolkits are a useful reference guide for any person who takes an active interest in their tax affairs.

The three guides are:

1. Capital v Revenue Expenditure – for use with 2009/10 self-assessment and company tax returns. This guide assists taxpayers in understanding which expenditures are income in nature and which are capital. The former are normally allowable as deductions in calculating taxable profits. The latter are not, but may be eligible for capital allowances;

2. Property Rental – for use with 2009/10 self-assessment tax returns. This guide assists taxpayers in understanding the tax treatment of different types of property rental (which is very complex in the UK) and the allowable expenses for tax purposes of each; and

3. Directors’ Loan Accounts – for use with 2009/10 company tax returns. Directors’ loan accounts are something of a tax minefield, and understanding the effects of being ‘overdrawn’ in a directors’ account is important if unpleasant surprises are not to result.

Access to all HMRC toolkits can be found at

HMRC Toughen Stance on Companies in Difficulty
All the positive publicity created about ‘time to pay’ agreements has increasingly been shown to be misplaced as new research shows that HM Revenue and Customs (HMRC) are now leading the way in bringing insolvency proceedings.

Recent research shows that in 2009/2010 more than 58 per cent of winding-up proceedings against companies were started by HMRC. Furthermore, HMRC’s rate of rejection for time to pay agreement applications has doubled in the last year.

Contact <<CONTACT DETAILS>> for advice on any tax law matter.

Income Splitting – Another HMRC Attack
A case involving a ‘multiple shares’ company, in which different classes of shares were created, with different rights and varying dividends paid to the shareholders over time, illustrates the baleful look that HM Revenue and Customs (HMRC) give to such schemes.

A husband and wife had set up the share structure when they bought a business, each of them investing half the money required. The agreement was that in return for her investment the wife would receive far fewer ‘A’ shares than her husband (who had day-to-day control over the business) and not be in a position of responsibility in the company. However, she stood to receive far larger dividends than he did, because she was also issued with ‘B’ shares which could (and in the event did) receive dividends in their own right. The position was complicated by the fact that the dividends were paid to her on the understanding that she would pay them across to her husband. The dividends she passed across were used to repay loans (for which they were both jointly liable) taken out to purchase the business.

HMRC argued that the arrangement was ‘income splitting’ and the effect was to set up a ‘settlement’ for the wife. Accordingly, various Income Tax assessments were raised to assess the wife’s income as if it were her husband’s.

The court’s decision upheld HMRC’s argument, but only in part, the judge ruling that there was nothing gratuitous in the issue of the ‘B’ shares on the basis that the wife’s investment warranted more than they were worth in return.

As a result, the net gain to HMRC is about £6,000 in extra tax – considerably less than originally sought.

The case does show, however, that HMRC will seek to apply legislation relating to settlements if it suspects income splitting and illustrates the wisdom of making sure that where various classes of shares are created, this is done with the benefit of expert advice.

HMRC have recently announced their intention to appeal against the court’s decision.

We can advise on all aspects of corporate share structure and shareholders’ agreements. Contact <<CONTACT DETAILS>>.


Court Upholds Genuine Pre-estimate of Loss
When a contract contains a ‘penalty clause’ for breach of the contract, the clause will not be enforceable if it is punitive, rather than a genuine attempt to compensate the other party based on a estimate of the loss they would incur as a result of the breach of the contract.

Accordingly, where such a clause is invoked, the party in breach of the contract often attempts to avoid liability by claiming that the clause is a penalty, rather then a pre-estimate of loss.
A penalty clause is not unenforceable, however, just because the actual loss suffered may be less than the damages payable under the clause, provided that at the time the contract was entered into the damages for breach of contract specified in the contract sought to be a fair compensation for the loss suffered.

In a recent case involving a breach of contract connected with the building of a super yacht, the court heard a claim that a clause which required forfeiture of 20 per cent of the contract price, if the buyer breached the contract, should be enforced.

The buyer argued that it was a penalty clause because a similar contract had been undertaken by the same shipyard with a ten per cent forfeiture clause.

The shipyard argued successfully that the figure of 20 per cent was a genuine pre-estimate of loss. It pointed out that any sum it received in excess of that sum would be refunded immediately under the contract and that it would take a long time – years, possibly – to quantify the losses precisely.

The court agreed that the clause struck a fair balance between the two parties, both of which had enjoyed the benefit of expert representation when negotiating the contract and had entered into it freely.

Exclusion Clauses Fail to Protect IT Consultants
Clauses limiting liability under contracts have always been contentious, so a recent decision is to be welcomed because it sets out clearly the limitations which apply to exclusion clauses.

The case involved GB Gas Holdings (Centrica) and Accenture, which had a contract to implement an IT-based billing system for the gas supplier.

In the event, there were many problems with the system and GB sought restitution for its consequential losses. Accenture resisted paying compensation, on the basis of a limitations clause in the contract.

This sought to exclude:

• loss of profits or of contracts arising directly or indirectly;
• loss of business or of revenues arising directly or indirectly; and
• any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential or punitive.

Losses for which restitution was sought (amounts claimed in brackets) included:

• loss of gas distribution charges resulting from the unreliable transmission of usage data (more than £18 million);
• compensation paid to customers, which included ex-gratia payments to preserve goodwill (£8 million);
• additional borrowing charges (£2 million);
• costs of chasing debts not correctly due (just under £400,000); and
• other costs (more than £100,000).

The court ruled that none of the above losses (including the ex-gratia payments) were excluded by the limitation clause.

If you are entering into any substantial contract, we can advise you on how best to minimise your commercial risk. Contact <<CONTACT DETAILS>>.

Intellectual Property

First Impressions Matter
A recent trade mark case confirms that first impressions matter. It dealt with a dispute over a trade mark application made by a firm which had a similar name to another and which was in a similar line of business. The application was opposed by the other firm, which was the proprietor of existing trade marks.

According to the High Court, the risk of ‘initial interest confusion’ would lead to infringement of the trade mark, despite the fact that a more studied review would enable a person to discriminate between the two firms and their products so that, by the time any purchase was made, there would no longer be confusion in the mind of the purchaser.

The Court refused to accept the application by the firm seeking to register similar trade marks, in spite of the argument that the trade marks were based on the nickname of the firm’s proprietor.

Says <<CONTACT DETAILS>>, “The ‘it’s my name’ defence is a surprisingly weak one and this case reinforces the point that before setting up a business under a specific name, it is sensible to check out, at an early stage, the position regarding trade marks you may want to register.”


New Lease Starts When Old Lease Ends
You cannot create a new lease until the old lease has terminated. That was the straightforward message of the Court of Appeal in a case in which a company asserted it had a valid lease over a builder’s yard when the old lease had terminated ‘by operation of law’, allowing the lease to be assigned to it.

The landlord gave a lease over a builder’s yard to a company which operated two businesses from the premises. The company had financial problems, which led to the appointment of an administrative receiver. A new company, called QFS Scaffolding Ltd., was formed to take over one of the businesses and it occupied the builder’s yard. QFS commenced negotiations with the landlord, but no new lease was agreed. The administrative receivers then ‘assigned’ the existing lease to QFS.

The landlord considered the lease to have been surrendered. For this to be the case, there had to have been conduct by the landlord or tenant which was an unequivocal indication that the lease had been terminated and would not continue. In this case, the insolvent company had vacated the premises, had turned over occupation of the premises to QFS and had not paid or acknowledged the need to pay rent.

The landlord had continued to negotiate over the lease and had drawn on the rent deposit when the rent due was not paid. However, the landlord had not acted in any way that was inconsistent with the continuation of the lease.

In the view of the Court, the occupation of the premises by a third party was not inconsistent with the continuation of the lease. The landlord’s actions were also not inconsistent with the continuation of the lease.

Accordingly, the previous tenancy had not terminated by operation of law: it would not do so until steps were taken which demonstrated that it was terminated.

For advice on any insolvency issue, please contact <<CONTACT DETAILS>>.

Data Protection

First Monetary Penalties for Serious Data Protection Breaches
The Information Commissioner has served the first monetary penalties for serious breaches of the Data Protection Act 1998 (DPA).

In the first case, Hertfordshire County Council was issued with a penalty of £100,000 for two serious incidents where Council employees faxed highly sensitive personal information to the wrong recipients. The first concerned information meant for a barrister, regarding a case of child sexual abuse that was before the courts. The fax was sent in error to a member of the public. The Council subsequently obtained a court injunction prohibiting disclosure of the facts of the court case or the circumstances of the data breach. The second breach occurred a few days later when another member of the Council’s childcare litigation unit sent sensitive information that was intended for Watford County Court to a set of barristers’ chambers unconnected with the proceedings to which the information related.

The Council reported both breaches to the Information Commissioner’s Office (ICO). The Commissioner ruled that a penalty of £100,000 was appropriate as the data breach could have caused substantial damage and distress and the Council had failed to take steps to prevent a recurrence of the mistake.

In the second case, a monetary penalty of £60,000 was issued to an employment services company, A4e, after the loss of an unencrypted laptop containing personal information regarding 24,000 people who had used community legal advice centres in Hull and Leicester. The laptop was stolen from the home of one the company’s employees. A4e reported the loss of data to the ICO and subsequently notified those whose data could have been accessed. The ICO found that it had failed to take reasonable steps to prevent the loss of the data.

The Information Commissioner, Christopher Graham, said, “These first monetary penalties send a strong message to all organisations handling personal information. Get it wrong and you do substantial harm to individuals and the reputation of your business.”

The power to levy penalties for serious breaches of one or more of the eight principles in the DPA came into force on 6 April 2010. The maximum an organisation can be fined is £500,000.

Contact <<CONTACT DETAILS>> for advice on any data protection issue.


OFT Cold-Calling Crackdown
The Office of Fair Trading (OFT) recently warned the debt management industry to cease from using unsolicited and misleading cold-calling practices to generate client leads.

As part of its crackdown on illegal cold-calling in the sector, the OFT has recently revoked the consumer credit licence of a company which used various improper practices, including e-mail ‘spamming’, misrepresenting itself as making calls on behalf of the Government and claiming to be able to obtain the writing-off of consumer debt for free.

The OFT is working with the debt management industry trade associations to warn members that they should only use licensed lead generation firms and that failure to do so could lead to licensing action. This will be reflected in revised guidance for companies working in the industry, which is due to be published for consultation next year.

If you are concerned about the lawfulness of your business practices, contact <<CONTACT DETAILS>>.


Collective Redundancy Consultation – Court of Appeal Seeks Clarification
The Court of Appeal (in United States of America v Nolan) has sought guidance from the European Court of Justice (ECJ) as to the point at which the obligation to consult arises under Directive 98/59/EC, the Collective Redundancies Directive.

This issue has caused problems in the past and clarification will be welcome. Whilst the Directive provides that an employer should begin consultations when ‘contemplating’ making collective redundancies, this duty is given effect in domestic law – under Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) – as being a duty to consult when an employer ‘proposes to dismiss’ employees as redundant.

The question arose in this case following a decision by the Secretary of the US Army to close a US Army base in Hampshire, which resulted in the redundancy of some 200 civilian employees. One of the employees, Christine Nolan, brought a claim on behalf of the redundant employees for compensation by way of a ‘protective award’ under TULRCA on the ground that the USA had failed to consult with representatives of the civilian workforce in accordance with its obligations under section 188. She argued that the consultation period was far less than the 90-day period required and, in particular, that there had been a failure to consult before, and about, taking the operational decision to close the base.
The Employment Tribunal found that no meaningful consultation over the closure of the base, and the redundancies this would involve, had taken place and awarded Mrs Nolan a 30-day protective award. The Employment Appeal Tribunal upheld this decision, relying on the decision in UK Coal Mining Ltd. v National Union of Mineworkers that where closure and dismissals are inextricably linked, the duty to consult over the reasons for the closure arises.

The USA appealed to the Court of Appeal on the ground that the more recent judgment of the ECJ in a Swedish case (Akavan Erityisalojen Keskusliitto Alek RY and others v Fujitsu Siemens Computers) is authority for the proposition that, upon the true interpretation of the Directive, the consultation obligation is not triggered by a proposed business decision to close down a workplace but only arises at the later stage when the decision has been made and the intention to make the employees redundant has been formed.

The Court of Appeal chose not to venture further views on the correct interpretation of the Directive, concluding that it could only decide the appeal with the benefit of further guidance from the ECJ. Furthermore, this is an important issue as employers need to understand the exact nature of their consultation obligations in such circumstances.

Gross Misconduct and Breach of Contract
When an employee is sacked for gross misconduct, has the employer breached his contract of employment?

This rather remarkable proposition was put forward by Stephen Dunn, the Managing Director of AAH Ltd., one of a group of companies of which the head company, Celesio AG, was based in Germany. Mr Dunn had failed to inform AAH of a fraud of which he had been aware for five months.

When his employer discovered this, Mr Dunn was sacked for gross misconduct. He then sought compensation.

Celesio had in place a set of mandatory Risk Management Guidelines for the directors of its subsidiary companies to follow. These obliged subsidiary directors to report immediately any potential risks to Celesio. In addition, Mr Dunn’s contract of employment obliged him to ‘perform all the duties and exercise all the powers of his office to the best of his ability and …comply with all lawful directions and instructions given’.

The argument went all the way to the Court of Appeal, which ruled that Mr Dunn had repudiated his contract because his behaviour was such that it undermined the employer’s trust and confidence in him to such an extent that it was no longer reasonable for AAH to continue to employ him.

Contact <<CONTACT DETAILS>> for advice on any employment law matter.

Health and Safety

Mesothelioma – Who is to Blame?
The Court of Appeal has handed down its judgment in an important test case concerning compensation for people who develop mesothelioma as a result of exposure to asbestos in the workplace. The decision will not only have serious implications for victims of the disease but will also create uncertainty for everyone involved in such cases.

When bringing any action for damages, the first step is to demonstrate who is liable for the injury suffered. This has always been a problem in mesothelioma cases, as the manifestation of the disease normally occurs many years after the exposure to asbestos and sufferers may have worked for several employers in the intervening years. The situation is further complicated by the fact that some of the employers (or their insurers) may no longer exist.

Unfortunately, even after the question over the causation of the disease has been resolved, the decision as to which insurers are responsible has now been obscured by the judgment, which runs to more than 160 pages.

By a majority, albeit for different reasons, the Court held that the wording of the insured defendant’s insurance policy will be critical in determining whether or not an insurer is liable for the claim by the mesothelioma victim.

The nub of the Court of Appeal’s decision is that where the insurance policy states that the liability is insured when the injury is ‘sustained’, the policy under which compensation may be claimed is the one in force when the disease starts to develop. However, where the policy insures the policy holder at the time the disease is ‘contracted’, the policy will cover the insured when exposure to the carcinogenic agent occurs.

This ruling raises a raft of issues. For example, it is likely to lead to protracted arguments over the precise date of injury. Further complications will arise when the employer involved has changed its insurer and the wording of the successive policies is at variance.

An appeal is likely and it is to be hoped that this will bring greater clarity to this already complex area of litigation.

For advice on any health and safety matter, please contact <<CONTACT DETAILS>>.

[Disclaimer and Ownership Details]

Commercial E-Newsletter Partners’ Notes ~ 30 November 2010

Communications Needed to Understand the ‘Factual Matrix’ Are Admissible

Oceanbulk Shipping and Trading v TMT Asia Ltd. and others [2010] EWCA Civ 79.


First Service Ruled In
AWS v Laing O’Rourke Utilities Ltd. [2010] EWHC 1529.


HMRC Issue New Tax Guides
ICAEW Tax Faculty Newswire 532, 2 November 2010.

HMRC Toughen Stance on Companies in Difficulty
Reported in Accountancy Age, 8 November 2010.


Income Splitting – Another HMRC Attack
Patmore v HMRC [2010] UKFTT 334 (TC). See


Court Upholds Genuine Pre-estimate of Loss
Azimut-Benentti SpA v Darrell Marcus Healey [2010] EWHC 2234 (Comm).

Exclusion Clauses Fail to Protect IT Consultants
GB Gas Holdings Ltd. v Accenture [2010] EWCA Civ 912.

Intellectual Property

First Impressions Matter
Och-Ziff Management Europe v OCH Capital LLP, case No. 112/10, High Court of Justice, Chancery Division (London).


New Lease Starts When Old Lease Ends
QFS Scaffolding Ltd. v Richard Douglas John Sable and Ann Christine Sable [2010] EWCA Civ 683.

Data Protection

First Monetary Penalties for Serious Data Protection Breaches
ICO press release, 24 November 2010.


OFT Cold-Calling Crackdown
OFT press release, 2 November 2010.


Collective Redundancy Consultation – Court of Appeal Seeks Clarification
USA v Nolan. See

Gross Misconduct and Breach of Contract
Dunn and another v AAH Ltd. [2010] IRLR 709. See

Health and Safety

Mesothelioma – Who is to Blame?
Durham v BAI (Run Off) Ltd. and other test cases [2010] EWCA Civ 1096.

Referred to as the ‘EL Policy Trigger litigation’.



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